The future of money belongs to Digital Financial Market Infrastructure (DFMI) - but Central Banks, Private Sector companies and the scions of Decentralised Finance are all fighting for the same ground

As cryptocurrencies and stable coins have become meteorically more popular across the globe, the world’s central banks have realized that they need to provide an alternative or let the future of money pass them by

Russia’s recent disconnection from SWIFT – the world’s most widely used financial messaging service – has triggered a conversation about the future of financial market infrastructure (FMI) which is long overdue.

Innovation in digital currencies means that the influence of global reserve currencies is going to decline in the coming years, such that power and influence will instead be wielded by the dominant Digital Financial Market Infrastructure (DFMI).

As cryptocurrencies and stable coins have become meteorically more popular across the globe, the world’s central banks have realized that they need to provide an alternative or let the future of money pass them by.

Currently, 87 countries (representing over 90 percent of global GDP) are exploring a Central Bank Digital Currency (CBDC), while 9 countries have now fully launched a digital currency. In other words, the race for the future of money is well underway.

The conflict in Ukraine has undoubtedly accelerated this race amongst the West, Russia and China to build the dominant Digital Financial Market Infrastructure (DFMI). In other words, what will become the prevailing global e-currency paradigm.

For years, China has been aggressively promoting its cross border interbank payment system (CIPS), but attempts to promote the digital yuan as an alternative global trade currency have been undermined by capital controls that mean it still only accounts for half the sterling’s share of global payments by value – but it is catching up quickly.

Last month, President Biden issued an executive order which indicates that his administration sees development of a CBDC as potentially important to supporting “the continued centrality of the United States within the international financial system” and protecting the “unique role that the dollar plays in global finance.”

The emergence of digital currencies represents the final step in the full digital transformation of the global financial system and the biggest transformation the industry has faced in more than 300 years.

With the old banking world playing an increasingly smaller role as it gives way to the new era, the winners of the new race edge ever closer to substantial influence over the global money supply while the losers march slowly to irrelevance.

Against this backdrop, the private sector has a crucial role to play in developing an open-source, fully integrated and interoperable ecosystem for DFMI, such that no single tech giant or government can dominate the future of financial market infrastructure.

If achieved, the practical benefits to international trade are unfathomable. Cross-border payments illustrate this perfectly. Traditionally, this is an area that is highly complex, dominated by local and regional regulations, constraints and requirements.

Merchants that want to operate internationally are forced to use a variety of payment service providers across different markets. There is also a need to set up bank accounts to handle local currencies, which contributes to high costs, settlement delays and a general lack of transparency.

With digital assets and transactions undertaken on the blockchain, all of this can be sidestepped – and those transacting can enjoy simple, cheap and almost instant cross-border payments. To achieve this on a global scale, the winning private sector platforms will need to prioritize making digital identity, financial inclusion and regulatory compliance core facets of their unified and fully integrated designs.

However, both Central Banks and private sector companies will continue to meet fierce opposition from the proponents of decentralised-finance (DeFi), most notably from staunch Bitcoiners – and not without good reason. The recent advent of the Bitcoin Lightning Network, a secondary layer of the Bitcoin blockchain, is showing promising signs of overcoming the ‘scalability barrier’ that restricts the widespread adoption of cryptocurrencies.

If scaled properly, a blockchain network can handle millions to billions of transactions per second (TPS). In this context, the Lightning Network charges low fees by transacting and settling off-chain, allowing for new use cases like instant micropayments – which helps answer the often levelled question “can you buy coffee with crypto” – by speeding up the processing times and reducing the expenses (or energy costs) associated with Bitcoin’s blockchain.

We are not likely to see the emergence of a clear winner any time soon. Rather, the next two decades will see the world’s legacy reserve currencies fight for their relevance on a level playing field with the leading blockchain-based and tokenised assets. The prospect of a second Cold War has suddenly morphed into the preliminary battles of the Crypto Wars, which are hotting up with every passing day.

Tim Heath is a Founder and Board Member of the Yolo Group, and a General Partner at Yolo Investments, a Venture Capital firm which operates globally recognised gaming brands such as bitcasino.io and sportsbet.io. Tim was an early adopter of Bitcoin, and specialises in transforming ideas into successful businesses - he has done so with such brands as the innovative content aggregator Hub88.io, and the mobile- focused games studio OneTouch.io.