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By Jorge Lesmes, Banking Director at NTT DATA UK&I

In October, the Monetary Authority of Singapore’s (MAS) Managing Director, Ravi Menon, explored the idea of blockchain networks as a solution for slow and inefficient cross-border payments during his keynote speech at Swift’s Sibos conference. I was pleased to hear that his suggestion integrated both stablecoins and central bank digitised currencies (CBDCs). It showed that he was keeping an open mind to the wide array of options provided by cryptocurrency.

Whilst I was pleased, I was certainly not surprised. In recent years, financial institutions across the globe have been eyeing stablecoins as a less volatile alternative to standard cryptocurrency. Especially after the pandemic, stakeholders of all sizes – from everyday investors to global players such as Wells Fargo and JPMorgan Chase – are exploring the opportunities provided by investing in less traditional assets. However, they want to do so without the inherent risk that comes with unpegged cryptocurrency.

For those who are unaware, it’s important to explain exactly what we mean when we say “stablecoin” and “CBDC”. Crucially, it’s also vital to understand how they might operate across continental and perhaps even global networks.

Is operating in the blockchain inherently risky?

The first decentralized cryptocurrency Bitcoin was released in 2009. Since then, the financial world has dramatically changed; and whilst the market has been hugely volatile, it is becoming increasingly clear that blockchain solutions are here to stay. The question is, is blockchain risk inevitable?

Before the world’s largest financial players are ready to dive into crypto, it’s clear that a certain degree of reliability needs to be assured. Of course, there is risk in any investment, but the past decade has shown crypto to be particularly volatile.

To combat crypto’s inherent volatility, the creation of the first stablecoin came as no surprise, just four years after Bitcoin. According to the online platform Coinbase, a stablecoin is “a digital currency that is pegged to a ‘stable’ reserve asset like the U.S. dollar or gold”, specifically designed to “reduce volatility relative to unpegged cryptocurrencies like Bitcoin”. Reducing volatility is the key assurance banks and other key investors need, and stablecoins go some way in achieving that assurance by design.

During his keynote speech at Sibos, Menon also explored the use of CBDCs, another viable option that we might see becoming increasingly common as we move into a financial future that accepts blockchain solutions more freely.

In their essence, CBDCs are digital currencies produced by central banks. Not unlike stablecoins, they are pegged to a nation’s fiat currency as a measure to keep their volatility in check. Banks are increasingly looking to CBDCs, with the Bank of England’s CBDC Taskforce being a strong example of this.

So, are blockchain solutions inherently risky? The simple answer is no. I hope to see more financial bodies, like MAS, turning to blockchain to solve real-world issues that have needed serious attention for years.

Getting ahead of the curve

Blockchain has the potential to revolutionize the way we make cross-border payments. With its ability to transfer value transparently and securely across borders without the need for intermediaries, blockchain could make international transactions faster, cheaper, and more efficient.

It’s not just the Monetary Authority of Singapore that has begun exploring the use of CBDCs as a way to take advantage of the benefits of blockchain technology. Recently, the European Central Bank started road testing a digital euro in Spain whilst the Bank of England has started accepting applications for a CBDC digital wallet prototype. By issuing their own currencies, these central banks can make it easier for individuals and businesses to make cross-border payments, while also gaining greater control over the monetary system.

If blockchain solutions are going to be implemented across the board for the use of cross-border payments, especially within the institutions that want to operate without the high chance of risk that comes with unpegged cryptocurrencies, both stablecoins and CBDCs seem to represent the future.

What’s important to remember is that despite the decreased likelihood of significant losses on investment, the correct level of knowledge is still vital. Those financial institutions that are considering stablecoins and CBDCs should align themselves with a partner who can provide the necessary expertise.

The potential strength of pegged cryptocurrencies is clear, and they might just be the key to a blockchain-led future. To stay ahead of the global trend, FIs and banks across the globe should start familiarising themselves with stablecoins and CBDCs. Once the knowledge is there, I’m confident widespread adoption will follow.

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