Cryptocurrencies as an asset class have real staying power, according to one expert. But their long-term value as a payment form? Not so much, said Lombard Odier’s head of fintech, Jeroen van Oerle.
While digital currencies as an asset class have democratised the way investing works, cryptocurrencies – like bitcoin – haven’t yet found a way to fully compete against the traditional financial systems. Outside cross-border payments, the traditional system can process more transactions per second and confirmation is given immediately, unlike with bitcoin transactions
Van Oerle said that as govcoins, or central bank digital currencies (CBDCs), gain popularity, it will be harder for the payment coin category to survive where know-your-customer and anti-money-laundering rules are already established in the traditional sector.
Lombard Odier’s head of fintech, Jeroen van Oerle.
“You need to compete ultimately with central banks who will use this infrastructure to optimise cross-border payments,” he told Arabian Business.
Currently, the only value payment coins have – in van Oerle’s view – are for cross-border transactions that typically take a few days to complete and are costly. But he believed once central banks tap into this market, lowering the cost and increasing financial inclusion, they’ll become the dominant player.
“You only need a wallet, and that wallet can be with a traditional bank, but it can also be with the central bank, so then it becomes much easier for people to become involved in digital payments,” he said, adding that it’s an attractive option for central banks to pursue given that “financial inclusion is high on the agenda of regulators and central banks”.
In 2020, 65 central banks in advanced and emerging market and developing economies were surveyed, with 86 percent of central banks responding they were actively engaging in some form of CBDC work, according to the Bank for International Settlements (BIS) report from January 2021.
In the next three years, central banks representing one-fifth of the world’s population are likely to issue a general purpose CBDC, with 21 percent of jurisdictions saying this is a possibility, the BIS report found. Sixty percent of central banks said they’re unlikely to issue any type of CBDC in the short or medium term.
A few countries have so far launched their own cryptocurrencies, including Venezuela, Estonia, Russia, Sweden and Japan. The UK has branded the British CBDC the Britcoin.
China, where the government has moved to crack down on crypto trading and mining, has already rolled out its digital e-yuan.
Critics of CBDCs have claimed their presence means the end of anonymity on the blockchain, but van Oerle said that’s not necessarily true, pointing to a consensus mechanism that was developed where individuals are grouped according to criterion, eliminating the ability to locate one individual.
View from the Gulf
In the GCC, van Oerle said the region is looking to leverage crypto and blockchain technology to its advantage.
The Saudi Central Bank (SAMA) and the Central Bank of the UAE in 2020 launched a digital currency trial – the Aber project – that looked to evaluate the feasibility of issuing a wholesale CBDC to develop cross-border payment systems that would reduce time and cost, a statement on SAMA’s website from November 2020 read.
There hasn’t been an update since the end of 2020 on the joint project, but the region has leaned into the new technology.
Dubai has launched the DMCC Crypto Centre that is set to be a hub for the development and application of crypto and blockchain technologies. It offers a home to all types and sizes of crypto businesses, from companies developing blockchain-enabled trading platforms, through to firms offering, issuing, listing, and trading crypto assets. And the Dubai International Financial Centre recently became home to UAE-based digital assets and blockchain technology Zeniq’s new blockchain tokenisation platform.
Dubai International Financial Centre recently became home to UAE-based digital assets and blockchain technology Zeniq’s new blockchain tokenisation platform.
“I think if the region does this the correct way there will be a lot of success, especially because in other places like Europe, the US and China there’s so much scepticism around it. So if companies can move fast with a regulator who moves things along, instead of against, that is a massive plus,” van Oerle said.
Digital assets
Separately, van Oerle said that on the asset side of digital currency, “we see higher liquidity, access is higher, and it’s a democratisation of assets for everyone”.
Now individuals can own one-millionth of a Ferrari or a tiny portion of a high-value painting and round out their pension portfolio with these assets.
“I think the entire asset management industry will change completely,” he said. “You can do that by selecting equity and bonds like we have done for the past hundred years, but now this new asset category comes to the table where we can use these new assets to diversify the portfolio of equities and loans, and so in my pension or savings account I can have 10 percent allocation to direct real estate, jewellery, paintings, watches, whatever, that is a massive diversification benefit to my entire portfolio.”
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