Anastasia Rackovska, Head of Enterprise Risk Management, Paynt and Tsambika Jeffries, VP Risk and Governance, BVNK discusses the beginning of a new era and digitalising data.
Blockchain technology has been widely recognised as a breakthrough in protecting digital data.
Although the concept existed for decades, the first public blockchain was created in 2008 by Satoshi Nakamoto – a pseudonym for an individual or a group of people – and thus, Bitcoin was born.
Since then, new blockchains have emerged, along with thousands of crypto assets built on them.
A particularly important development came in 2015 with the creation of the Ethereum blockchain, which enabled developers to deploy decentralised software applications.
These applications allow users to access services such as trading, lending and borrowing without intermediaries. Together, these services form what is now known as decentralised finance (DeFi).
The true innovation lies not in cryptocurrencies themselves, but in the technology behind them – the blockchain.
It is a database that uses encryption to store blocks of data and links them together chronologically.
Blockchain offers several key benefits:
In essence, blockchain acts as a single, trusted source of truth, one that could fundamentally change how value is transferred and recorded across the global economy.
The world is steadily moving away from cash and relying increasingly on electronic money – a shift that makes sense given its convenience and relative safety.
When I was growing up, I remember a story from my school days.
Teachers used to receive their salaries in cash and on one payday, a teacher was robbed while carrying her wages home.
Beyond losing her income for the month, she also endured the trauma and fear of being attacked.
While digital theft is undoubtedly serious, it spares victims the physical and psychological distress that comes with such incidents.
Today, cash remains significant in many countries, especially in rural or low-tech areas, but it is clearly losing ground. According to the European Central Bank (ECB):
Non-cash payments rely on intermediaries – banks, payment service providers (PSPs) and money service businesses (MSBs) – that allow us to store and manage our funds securely.
Thanks to them, we can easily purchase goods from the U.S. or China from the comfort of our homes in the EU or UK.
Let’s return to blockchain technology, which has the potential to remove the need for intermediaries altogether. Blockchains were originally designed to facilitate clearing and settlement of payments – a function traditionally handled by banks – and to enable the direct exchange of value between parties.
While many remain sceptical about cryptocurrencies like Bitcoin and Ethereum due to their volatility, the emergence of stablecoins has helped bridge the gap between digital and traditional finance.
Another revolutionary feature of blockchain is programmability.
Smart contracts can automatically execute payments once pre-defined conditions are met, such as confirming delivery or project milestones.
This automation reduces administrative overhead and eliminates manual reconciliation, enabling new models like programmable payrolls or decentralised insurance payouts.
Alongside private innovation, central banks are exploring their own digital forms of money.
A Central Bank Digital Currency (CBDC) is a digital version of a country’s fiat currency issued and regulated by its central bank.
It combines the speed and convenience of digital payments with the stability and trust of traditional money.
Central banks pursue CBDCs for various reasons including: Payment efficiency, cost reductions, monetary policy, financial inclusion and transparency.
Examples of CBDCs in practice include: The Bahamas’ Sand Dollar (launched in 2020), the first fully implemented CBDC in the world; Nigeria’s eNaira (2021), which aims to improve inclusion and streamline payments; Jamaica’s Jam-Dex (2022), designed for secure peer-to-peer payments and digital commerce
It’s not all sunshine when it comes to innovation.
Despite their advantages, digital currencies and blockchain carry risks that differ from those in traditional finance.
They rely on complex technology and global connectivity, which can improve efficiency but also introduce vulnerability.
Regulatory and consumer protection have been lagging innovation in this area, however new regulatory regimes are being deployed, for example the Markets in Crypto-Assets Regulation (MiCA) in the EU and the Genius Act in the US.
The lack of regulation to date has constrained adoption of blockchain and digital currency due to the lack of confidence in the security and operation of the new technologies.
As more participants become regulated, we can expect to see broader adoption as confidence in the system grows.
Whilst regulatory standards and oversight will improve the overall control environment, there will still be risk to manage.
Operational risk can result from errors in the interconnectivity protocols between participants or within smart contracts, resulting in vulnerabilities that can be exploited by cyber criminals.
There are also scalability risks as performance of some blockchain networks can be impacted during peak usage periods. Linked to this are concerns around sustainability and energy usage, which could emerge as material risks in the future.
The pseudonymous nature of many blockchain networks raises the risk that they can be used for illicit purposes such as money laundering or sanctions evasion.
Criminals are becoming more sophisticated in avoiding detection so it is important that RegTech continues to innovate.
There are many tools now offering live monitoring of DeFi networks to identify suspicious and illegal activity.
Volatility of digital currency also remains a key risk area, with market shocks a frequent occurrence.
Whilst currency (fiat) backed stablecoins should match the underlying currency 1:1, there have been examples of the digital currency de-pegging.
Regulation should help in this area, adding more control around how stablecoins are managed.
Whilst there are risks associated with blockchain and digital currency, there are also material benefits and risk reduction in other areas.
The role of the Risk Management function is crucial in understanding the risks and opportunities in order to advise on potential adoption whilst managing risks within appetite.
The future of finance seems to be shifting toward a world where blockchain, digital currencies and decentralised systems are used alongside traditional money.
Although central banks state that digital currencies are intended to co-exist with cash rather than replace it, the figures speak for themselves – cash usage is steadily declining and it seems that, at some point, we will say goodbye to cash.
This article was originally published in the November edition of Security Journal UK. To read your FREE digital edition, click here.
