The future of money: Challenges and opportunities surrounding digital currencies

 From left: Moderator Daily FT Editor/CEO Nisthar Cassim, FINCSIRT Manager Loshan Wickramasekara, Sri Lanka and Maldives – VISA Country Manager Avanthi Colombage, NDB Chief Operating Officer Deepal Akuretiyagama, Central Bank Assistant Governor D. Kumaratunga and ICTA Director and Legal Advisor Jayantha Fernando

• Key insights shared at Daily FT-CICRA 8th Annual Cyber Security Summit

By Hiyal Biyagamge

Chief Guest Central Bank Governor Ajith Nivard Cabraal

Keynote Speaker Corporate Strategy VISA Asia Pacific Senior Director Aakash Degwekar (via online)

Guest Speaker ICTA Director and Legal Advisor Jayantha Fernando

The history of digital currency began in 1983, when David Chaum introduced the concept of a digital version of

cash controlled by a private key. Satoshi Nakamoto’s infamous Bitcoin paper was published 25 years later, setting the stage for bitcoin transactions. In the intervening years, innovation and evolution in the space have given rise to a flourishing crypto ecosystem, with new currencies, form factors, and applications emerging rapidly.

Opening the Daily FT-CICRA 8th Annual Cyber Security Summit as the keynote speaker, Visa Asia Pacific Senior Director, Corporate Strategy Aakash Degwekar discussed the rise of digital currency—or ‘digital versions of cash’—and how Visa is harnessing emerging technologies to deliver its mission: enabling individuals, businesses and economies to thrive by helping to move money more securely and seamlessly.

“By examining digital currency, we aim to better understand the impact it can have on the broader payments ecosystem. While the concept of digital currency was introduced more than a decade ago, recent developments have accelerated its adoption, such as the emergence of fat-backed digital currencies known as ‘stablecoins’; a growing community of developers building applications on top of blockchain-based networks; and rising interest among central banks to introduce sovereign digital currencies.”

“Given the potential of digital currencies to extend the value of digital payments to a greater number of people and places, we want to help shape and support the role it plays in the future of money,” said Aakash.

Unlocking a host of meaningful use cases

Degwekar further went on to discuss the outlook on the digital currency landscape and Visa’s approach for making digital currencies more safe, useful, and applicable for payments.

“Take stablecoins for example. Stablecoins combine the benefits of digital currencies with the stability of existing currencies like the US dollar, and have the potential to unlock a host of meaningful use cases for consumers, merchants, and financial institutions. Though the use of cryptocurrencies for everyday spend remains low, the mounting interest among consumers, developers, clients, and regulators is undeniable.”

There’s a behavioural change happening, according to Aakash, most prominently in Gen Z and Millennials. “A recent survey found that 55% of 18-34 year-olds in the US intend to buy bitcoin in the next 5 years (vs. 32% in 2017). Much of the appeal is cultural—with highly-engaged communities on platforms like Twitter, TikTok, and Reddit cohering around a shared mantra and vernacular.”

“Furthermore, the crypto developer ecosystem is burgeoning with continued growth in the number of developers building new applications to deliver value to end users. Ethereum, one of the largest crypto networks, has seen 215% growth in active developers in the past three years.”

On top of that, Aakash said that fintech and established financial institutions are taking notice of the rise of digital currencies. “Some of the largest and most reputable financial institutions are actively exploring digital currency use cases—for example, JP Morgan’s JPM Coin. Additionally, with the proliferation of crypto-native fintechs, more and more non-crypto-native fintechs are building out and launching new crypto features/ products—for example, leading fintech companies like Square, SoFi, Revolut, Robinhood, and PayPal are all providing access to cryptocurrencies.”

Meanwhile, central banks around the world are increasingly interested in central bank digital currencies (CBDCs); 86% of central banks are now exploring the benefits and drawbacks of CBDCs. 60% of central banks are reportedly conducting pilots or proofs of concept. 

