by Carlo Liotti and Davide Oliveri, respectively Partner and Associate Manager in Excellence Payments

“OK, I give up. Klarna and me will embrace crypto. More to Come!” (Sebastian Siemiatkowski,

This recent tweet from the co-founder of the leading payment services company was published a few weeks after its IPO on the US market. “We have had to rethink our strategy to respond to the evolution of consumer needs and to embrace the technological innovation that cryptocurrencies represent.” A statement that was unthinkable until a few months ago, which well summarizes the way in which the main players in the payment market perceive and adapt to the spread of cryptocurrencies. It is clear how urgent it is for traditional payment companies, in a market that has undergone significant changes in recent decades, to consider the value that cryptocurrencies such as Bitcoin and Ethereum have introduced, offering decentralized and transparent transactions that challenge traditional mechanisms.

In the debate on the possibility of considering cryptocurrencies not only as a new asset class characterized by a “natural” volatility, the answer was perhaps too weak and generic. There should have been a more in-depth discussion on the features that cryptocurrency management infrastructures make available to the payment system, considering that the big players in the market and some cutting-edge institutions had already started a roadmap for the development of a digital currency offering (in particular “stablecoins”), to provide an initial response to the issue of erratic prices.

At the same time, the debate and experimentation of new digital currencies that operate under the aegis and control of central banks is gaining more and more weight.

CBDC, increasing trust in digital currencies

Over 90% of central banks are pursuing or considering central bank digital currency (CBDC) projects, and more than 30 have launched pilot projects. There is now consensus in Europe in considering the digital Euro as a payments modernization project, designed to simplify daily transactions and ensure greater financial inclusion. Digital currencies are attributed a series of benefits for most of the different subjects involved: for consumers: simple and inclusive tool, with a single digital identity (Digital Euro Account Number – DEAN); for businesses: immediate access to funds, reduced transaction costs, offline mode for fast payments; for financial intermediaries: greater competitiveness, innovative services on a pan-European scale.

At the same time, the introduction of digital statutory currencies allows to provide a clearer regulatory framework, increase user trust thanks to institutional backing and facilitate the integration between traditional systems and digital innovation.

Institutions and operators converge in identifying the main advantages:

• Transparency, guaranteed by blockchain technology

• The potential reduction of transaction costs ¹

• Greater speed in international transfers ²

• The possibility of automation through smart contracts

(1) International bank transfers involve multiple commissions: transfer fees (up to $25); additional commissions up to 7%, exchange rate commissions, costs for each intermediary involved. All this generated more than $220 billion in revenues for the banking system in the world in 2019.

(2) Bitcoin transactions require an average of 10 minutes to be finalized, compared to 3 days for traditional bank transactions

If we move to another point of observation, that of the challenges posed by the development of a digital currency offer, it is worth remembering the summary made by Pietro Cipollone (in his capacity as Deputy Governor of the BoI) on the occasion of the conference “Central Bank Digital Currencies: Threat or Opportunity ? (London School of Economics) where he highlighted four areas to focus on:

Economic

– Finding the right rate of adoption (too high could threaten financial stability)

– Designing the CBDC as a means of payment, not as a store of value

– Limiting banking disintermediation through amount limits and penalizing remuneration

Legal

– Finding the legal basis for the issuance of a digital euro

– Evaluating the status of legal tender

– Harmonizing with the existing legislative framework (directives on payment services, anti-money laundering)

Technological

– Evaluating technologies such as blockchain

– Decisions on ownership, representation of the money, governance and access

– Cybersecurity with a focus on the extended attack surface

– Balancing programmability and security

Organisational

– Adapting the organisation of central banks

– Coordinating cash and digital euro management

– Acquiring specialist IT skills

– Governing a supranational system in the Eurosystem

In short: once the overlap between the world of cryptocurrencies and that of payments has been clarified, and the elements that do not attribute value but rather limit their adoption (price erraticness) have been isolated even when a sort of issuer guarantee is provided (stable coin), most of the “assets” remain on the table within the cryptocurrency market that have seen the development of new functions and determined the need for a broader regulatory scope.

