July 29, 2022
Konstantin Mashukov, Truvity founder
At the Money 20/20 conference was a discussion about CBDC, Open Banking, Digital ID, Crossborder interaction, and tokenization. Read the executive summary to catch up with trends and the future of finance.
This was probably the hottest topic of the conference, which is not a surprise. About 80% of central banks worldwide are exploring use cases of CBDC, and 40% are testing proof-of-concept programs, according to a new report by Bison Trails. But there are more questions than answers around this topic. Everyone appeals to an example settled by China with its 250 million users of digital wallets with e-CNY (digital yuans). But, if China can force citizens to use them, this is not the case in Europe and the UK.
The European Central Bank (ECB) sees its future Digital Euro as a digital version of cash, pointing to the convenience and security of personal funds as the main benefit to its users. Some experts doubt that convenience is achievable without the interoperability of CBDC and compatibility with the crypto world.
We think that the programmability of the CBDC could be very handy for governments that wasted billions of Covid-19 support payments in recent years. The situation didn't go by the planned scenario because accepters of the government money decided to spend them on crypto coins and other unexpected things but general goods and services, and these measures didn't support economies as much as hoped. With programmable CBDC, it's easy to limit where and how the owner of money can spend them.
But with CBDC, governments can get unprecedented control over consumers’ personal data. It looks very tempting to misuse this deep knowledge of voters’ habits, needs, problems, and challenges. Especially if the commercial banks will be out of business one by one which is very possible. If a consumer gets financial services from a government and keeps the money as CBDC, there is no real need for commercial banks. This ethical question requires further discussion.
Nowadays, commercial banks work as the first line of defense against fraudsters and criminals, filtering them off during the onboarding process and KYC. If an economy switches to CBDC, the question is, who will be responsible for this part of the job? Central Banks are not meant to do this work and must rely on third-party identification services.
At the conference, we saw a lot of startups offering identification and KYC services to financial companies. By our estimation, about a quarter of all the booths at the conference exhibition hall at Money 20/20 were taken by companies focused on this problem. The compliance’ complexity increases and KYC becomes more problematic. It’s harder and harder to distinguish between a good customer and a criminal. You don’t need to be an oracle to predict that demand for KYC solutions will be growing in the next years. We believe that this is a perfect application for SSI. A consumer can be identified and known before getting CBDC from a Central Bank using verified credentials issued by the government stored in the SSI-based digital wallet. This also would be a relief for neobanks that are an easy target of fraud as long as they lack the resources to build a proper defense against complex crime schemes.
But, all companies that we saw at the conference are focused on consumer applications, and we found no products meeting B2B requirements. Some startups provide so-called Know Your Business (KYB) service based on information from public registers or purchased data about legal entities registered in particular jurisdictions. This information is unfortunately not complete and consists of superficial data about the legal entities. It is also barely reliable because, in most cases, it was self-declared by companies and is not up-to-date.
In the future, the Business Wallet technology based on the SSI principles will be the best way to address these issues. A company will store all the data, including the structure of ownership, a complete list of stakeholders, and other information in its Business Wallet, and will grant access to parts of the data whenever it is necessary.
There is a potential market for aggregated data providers that would allow doing KYB of a company and KYC of its owners in one place, which is necessary to get a complete picture of an onboarding customer and their business and to mitigate compliance risks. The SSI can play the role of glue in business interactions and a protection mechanism for the current and emerging fintech projects, which will become even more critical with the increasing complexity of regulations and compliance workflow.
People’s behavior has changed, and fintech startups continue to take up market share from well-established players. Open Banking has got a fresh start. More banks are collaborating with non-banking startups and other banks, forming hybrid ecosystems with financial and non-banking products, and looking for new revenue streams. Tink is an example, and Sterling Bank as the company leverages its open APIs for rapid international expansion. The bank enters other markets as a fintech platform providing a fully equipped back office for local fintech players instead of offering traditional banking services to consumers.
Globalization is stuck in the middle of the road and, in some aspects, even turned back. We must find an efficient and secure way to move money between jurisdictions in the "new normal' environment. Unfortunately, we don't see any good solutions that would allow running transactions globally in a way that fits with the digital era we live in. We still rely on outdated mechanisms that don't help even with transactions between common jurisdictions like Hong Kong, the EU, and the UK. Even in Europe, the interactions between EU markets are problematic, which was widely discussed at Money 20/20. The EU efforts in this field give us some optimism thanks to the EU4Digital and "EU Digital Single Market" program includes SSI as part of the solution.
The pandemic increased opportunities for scammers and fraudsters well equipped with automatization and AI tools. Now, they can run massively scaled attacks, capitalizing on poor government cyber defense and rapidly changing social and business support programs (eg rebate scams).
Cyber threats will be an even more crucial problem in the context of the new economy tech stack. Together with benefits, digitalization brings risks of new cyber threats. Data silos are hacker honeypots and can attract professional cyber criminals who will bring cyber threats to a new level in scale and massive damage.
Data is the new oil, and everyone is talking about ethical ways of data management. It used to be a theory, but with Open Banking, the problem became real and more acute than ever before. In the complex ecosystems that engage banks, fintech startups, and non-banking projects, GDPR becomes hard to follow. One potentially successful approach to this issue is the depersonalization of personal data. There is a need for new interoperability schemes and collaboration on data without actually sharing it. And here, the SSI with ZKP (Zero-Knowledge Protocol) can be handy to solve the problem.
Furthermore, decentralization and a shift to peer-to-peer interactions are the most promising strategies to address cybersecurity issues. Following this approach, technological solutions based on SSI principles can help shrink the “attack surface” and make the attacks less possible.
As many experts say, winter is coming to the crypto industry, and we agree with them. There is no reason to be optimistic about cryptocurrencies with CBDCs development, Open Banking updates, and further growth of the fintech segment. CBDC is a “PayPal from government” and can provide all that cryptocurrencies can bring to the table and do it on the mass-market scale.
The crypto world creates promising innovations in the field of payments and Digital Wallets with decentralized identification solutions. However, they are completely disconnected from the established industry of finance and standards of KYC and AML. Although we have seen a lot of crypto projects right next to the banks in the Money 20/20 exhibition hall, there is a vast gap between these two worlds. The crypto world is supplying talents and technology to traditional banks and generously funded fintech companies, which will continue like this.
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