“Growing interest and adoption among consumers, businesses, and governments have dominated headlines for the last few years, and this trend shows no sign of slowing. Whether it’s fluctuations in bitcoin, a viral meme storming the internet, or the trading of multimillion-dollar crypto-assets, it is difficult to deny the indelible impact that digital currencies are having on the ‘culture of money,’” opined Aakash.

Crypto, stablecoin and CBDC

There are three types of digital currency: cryptocurrency, stablecoin and Central Bank Digital Currency (CBDC). The most well-known cryptocurrency is bitcoin. Bitcoin’s decentralised blockchain network went live in 2009. Aakash said that Visa views this segment of digital currency as a commodity or ‘digital gold.’ Cryptocurrencies are typically not used as a form of payment at this time due to a number of reasons, such as their high volatility, low transaction throughput, and limited acceptance.

Stablecoins are fiat-backed. They have the potential to be used as payments in global commerce, much like fiat currency. Whereas cryptocurrencies are decentralised and volatile, stablecoins are designed to offer stability. The limited volatility increases the possibility of digital currencies being used for payment. And unlike fiat currencies, stablecoins can transcend borders with transactions that can be near instant.

Speaking of CBDC, Aakash said this particular digital currency has been gaining momentum. Recently, CBDC has gained significant interest among a growing number of central banks, with three in five conducting pilots or proof of concepts—spurred in part by growing interest in cryptocurrencies as prices appreciate and the development of stablecoins such as USDC. Several countries and regions have CBDC research projects underway (e.g., Riksbank Sweden).

Visa’s key areas of focus for digital currencies 

Visa sees its work in digital currency as an extension of our corporate strategy around consumer payments, value-added services, and new flows. 

“Our role in digital currency is focused on enhancing all forms of money movement— whether on the Visa network or beyond. Additionally, we’ve spent the past few years studying cryptocurrency, stablecoins, and public networks, building relationships in this space, and exploring how to add value.”

Aakash explained the four focus areas of Visa for digital currencies which are credentials everywhere, crypto value-added services, facilitating new digital currency flows and CBDC research and stakeholder management. 

1.  Credentials everywhere 

Most consumers participating in the crypto economy are managing their funds through a crypto exchange—via a web-based platform or mobile app. Aakash said Visa is working with 50 of the leading digital currency platforms to enable connecting their customers’ accounts to Visa credentials, with the goal of making it simple and convenient to convert and spend crypto at any of the 70 million merchants worldwide that accept Visa.

2. Crypto value-added services 

For banks or fintechs who are lacking a digital currency offering and are looking to develop one, Aakash said they could utilise Visa Crypto APIs. Doing so helps them deliver new innovative offerings to their existing customer base without the need to use a separate crypto exchange.

Speaking further, Aakash said, “We have launched a global innovation hub where like-minded partners can jointly develop solutions and user experiences in the realm of digital currency and crypto. At our hub, partners can gain access to industry insights and work closely with our experts to uncover trends in digital currency and explore growth opportunities, collaborate on research, design and test solution concepts and develop and pilot proof of concepts with payment engineering experts.”

3.  New digital currency flows 

Visa is evolving to be a network of networks—to enable the movement of money across a variety of payment flows on VisaNet and beyond. With this strategy in mind, Aaakash said the company is focused on helping clients who want to participate in using new digital currency flows. 

“For example, our vision is to help make it possible for global marketplace clients to quickly identify Visa Crypto Partner Wallets that are equipped to safely receive USDC payouts— giving those marketplaces confidence to pay their sellers in another country. Once a seller in another country receives those funds, they can use the Visa credentials in their digital currency wallet to convert and spend their income at any Visa-accepting merchant.”

According to Visa, these new digital currency payment flows can be particularly useful in instances where payers and payees are distributed globally, and in regions where payments in a US-backed currency are desirable. Additionally, they can complement the other ways Visa enables payment flows by enabling payouts over public blockchain networks that are received by digital currency wallets.

