The rise of digital currencies and their acceptance in a digital world | Blog

01 / 11 / 2022

Throughout history, payment methods for goods and services have in part been defined by the world around us, with factors including available technology, societal preferences and legal frameworks. Beyond physical cash, many forms of payment have been utilised within both specific and broad aspects of business and global interaction. Now, in the digital era, rapidly evolving technology has given rise to the creation and use of digital payment methods, including various forms of digital currencies, alternatives to physical currency, such as Central Bank Digital Currencies (CBDCs), including the upcoming Digital Euro, or ‘cryptocurrencies’, such as Bitcoin and others. With an increased focus on frictionless experiences and further development in digital spaces such as the 'metaverse', what impact can increased acceptance of digital means of payment and currencies have and what might it mean for the future of payments?

Woman using smartphone to buy cryptocurrency at a coffee shop

Nicolas Kozakiewicz, Innovation Executive Advisor at Worldline, shares his thoughts on the rise, potential and challenges of digital currencies and their increased acceptance.

 

What are digital currencies?

So, what exactly is meant by digital currency? “A currency is a medium of exchange in circulation,” states Nicolas. “That currency is used as payment in a trade, which is an exchange of ‘value’. Originally, trades were barter, e.g., an apple, a gold nugget or a sack of potatoes for a pear, a small diamond or a meal. But for convenience and ease of trade, a pivot asset, called money, was created, so that an apple could also be purchased for a currency amount, say $1. The currency is the physical representation of that pivot asset.” For people to grant value to this, a currency is always backed by other valuables, such as gold, or, simply today, the production power of a state. A digital currency is a digital version of physical currency.

While today, it is almost exclusively financial institutions that issue and operate physical currencies, digital currencies have been issued and operated by service providers that may not be a financial institution. A subset of digital currencies, known as cryptocurrencies, are based on cryptographic-driven peer to peer infrastructures called blockchains. In most cases, they are not backed by any valuables, and are prone to speculation and high volatility, due to their lack of collateral or guarantee.

Currently, digital currencies can be placed into one of three broad categories; the yet-to-be fully realised concept of Central Bank Currencies (CBDCs), Cryptocurrencies and Stablecoins. Each has different applications and methods of use, but all share common characteristics, including being universally accessible, purely electronic and, to differing degrees, open through peer-to-peer interaction. Some can be operated in 'public' environments, i.e., those without a central authority, and others in 'private' settings, directly managed by a service provider, like other digital services.

 

What benefits do they bring? What is their relationship with the digital revolution?

As with other forms of currency and payment platforms, digital currencies offer a range of benefits, both potential and tangible.

"Digital currencies offer a range of potential benefits, some of which are already in practice," says Nicolas. "One of the major advantages of using digital currency is the speed of payments, especially when compared to traditional financial institutions and payment methods."

Indeed, along with speed, increased efficiency is a significant expectation of CBDCs, especially regarding state-issued refunds or payments such as tax returns or other benefits. When discussing potential digital currencies such as the Digital Euro, the concept of access also comes into play. Unlike traditional transfers and payments, digital currencies offer 24/7 access and provide the opportunity to serve the vast global populations with limited or no access to conventional banks. However, as Nicolas suggests, this may not be true for all digital currency forms.

"All digital currencies have various ethical impacts. While they offer a more open and accessible means of payment for those not served by traditional banking, can you consider currencies such as cryptocurrency ethically sound? Who is providing backing to these currencies and intrinsically, where is the value? That should be a major consideration for regulators and governments either seeking to adopt existing digital currencies or develop and introduce one of their own."

One aspect of the rise of digital currencies is that the balance of power has swung away from traditional forms of banking and state governments. With cryptocurrencies and public distributed technologies being difficult or impossible to regulate or control effectively, how can individuals be protected, or illicit activities be curtailed? "It is certainly a concern," agrees Nicolas. "The rebalancing of power is in some regard a positive one, as it is spurring on development and investment into products such as the Digital Euro. But on the other hand, far more power now lies with those involved in the ownership and transfer of cryptocurrencies. Who knows who is on the other end of that transfer or what value the currency will have tomorrow? There are many conversations around blockchain technology security, safety and ethics."

 

What are the most significant barriers that digital currencies currently face?

The financial world is complex, and the digital revolution has brought forward myriad challenges and discussions at both a regulatory and process level. 

