Investing In The Future Of Digital Payments
6 June 2020 David Grammig, 3 min read
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EU Commissioner for Financial Stability, Financial Services and the Capital Markets Union Mairead McGuinness delivered a speech on May 17th to the AML Intelligence Boardroom Series on the new EU AML action plan to be released in July. Significantly, McGuinness mentions in her remarks that the bloc intends to ban all cash transactions over 10,000 Euros as part of the EU's efforts to tighten up due diligence controls and restrict illicit transactions.

Could this new continental restriction be a boon for digital payment service providers outside of traditional banking? The question is worthy of exploration from a standpoint of both looking ahead to the future of digital payments and considering the investment opportunities that can arise as a result.

Depending on where in the EU one lives or does business, the new cash ceiling proposal may or may not come as a shock (after all, the cash-based transaction cap in Greece is a mere 500 Euros). Either way, the shift away from large cash movements will undoubtedly pave the road for the future domination of two rising stars: central bank digital currencies (CBDCs) and digital payment platforms.
National digitized currencies are just over the horizon
Economists across the globe continue to brand CBDCs as the next big financial disruptor, given that they are backed and run by national central banks. Back in March at a Bank for International Settlements webinar, People's Bank of China Digital Currency Institute Director Changchun Mu took the first swing at a Chinese digital finance leadership role by proposing global standards that all CBDCs could follow to ensure a smooth transition and maintain ease of cross-border payments. Mu's comments included stressing a need for a scalable foreign exchange platform, consistent and synchronised information and fund flow, and interoperability across jurisdictions.

As Fitch Ratings asserted in a report earlier this month, a major cause for celebration in the coming rise of national reserve-backed digital currencies is the opportunity for greater inclusion in jurisdictions with loosely regulated financial sectors that have resultingly been cut off from global markets due to de-risking by major financial institutions. The higher guarantees that CBDC-involved transactions will be free from elements of financial crime, particularly laundering the proceeds of corruption or public fund embezzlement, is surely going to result in a massive wave of investment into developing nations home to ripe investment portfolios (look no further than the DRC's mining sector).

Although a number of CBDC pilot programmes are well underway (the US Federal Reserve has expressed wariness over the concept, but is nevertheless running such a pilot through the Federal Reserve Bank of Boston and MIT), no central bank has yet launched digital currencies. This leaves digital payment service providers scrambling to race to the top in the remaining months and dwindling years before CBDCs become a household name.
Would the launch of CBDCs spell doom for the digital payments sector? Far from it
While a number of digital payment service providers are undoubtedly sweating bullets at the prospect of CBDCs popping up in the EU, China, the US, and beyond, the rise of CBDCs should be viewed through the lens of digital expansion rather than an apocalyptic end to the private digital payment sector.

With the higher guarantees of anti-money laundering and counter-terrorism financing that come with CBDCs, sacrifices must be made, and for digital payments, this means privacy. The EU's coming cash transaction cap will surely provide a significant boost for digital payment service providers given data privacy concerns. With ransomware and other cyber intrusions reaching all-time highs in the past 18 months, firms have every reason to be wary of providing sensitive data to brand-new central bank digital platforms that may be vulnerable to attacks, with many likely to opt for existing private platforms.

This interregnum of sorts that the digital payment world finds itself in will not last long, and investment opportunities are likely going to come and go with warp speed as the great digital payment race continues to ramp up.