4.  CBDC research and stakeholder management 

As the world leader in digital payments, Aakash highlighted that Visa bears responsibility to lead and contribute to discussions shaping the digital currency space.

“Our research and development team has been exploring the science of blockchain technology for several years and their work has yielded several promising innovations. The company has been working on new research material on offline capabilities and privacy. We believe that central bank digital currencies could be transacted from one device to another device directly without any intermediaries. Thus, the offline payment system creates an experience similar to physical cash.”

He also said, “With the future of payments becoming more digital and with digital tokens as bits of information, industry standards are needed to protect data privacy and to develop consumer protection. Visa has been driving cutting-edge research in privacy preserving cryptography, including the Zether protocol, and we’ll continue to strive for higher consumer protection standards in the new age of digital currencies.”

For any technology to gain widespread adoption, Visa believes that multiple key stakeholders need to come together to make it work for people in a variety of locales and contexts. CBDC is no different. The challenges that central banks face in launching CBDC are vast and complex. Implementing new technologies is an iterative process, requiring input from diverse stakeholders, and we want to contribute our expertise and thinking as crucial design decisions are being shaped. 

“At Visa, we’ve been driving cutting-edge research and product capabilities, partnering with leading digital currency providers, and engaging with policy makers and central banks around the world as their thought partner to help shape the ongoing dialogue and understanding surrounding digital currencies and CBDC. We look forward to working with central banks at this important moment in time to create a secure, convenient, and reliable CBDC that can seamlessly integrate with the existing payments ecosystem.”

Enabling policies create trust on digital currencies 

Speaking at the summit, ICTA Director and Legal Advisor Jayantha Fernando spoke about enabling laws and policies that are needed to ensure trust and confidence for users to adopt these technology facets like blockchain and digital currencies. 

“We are in an era where central banks are at the threshold of moving in the direction of adopting new and innovative measures of digital money. In Sri Lanka also, there is a significant hype around cryptocurrency and other modes of digital currencies. Today, we have a variety of stakeholders, from the Central Bank of Sri Lanka to the Ministry of Justice, working together to formulate a set of recommendations that would set the stage for new policies and measures. These would give choices to Sri Lankans to seamlessly and securely use crypto or CBDC.”

“The exact approach and the manner of timing of these interventions is to be decided by the Monetary Board of Sri Lanka. The impact of these modern trends on monetary policies is significant. It goes without saying that technology is moving rapidly but when it comes to some countries, the policy makers are behind technology. It is a universal phenomenon that laws and policy measures are always behind technological advancements with security and privacy challenges yet to be addressed,” said Fernando.

Fernando said that there are important questions that the policy makers will have to answer before they venture into novel innovative methods whether it’s CBDC, stablecoin or crypto. 

“The choices are many, but what is appropriate to boost inward revenue is perhaps what might determine the course the policy makers led by the central bank or monetary board and other regulators would chart along the way. One point that I want to highlight as part of this overview is that the impact on monetary policy on whatever approach Sri Lanka adoption in terms of virtual currencies is difficult. Our monetary law act is not up to date and it does not deal sufficiently with the subject matter. So comprehensive amendments may have to be made to the monetary law act to include virtual currencies.” 

“Our Data Protection Act is quite modern however it has been there since 2005. The foreign exchange act was modernised in 2017 but we all know the regulations from the Foreign Exchange Department of the Central Bank prohibits our citizens from engaging in crypto activities using our payable devices. These rigid control measures are being reviewed and going further, one option this committee is looking at right now is considering whether there should be a tighter operation by way of virtual currency being recognised as an asset class regulated both by the Central Bank of Sri Lanka and the Securities and Exchange by mid-December. This will be achieved by implementing a separate legal framework and a governing act, enabling the Central Bank and SEC to regulate that exchange and also facilitate and monitor the inward and outflow of the currencies out of these exchanges. We are in challenging times and a lot of work is being done in this area and in that context, creating trust and confidence in consumers to adopt these innovations is an area we have to consider and the primary focus,” Fernando highlighted. 