An increasingly rich regulatory framework
The payments landscape is undergoing an epochal transformation and Italy is experiencing this transformation on the front lines. In just four years, from 2019 to 2023, the number of digital transactions per person has more than tripled, from 61 to 186. A change that tells a story of cultural adaptation rather than technological adaptation. Contactless payments, once viewed with skepticism, have become the norm, doubling in volume to reach 186 billion euros. This evolution is accelerating thanks to the introduction of new regulatory frameworks and the strategic response of the main market players. The introduction of the regulatory complex collected – in large part – on MiCA and DORA represents a fundamental turning point for the sector. MiCA has revolutionized the market access times for crypto service providers: what previously took two years is now completed in six to eight months and has catalyzed a 45% increase in corporate investments in the crypto sector in the last year.

DORA is transforming digital security from a cost center to a strategic investment. Large financial institutions are investing an average of 2.3 million euros to adapt, but the return on investment is extraordinary: 180% in three years, thanks to the drastic reduction in incidents and recovery times. The synthesis of the combined impact of DORA and MiCA on the development of innovation in the payment market can be summarized in the creation of a framework of trust.

DORA: ensures operational resilience, standardizes technology risk management, strengthens cybersecurity

MiCA for its part: regulates the issuance of crypto-assets, defines requirements for stablecoins; protects investors. In short, these regulations are creating the “regulatory highways” needed for faster but controlled innovation in the digital payments sector, balancing protection and market development. (1)

But the real impact is measured in operational efficiency.

Blockchain and cryptocurrency are disrupting industries that seemed immutable. Take Walmart: using blockchain, they transformed their food traceability process from a week-long process to a process that takes seconds. This isn’t just a technological improvement; it means safer food, less waste, and increased consumer confidence. In international remittances, the transformation is even more dramatic. Cryptocurrency-based solutions have reduced transfer costs from 6.4% to 0.2%—a shift that has a real impact on the lives of millions of workers who send money home.

Payment circuits and the need to reinvent themselves

Traditional payment circuits have not stood by and watched. Visa has launched its Universal Payment Channel, capable of processing 65,000 transactions per second and reducing settlement costs by 96%. Mastercard has created a sandbox for digital currencies that has already attracted over 100 central banks, drastically reducing implementation times from six months to six weeks. The company is operating on two fundamental aspects following the stimuli generated by the continued affirmation on the market of solutions that originate in the “crypto and blockchain” environment. First, it is accelerating investments in infrastructure under the umbrella of the “Multi-rail strategy”, developing protocols for instant payments, promoting integration with blockchain networks and drastically improving its processing capacity.

More relevant is the strategic change that Mastercard seems to have undertaken following the changed competitive scenario, which is driving the evolution of the business model from “scheme fees” to “value-added services driven”. Three figures above all explain the commitment that the company is adopting to lead the change: revenues from data analysis services have grown by 124%, cybersecurity solutions generate 15% of revenues, consulting services have increased by 89%. The next two years will be crucial. Companies that know how to navigate this new landscape will be able to access new markets with low barriers to entry, expand their customer base by a third and reduce operating costs by up to 60%.

But success will not come automatically. It will require a balanced approach between innovation and compliance, with targeted investments in regulatory compliance. These are not just costs, but investments in the future. The real revolution is not in technology or regulation, but in the convergence of these elements in a new payments paradigm. The companies that will succeed will be those who can see beyond the individual changes, seizing the interconnections and opportunities that emerge from their combination. The future of payments is already here and is redesigning not only how we move money, but how we conceive value itself. The companies that can interpret this transformation not as an obligation but as an opportunity for innovation will be those that will lead the market in the coming years and will be able to benefit from significant and lasting competitive advantages.

So what?

Given that the distinction between cryptocurrencies as a form of investment and digital currencies as an evolution of statutory currencies is increasingly clear, we can agree that both technology and regulatory evolution together with the central banks’ oversight of these issues have created the conditions to act and accelerate change. On this point, it should be remembered that payment circuits have long since activated working groups with the Institutes and Banks with which they operate to collect the “voice of the customer” and begin to design an offer that transfers the advantages previously highlighted to those who make the market. Preparing a new range of digital wallets, evolving the range of products offered for B2B payments, opening the market to new categories of customers, developing forms of embedded payment, these and many others are the projects that we would like to see on the agenda of operators in the payment market.

It is up to them to take charge of the last mile of this long marathon.

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(1) DORA (Digital Operational Resilience Act) / MiCA (Markets in Crypto-Assets). DORA focuses on the digital operational security of financial institutions – MiCA specifically regulates the crypto-assets market and its operators