One of the significant areas of discussion regarding some digital currencies is their ecological impact. While many other forms of digitisation offer environmental benefits and sustainable practices, the same may not be said of all forms of digital currency, especially those using proof of work consensus  technology such as on public blockchains. "Calculating the carbon footprint of cryptocurrencies is complicated," concedes Nicolas. "The energy required for the operation of some cryptocurrencies is huge, and while sustainable practices do exist, to a very limited extent, who is to say that all the major players are transitioning to sustainable energy sources across the blockchain? More regulated forms of digital currency, such as privately operated CBDCs and Stablecoins, can be traced much more easily to show no negative environmental impact. So, the big question is, how sustainable can public cryptocurrencies be in the long-term and how can commitment to sustainability be proven?"

With sustainability such an important topic for governments and businesses, embracing a payment method or championing a strategy that builds up digital payments may have potentially devastating consequences for brand image and company reputation if green claims and a clear commitment to transformation cannot be proven.

Another critical consideration concerns the payments digital divide. Embracing digital currencies and the technology that supports them requires a certain amount of digital readiness. Therefore, what ethical implications may this have for developing regions or economies that have built and relied upon different forms of commerce, technology, or infrastructure? Nicolas suggests that while challenges certainly exist, there is a reason for optimism.

"We have to recognise that digital currencies are, by their nature, designed for people with access to the digital world. However, digital comes in many forms. For example, in regions such as South America, Africa and Southeast Asia, there's extensive and strong mobile money usage. This payment method allows people to store a value in an account and use that value to make payments using an old-school phone – no smartphone needed. So, there are many guises that digital currencies can take, with much potential for adoption outside of 'traditional' digital infrastructure – this even extends to include paper-printed digital money!"

Like any new service, fast and easy adoption and a quality UX are vital in developing digital currencies. As competition in platforms, currencies and providers increases, aspects such as pricing and trust will likely influence the development and uptake of digital currencies and their services.

 

Should caution be exercised regarding the future development and use of digital currencies? 

As with any new development, it's essential to have a clear understanding of the potential risks as well as potential benefits. For businesses and individuals seeking to use digital technologies such as digital currencies, understanding cause and effect is key. "These products and technologies bring an element of the unknown and many additional questions," suggests Nicolas. "One aspect to which users should apply scrutiny is that any business, or indeed an individual, now can create a currency. This means no more full control, increased competition and the risk of loss of monopoly by state-backed currencies. While, in some regard, this brings benefits, it also raises the previously mentioned aspects of 'who is behind the blockchain' and usage complexity."

The world of digital currencies in their current form is new, and much of the potential is currently unknown. As has been shown by the volatile value of many cryptocurrencies, using them introduces a degree of risk. Only the future will tell whether these risks can be mitigated through regulation and control and whether such regulation and supervision are possible or warranted.

 

So, what next?

With a general advance toward more integrated, seamless and immersive experiences, from entertainment to healthcare, the future of digital currencies and digital technology looks bright and sunny. It is a world of opportunity and likely soon to be one of increased competition. With state-regulated and backed currencies such as the Digital Euro, reliable, trusted and stable access to currencies and banking can be extended to all with basic digital technologies.

The rise of digital platforms, commerce and technologies has evolved alongside increased recognition from society that their data is a commodity. This may be key to the long-term success of digital currencies. Only time will tell just how far digital currencies can take us.

Nicolas Kozakiewicz

Innovation Executive Advisor, Worldline
Nicolas has 24 years’ experience in Innovation and R&D, half in big corporations and half founding, funding and developing start-ups, in Europe and Silicon Valley. Nicolas lead multinational engineering teams, from upcoming trends and technologies to Business-applied Revenue-generating services. For the past few years, Nicolas has driven the Global R&D and Innovation at Worldline, leading teams to find, evaluate, prioritize and drive to market reality all the disruptive technologies/ usages, instilling innovation, igniting new services and increasing performances and efficiency in our portfolio. Nicolas joined Atos group in 2009 and holds a SW/HW engineering degree from EFREI backed up by a Start-up-specialized MBA course at HEC. Nicolas teaches Blockchain in prestigious schools like Columbia Edu, Polytechnique, TelecomParisTech, IMT or HEC. Current studied big trends made a reality are Stable Coins, Quantum-Resistant Cryptography and Artificial Intelligence.