Imagine a scenario where you need different messaging programs to send different types of messages – for example WhatsApp for text messages, Viber for audio, Telegram for video, etc. This is impractical, right? But this is exactly what is happening in finance: it is impossible to send both digital money and cryptocurrency from a bank account without further action. This has not yet affected the masses, but after national digital currencies or the central bank’s digital currencies are issued globally in the next few years, the situation is becoming more complicated. We need to start looking for a solution now.
CBDC requires a polymorphic structure
The traditional economic system can no longer ignore new technology. According to the Cambridge Center for Alternative Finance, the number of cryptocurrency users almost tripled from 35 million in 2018 to 101 million in the third quarter of 2020. Another study by researchers from the UK Financial Conduct Authority showed 78% growth since 2019.
Transactions with cryptocurrencies are profitable. In the fourth quarter of 2020 alone, PayPal increased the number of transactions by 36%, which is almost $ 277 billion dollars. Growth began in the third quarter of 2020 when the company introduced cryptocurrency transactions. This is one of the best quarterly returns in PayPal history.
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In three to five years, however, the central bank’s digital currencies will become part of our daily lives. And we need a whole new infrastructure for mass adoption. China was the first to actively promote its digital yuan project, known as Digital Currency Electronic Payment, or DCEP. China is completely focused on infrastructure, as many local banks have already developed or upgraded their e-wallets – the most important tool for working with DCEP.
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So far, the Chinese digital yuan is the only real working example of digital money issued by central banks. In particular, more than 60 central banks around the world are exploring this possibility. DCEP is built on a central blockchain technology that is fully managed by the Central Bank of China. This technology provides full control over all financial transactions, ensures targeting of social expenses, increases tax collection and prevents financial crime.
In turn, the international payment system Visa recently introduced a protocol for autonomous transactions with central banks’ digital currencies. To pay or accept payments offline, you just need to download the mobile app. In this case, the central bank’s digital currencies mainly replace cash, which increases the number of transactions controlled by the source, the bank or the financial intermediary.
A polymorphic monetary system will soon become a requirement for financial instruments. Banks must ensure that cash, CBDC and crypto transactions can be done in one place: the bank application. But there is a problem: the new formats have nothing to do with their predecessors. Furthermore, governments see the launch of the central bank’s digital currencies as a separate issue. In other words, it does not follow the same standard with neighboring countries.
What prevents combining “old” and “new” money?
Cryptocurrency and CBDC are relatively new. There is therefore great uncertainty surrounding these financial instruments. However, paper money and digital money have common functions, and the way and quality of their implementation affects how a diverse financial solution is created.