What's changing in the payments landscape?
The global payments landscape is rapidly evolving, with significant regulatory change being introduced across key financial centres, alongside more jurisdictions considering the introduction of central bank digital currencies (CBDCs) and private-sector initiatives developing at pace. Many of these developments rely on blockchain and distributed ledger technologies (DLT).
Fintech lawyers are grappling with the implications and uncertainties surrounding the development of DLT-based products. Amid the expanding market, concerns persist about the stability of cryptocurrencies, but the potential for central bank-backed digital currencies (CBDC) to be issued in key jurisdictions has sparked interest among legal professionals, who weigh the benefits of streamlined cross-border payments against potential challenges like data privacy and speed of adoption.
of payments come from cash use since the pandemic.
On digital currencies, there is speculation and disagreement over what the introduction of wider digital currencies might mean for the payments world and the lawyers within it. With the collapse of Silicon Valley Bank and FTX, and ongoing challenges for other key market players, concerns about the stability and security of digital assets remain.
However, the digital currencies market is still growing. The Bank of England estimates it will increase from $150 trillion in 2017 to $250 trillion in 2027 - more than a $100 trillion increase over 10 years. At the date of publishing, the price of Bitcoin is on the rise again which may bolster a potential uptick in the market.
And since the pandemic, cash use constitutes only 15% of payments, meaning that money is now predominantly out of the public sphere and instead in account deposits in commercial banks or private money in the form of e-wallets, crypto or stablecoins. This alone could be a key driver for introducing a CBDC, a digital representation of fiat money issued by a central bank.
According to the Atlantic Council, more than 130 countries, representing 98 percent of global GDP, are exploring the opportunities that CBDCs might bring. A few countries, including the Bahamas and Jamaica, have already launched CBDCs, while the majority are still in pilot or research stages. Key financial centres including the EU, UK and Singapore are edging closer to making a decision on whether to issue.
Many CBDC projects have a domestic, retail focus. However, international standards setting bodies such as the Bank for International Settlements (BIS) are pushing for the use of CBDCs to facilitate cross-border payments. Solving the issue of interoperability between initiatives is key.
“The payments landscape we are looking at today is going to change tomorrow. We are at a point in time where new payment methodologies are being developed, and it is up to the industry, to the merchants, and to the user to feed into that debate and make sure we are getting what we want out of it and that it is better and safer.”
- Diego Ballon Ossio, Partner, Clifford Chance
Fintech lawyers are interested in the potential capabilities of CBDCs, including the possibilities they offer for innovative product development and their potential to make cross-border payments easier. Being backed by a central bank could cut out the lags that currently exist when dealing with cross-border payments, making in-house lawyers and their business and sales teams' lives smoother.
However, introduction of CBDCs isn't without fallbacks. Lawyers are concerned about the increased risk of data exposure as a digital currency would be easier to track, which is handy for anti-money laundering but potentially worse for the individual right to privacy. It is critical that this is addressed as part of the design of any CBDC platform. There is also scepticism about how quick take-up of a digital currency would be, and whether there may be circumstances where users would rush to take cash out, potentially causing collateral issues for central bank funds. From a commercial perspective, the future role of banks and their vital role as intermediaries is of key importance. Central banks will not make the role of commercial banks redundant, but substantial change to business models is likely. Any potential use of CBDCs would also need to be considered and compared against alternatives, including stablecoins and tokenised deposits on the private sector side.
It's important to note that the future isn't all DLT-based. There are also significant developments more widely across the international payments landscape. For example, Dina White, general counsel at Zodia Markets notes that “on the fiat money side improvements are being made, such as increased international standards coming in with ISO 20022.” Clifford Chance share some further insights on wider payments developments below.
Trends and regulation in the payment industry
Diego Ballon Ossio, partner at Clifford Chance discusses the trends currently seen in the payments industry. From the application of crypto technology in new parts of the payments industry, to the use of blockchain to shorten settlement cycles, listen to cutting-edge insights into what is currently going on in the payments space.
Regulation insights with Clifford Chance
Global regulators are acting to keep pace with the rapid evolution of the payments sector, emergence of new payment solutions and more sophisticated types of fraud. This will significantly increase the regulatory burden for firms and lawyers in the fintech space.
For example, in the EU, the European Commission has proposed making targeted amendments and updates to the existing regulatory regime for payment services and electronic money (e-money) via a new (i) Payment Services Directive (PSD3) and (ii) Payment Services Regulation (PSR). This is accompanied by a new open finance proposal in the shape of a regulation on a framework for Financial Data Access (FIDA). These complement a wider digital finance package including the comprehensive markets in crypto-assets regulation (MiCA) and the new digital operational resilience act (DORA) as well as proposals around a potential digital euro.
In the UK, The Future of Payments Review Report was published in November 2023 which included a call to enhance open banking requirements as a priority, with a request to develop it into a sustainable commercial arrangement with incentive for providers to drive, invest and support it. The report also recommends the need for an overarching payments vision with high level guidance on the relative priorities, so that both regulators and industry can become more aligned in their delivery. This would allow simplification of the current plans and landscape and improve regulatory alignment and efficiency. October and November 2023 also saw a raft of publications from the UK Government and financial regulators on the regulation of stablecoins and cryptoassets in the UK. These publications offer more detail around how the evolution of a comprehensive regulatory regime for cryptoassets and stablecoins will look in the UK in comparison to MiCA and other regimes.
These developments are also mirrored internationally. For example, the Monetary Authority of Singapore (MAS) has recently published the responses to its October 2022 consultation on proposed regulatory measures for digital payment token services which will introduce requirements for segregation, safeguarding and custody of customers’ assets as well as business conduct, consumer access, and technology and cyber risk management requirements. The MAS has also released a blueprint outlining the infrastructure required for a digital Singapore dollar and announced a plan to issue a live CBDC for wholesale settlement. And in the US, in October 2023, the Consumer Financial Protection Bureau published for comment a long-awaited proposed rule to accelerate a shift towards open banking.