Do not miss the bus

Fernando spoke about the development of Sri Lanka’s digital landscape and discussed some of the international standards that Sri Lanka might have to apply to benefit from digital innovations including digital payments in a rapid manner and enable the rural community to adopt it. 

“There is a saying in Sri Lanka that says ‘do not miss the bus’. Therefore we must benefit from the international norms and standards that are available. Sri Lanka has been in the digital landscape doing that and we see those developments being infused in our Electronic Transaction Act. With new payment and digital settlement options coming alive, the challenges associated with teaming with new scenarios can be handled only if we are part of international laws and standards. What is important is that in the context of the monetary law landscape, the payment and settlement laws and other laws have also been benchmarked to international law standards and I would like to commend the Central Bank on taking steps to adopt international practices from time to time.”

Fernando further mentioned that even though Sri Lanka has fast tracked its digital adoption, awareness around those developments are less.

“Countries like Australia and the United States are on the road to having completed their domestic processes regarding virtual currency asset classes and those are some complex countries that have to amend their domestic state law to adopt this global standard. Sri Lanka rectified this instrument and adopted the suitable amendments in 2017 and onboarded our country to a global standard in international lists. What that has meant is our digital adoption has been fast tracked in a way but still we see a challenges amongst several user communities; doubts in the peoples mind as to whether these digital frontiers are truly available to businesses and citizens, I think the lack of awareness still is pretty much at a state of infancy and I think more needs to be done in terms of raising awareness,” said Fernando. 

Are cybercriminals bound by jurisdictions?

Discussing cyber threats and surrounding challenges, Fernando said that Sri Lanka has an acronym problem.

“People call it digital crime, internet crime, IT crime, cyber-crime; they are missing out on the terminology. Forget terminology, we have international bodies like the UN who cannot agree on this. So there is a lot to be desired on this subject in terms of legal evolution. The challenges are many. The victims from cyber related issues may be from one country but criminals may be coordinating their attacks from several locations.”

“Lawyers and judges and the legal systems of a sovereign state are bound by our jurisdictional parameters or limits. But are cyber criminals bound by these? Ask yourself that question. No, they can just go forum shopping and look at the jurisdiction which is a big frontier to locate their criminals. Now, we have crime assessors being offered by folks in the dark web so how do law enforcement entities detect and manage and mitigate these scenarios? This is a world where jurisdiction does not exist for those who commit crime. In this context, global standards have sought to evolve in these times to provide for law enforcement to collaborate with other countries on real time pieces and that was also not enough. Why are not the law enforcement entities equipped with the legal tools and expertise to deal with cyber security issues? Do we have to find out of the box approaches to these challenges by engaging the private sector?,” he asked from the audience. 

Data protection and privacy 

Speaking about the latest Data Protection Bill, Fernando said, “Laws and policies can be refined as we go along; further comments may be forthcoming with regard to the duration that this law would require for proper adoption. If you look at the latest Data Protection Bill, the first draft framework was published by the Ministry of Digital Technology in June 2019. Since then, a number of stakeholder rounds were conducted including with specialised groups. After that, we saw a large number of written submissions from global digital platform service providers making submissions on the norms that we would create to bind ourselves to the standard and how comfortable or uncomfortable they would be in adopting these standards. There are a lot of discussions taking place between several stakeholders even now and these discussions are critical to nourish the framework that was adopted recently.”

Global leader in payments Visa and technology giant Huawei Technologies were the Strategic Partners. Banking partner was NDB and Official payment network was LankaPay, whilst the creative partner was Triad. 

Pix by Upul Abayasekara and Ruwan Walpola