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The role of digital currencies in the new era of open finance

Yuval Ziv

Yuval Ziv

Managing Director, Digital Payments, Nuvei

The open banking revolution has been fuelled by the needs of digital-savvy customers yearning for more sophisticated services than legacy banks could offer. Now, as open finance emerges as the next step in this journey of innovation, digital currencies are naturally set to play a significant role. There are plenty of indications that digital alongside cryptocurrencies are approaching a mainstream adoption phase, and that this will change the payments landscape.

PayPal began allowing consumers to use their cryptocurrency holdings to pay at millions of its online merchants globally in March, while car maker Tesla bought $1.5 billion in Bitcoin. Meanwhile Diem, Facebook's rebranded Libra crypto project, is set to launch its US dollar stablecoins this year, despite several setbacks and the big networks, Mastercard and Visa, are embracing crypto.

We are also witnessing the dawn of central bank digital currencies (CBDCs). The Sand Dollar, the first nationwide central bank digital currency (CBDC) in the world, launched in the Bahamas in October 2020, China has launched the digital yuan and the British government has asked its central bank to look into launching a digital currency to co-exist with Sterling, nicknamed the Britcoin.

For CBDCs to have a mainstream future and to be accepted and adopted by consumers globally, central banks will need to spread the message that CBDCs offer safe and efficient payments backed a robust policy framework. They should also conduct stress tests regarding payment habits to ascertain how a CBDC can perform reliably in extreme situations such as the coronavirus pandemic.

To achieve a scalable and trustworthy CBDC, central banks must set the highest operational and technological requirements while also considering where the private sector can bring its their expertise and market abilities to the table.

As CBDCs move from planning and pilot stages to real-world use, it also seems that we are heading for a tipping point where crypto moves from being considered as an asset to hold or trade to a legitimate funding source. This is occurring just as the era of open finance is upon us, with customers’ entire financial footprints being opened up to trusted third party APIs in order to bring a wealth of beneficial, tailored customer experiences.

The convenience and innovations of open finance, also known as DeFi (de-centralised finance), will naturally bridge the gap between the blockchain space and the traditional world of finance in terms of payments. As cryptocurrency payments increase, they will rapidly become more significant for industries offering large ticket and high-volume goods and services. This is one of the reasons why we added cryptocurrencies to our portfolio of payments methods and acquired Simplex, to offer fiat payments infrastructure to crypto companies which ultimately reduces complexity for merchants and consumers via a single-integration approach to payments, driving growth and innovation.

All of this helps bridge the gap between the blockchain space and the traditional finance world. However, regulators around the world are still adapting and changing. It will take time before crypto is completely accepted as a standard payment facility.

At the same time and thanks to fierce competition from challenger banks, legacy banks have realised that they can no longer serve up a basic user interface if they want to maintain and grow a loyal customer base. Instead, they must offer a data-driven, customised, and personalised experience.

Open finance is at the foundation of this experience, acting as a catalyst for this new era of banking. While open banking is a transaction of data between a bank or credit union and a third-party consumer finance app, open finance extends data sharing across a range of services both within and beyond the financial industry.

This means less friction for consumers as their financial service providers conveniently help them to take care of many different aspects of their lives. This powers services including fraud monitoring on e-commerce sites, tracking spending and managing budgets.

This also helps to improve financial literacy among consumers, and that effect only increases the likelihood of cryptocurrencies becoming an integral part of the open finance ecosystem.

We often hear the word ‘disruption’ in the tech world, but that is not really the goal of the open finance movement. The goal should not be merely to uproot one system, centralised finance (CeFi), and replace it with another, DeFi. It rather should be a future where value is created so that it improves more lives and increases financial wellbeing in general.

However, key foundations will have to be in place for open finance to enjoy mainstream success. There must be a focus on value exchange to drive customer education and awareness so that they understand how it can enrich their lives and improve their financial wellness. It could also be necessary to embrace further regulation, to see this as a business-enabler, a chance to go above and beyond to deliver valuable and fair solutions to consumers rather than a tick-box exercise.

This focus on adding value, choice and convenience to the customer experience must also include cryptocurrency. This not only aids the infrastructure of the system, especially as much of the DeFi offerings already in existence are powered by Ethereum. It also plays to the tech-savvy nature of the customers being targeted who are more likely than most to be aware of crypto.

Consumers are quite rightly at the epicentre of this change. Their desires for innovation and convenience will accelerate the provision of open finance solutions fuelled by cryptocurrencies.

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