Opinion by: Marcos Viriato, co-founder and CEO of Parfin
Recently, it was reported that Bank of England Governor Andrew Bailey announced work is urgently pressing on to create a central bank digital currency (CBDC) for the United Kingdom as a form of digital money accessible to the general public. The announcement is a progress report on a scheme the UK has been considering since early 2023. Bailey’s announcement to fast-track activity, however, signals something: There is pressure to be faster and lead the move toward digital currency.
What has spurred Bailey’s comments resembles a concern shared with regulators worldwide: that fintech firms today, intensely driven by innovation and often less regulated across global markets, are advancing digital solutions faster than central banks. Traditional financial institutions simply cannot match up. This rapid acceleration of private sector solutions threatens the stability, security and privacy of global financial markets if left unchecked.
As the world of digital money continues to advance, central banks and financial institutions face an imperative to upgrade their technology and to adopt the innovation that has been created in the Web3 ecosystem, applying it in a secure, controlled and transparent regulatory framework to meet the benchmarks of modern fintech innovation. Lagging isn’t just a missed opportunity — it introduces vulnerabilities that sophisticated private-sector solutions could exploit. Traditional institutions may be unable to uphold the necessary pace of innovation, particularly when pitted against decentralized systems that can provide a higher degree of control and transparency, with millions of users contributing to the security and development of this new infrastructure.
The challenge for central banks to continue to lead in defining secure, accountable financial frameworks is not easily solved. The competitive edge that Bailey’s “less-regulated tech firms” have is that they have achieved more significant innovation by skirting stringent and restrictive regulations. Fintechs are born out of the latest technologies, with adaptive systems integrating Web3 advancements and decentralized infrastructure, whereas central banks and financial institutions work with legacy systems and deeply entrenched practices.
Recent: Chainlink, Microsoft, Banco Inter collaborate on Brazil’s CBDC pilot
The stagnation and slow pace of innovation from traditional financial institutions is not merely technical — it’s institutional. The frameworks that govern our economic system — both regulatory and operational — are not designed to keep up with the dynamic evolution of digital currency. Regulations have been shaped over decades, focusing on mitigating risk, protecting consumers and preventing financial crises. While crucial, these safeguards inadvertently create barriers to innovation.
Society’s expectations are, however, quickly shifting as people become more comfortable with digital, on-demand services, transparency and ownership of their assets. As the demand for secure digital banking grows, central banks and financial institutions face an unavoidable crossroads. They can either adapt to serve the modern financial consumer or lag behind other countries and institutions that are fast-moving in this direction. Unfortunately, the traditional frameworks are, at times, so constrained by regulatory caution that they become an obstacle rather than a protective measure.
Some might say it’s a realigning perspective — fearing the innovators disrupting today’s financial system will only widen the chasm between traditional finance (TradFi) and the challengers. Learning why the disruption is taking place and who is leading innovation could help inform regulatory developments and guide innovation for the central banks.
The solutions for such banks are simple but require much trust. We’re talking about new policies, partnerships and talent pipelines embedded at a traditional institutional level that can effectively navigate the radically different world of blockchain finance. Linking arms with the challenges you’re seeking to catch up to does come with its risks. Finding suitable partners in fintech companies that offer the security, the crypto asset services and the blockchain interoperability is a lengthy process requiring comprehensive trials.
Perhaps the model of digital currency governance itself must be rethought to enable security-driven innovations that are compliant but flexible and able to respond to global demands for speed and transparency. In the wake of its competitors, the opportunity for central banks lies in redefining what it means to secure a digital currency with an openness to embrace international cooperation to ensure a uniform standard of privacy, security and accessibility.
Central banks face a paradox: While protecting consumers from risk, they must also move forward. Beyond the chance that tech-driven challengers will outpace them lies a wealth of opportunity. It’s no secret that CBDCs unlock greater financial inclusivity. There are critical considerations as to how these digital currencies can better control inflation, interest rate transmission and fiscal policy coordination. Such a possibility seems argument enough to be more proactive in advancing CBDC progress worldwide, making hesitation seem all the more costly.
Marcos Viriato is the co-founder and CEO of Parfin, a fintech company that provides digital asset custody and blockchain solutions to traditional financial institutions. Before starting Parfin, Marcos had a significant career in the financial sector.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.