Carlos Kazuo Missao from GFT Explains How Market Dynamics May Impact Central Banks’ Approach to Digital Currencies

Americans are already choosing digital payments over traditional payment methods. Now, as digital currencies such as CBDCs gain interest around the world – as seen even more from the recent SWIFT announcement – demand stateside may create bottom-up pressure on U.S. banks – despite the Federal Reserve’s slow pace.

The US Fed is currently researching a digital dollar but has made no statement of support and has vocally deferred to Congress on any future decision. At the same time, some Fintechs would prefer a regulated stablecoin that does not involve government technology.

Global digital transformation company GFT  states that in other markets around the world digital currency initiatives have been more of a top-down initiative.

Known for its work with Deutsche Bank and Standard Chartered, GFT is now working with the Universal Digital Payments Network (UDPN) to enable banks globally to develop their own new digital currency use cases. The company’s Head of Innovation for the Americas, Carlos Kazuo Missao, has been on the ground floor of the digital currency journey in countries like Brazil and China and has shared key insights with CI regarding these developments.

Our conversation with Carlos is shared below.

Crowdfund Insider: GFT recently announced its work with the Universal Digital Payments Network (UDPN) to launch a digital currency sandbox for financial organizations. Can you tell us more about that and anything else you’re doing in the digital currency space?

Carlos Kazuo Missao: GFT is a founding member of the UDPN Alliance, a group of financial institutions and technology companies behind the UDPN, the global payments network for regulated digital currencies such as regulated stablecoins, tokenized deposits, and Central Bank Digital Currencies (CBDCs). As part of this, we supported the development of UDPN infrastructure which addresses the challenge of interoperability by fostering a payment network that accommodates a multitude of digital currency systems across various blockchain technologies, all the while tailoring the design to ensure compatibility with regulated digital currencies across diverse technical platforms.

Currently, the UDPN offers more than ten digital currency proof-of-concepts (PoCs). Some of these have already been completed by major global financial institutions including Standard Chartered Bank via its innovation, fintech and ventures arm SC Ventures in Singapore, and Deutsche Bank in Germany.

In addition to developing the UDPN itself, we also promote the network’s adoption through the new Sandbox environment you mentioned. The Sandbox provides banks and financial institutions with a secure place to work with new digital currency technologies, test built-in use cases, and develop custom use cases.

Crowdfund Insider: What’s driving the recent momentum around digital currencies? Is this something financial institutions should be prioritizing?

Carlos Kazuo Missao: The growing interest in digital currencies on a global scale is largely being driven by consumers, who have been opting for digital payments over traditional methods for some time now. Digital currencies are part of these payment methods, and while a majority of countries have only begun exploring them on a decentralized level, centralized systems are following in some regions. In more than 130 countries around the world, central banks are currently investigating, developing or have already launched CBDCs —which are the digital equivalent of physical cash, but there are also other types of digital currencies such as stablecoins.

The growing interest in digital currencies on a global scale is largely being driven by consumers, who have been opting for digital payments over traditional methods for some time now Click to Tweet

Whether or not banks operate in a region that is currently exploring CBDCs, new technology allows them to experiment with digital currencies in a way that aligns with their unique market demands. For some banks, this may mean taking an entirely centralized approach to developing digital currency use cases that only allow transactions in their region’s CBDC. Others will benefit from a blended strategy that facilitates both CBDC transactions, as well as transactions denominated in decentralized digital currencies.

Regardless of market dynamics, it’s safe to say that demand for digital currency development will continue. By observing how early adopters in other countries are approaching digital currencies, banks are in a unique position to get ahead of future advancements in their markets now.

Crowdfund Insider: You mentioned that local market dynamics are a big factor in how digital currencies are being adopted around the world. How do those dynamics vary from region to region?

Carlos Kazuo Missao: While digital currencies have touched nearly every global market in some form, each market is taking its own approach to adoption.

In larger and more developed economies such as the U.S. and Europe, for example, we’re seeing slower progress in regards to the introduction of CDBCs for various reasons, heightened regulations being one of them. Compared to markets like Asia and Africa where central banks are proactive and capitalize on new, emerging financial technologies, regulators in the U.S. and Europe typically take a more progressive, controlled approach. This is proving to be the case with their approaches to centralizing digital currency as well.

Latin America is another region that’s showing more eagerness towards CBDCs. For example, in Central America, the Caribbean, and South America, regulators have been more open to extending the reach of their CBDCs to foster cross-border payments across different Stablecoins. There are some restrictions on the types of digital currencies they want to work with, but they’ve shown more willingness to work across borders than other regions.

The Middle East is also moving very quickly now that regulators and financial services institutions have put their weight behind these initiatives. With both Saudi Arabia and the UAE piloting CBDCs with project Aber and the UAE being one of the key players in project M-Bridge.

The common ground in each of these approaches is that global markets are interested in the potential use cases of digital currencies, and are beginning to either test or adopt solutions of their own.

Crowdfund Insider: How will these market dynamics influence the way that consumers, commercial banks and central banks continue approaching digital currencies?

Carlos Kazuo Missao: In countries like the U.S. where regulators have made it clear that they aren’t actively pursuing implementation of a CBDC, we’re seeing more of a bottom-up approach to digital currency adoption.

In countries like the U.S. where regulators have made it clear that they aren’t actively pursuing implementation of a CBDC, we’re seeing more of a bottom-up approach to digital currency adoption Click to Tweet

This is driven by consumers, who, in their demands for new digital financial experiences, inadvertently put pressure on financial providers to cater to these demands. From there, newer market entrants like fintechs and other digital providers are typically some of the first to introduce new financial offerings, with retail and commercial banks following suit. Eventually, this cycle makes its way to central banks, who may take more time to do so, but will eventually introduce centralized, regulated systems around these new experiences.

While it’s true that, at the moment, the U.S. is in a bit of a dormant state with centralized digital currencies compared to other regions, that could speed up at any moment based on market demand.

Crowdfund Insider: Can banks and financial institutions in countries that haven’t taken the leap towards centralized digital currencies still explore and experiment with the technology?

Carlos Kazuo Missao: Yes, absolutely. With sandboxes, banks and financial institutions can experiment with everything from retail and wholesale CBDCs to tokenized deposits, stablecoins, purpose-bound money, and security and bond tokenization systems in a secure environment. This gives them the ability to develop and test new use cases based on what’s happening in their individual market—whether a CBDC is in place or not.

In the U.S. specifically, decentralized networks are providing a way for banks to capitalize on tokenized assets in the absence of a CBDC or larger centralized system. For example, stablecoins are a type of digital currency that is backed by existing government-issued currencies, such as PayPal Stablecoin which is backed by the U.S. dollar. While the U.S. dollar is still dormant on the CBDC side, it’s been much more active where stablecoins and other decentralized digital assets are concerned.

And although cryptocurrencies are still not regulated, the SEC has approved Bitcoin Spot ETFs, driving the adoption of digital currencies in response to increasing market demand.

Until the Federal Reserve starts to take similar action with a U.S. CBDC, decentralized assets are and will continue to be valuable ways for banks to test the water in digital currency projects.

Crowdfund Insider: As digital currency adoption continues taking shape around the world, what are some of the most promising use cases we’ll see?

Carlos Kazuo Missao: Brazil’s Drex is an excellent example of how countries can successfully launch and leverage a CBDC. The country was one of the earliest adopters of instant payments, which have since spread globally.

With both technologies, Brazilian regulators have taken a highly collaborative approach to developing and introducing new payment capabilities before launching them at scale. In the case of Drex, this involved creating a consortium of nearly 40 banks and technology companies who worked closely with the Central Bank to create and run proof of concepts as well as share new ideas and use cases that can be implemented. I think we’ll see more and more countries following similar experiments as digital currencies mature.

Recently, BIS (Bank for International Settlements) announced Project Agorá, which will allow seven central banks to explore the tokenization of cross-border payments in a unified ledger. It could enhance the functioning of the monetary system using new and modern approaches, like smart contracts and programmability.

BIS (Bank for International Settlements) announced Project Agorá, which will allow seven central banks to explore the tokenization of cross-border payments in a unified ledger Click to Tweet

Stablecoins are also paving the way for the eventual introduction of CBDCs in many countries. It may be years before we have a complete global CBDC map, but in the meantime, these types of digital assets are playing a very active role since they are backed by fiat money. This means that even though there are no direct regulations on stablecoins, they’re indirectly regulated, creating a solid stepping stone for broader CBDC adoption.

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