Modern technologies are improving businesses, albeit at a different rate, given the differences in size and structure of companies around the world. The adoption of technology solutions also varies due to factors such as necessity, plans, and cost analysis. Small businesses often focus on technologies that can immediately improve their processes while reducing the use of financial and human resources.
CBDC and digital ID are two growing technologies predicted to change many things about business, finance, and traditional institutions. Although institution-level companies and countries are adopting these, small businesses may need more resources to adopt such solutions on a grand scale. For example, enterprises engaging in forex trading may find uses for technologies that facilitate payment and improve security more than those that sell used items locally.
What are CBDC and Digital ID?
Central Bank Digital Currencies (CBDCs)
CBDCs are digital tokenized versions of a country’s fiat currency issued, regulated, and maintained by the country’s central bank. The value of CBDCs is not tied to any physical commodity but to the value of the material (fiat) currency. There are wholesale CBDCs (for financial intermediaries) and retail CBDCs (for general economic applications).
Digital ID refers to information that represents an external user – a person, organization, device, software, etc. – on a computer system and is used to prove the user’s identity. Digital ID usually includes biometrics, name, address, government-issued ID, date of birth, and social security number. The organization, deployment, and regulation of digital ID vary across countries and organizations, but the basic principles are similar.
Impact of CBDC and digital ID on small businesses
How will CBDC and digital ID impact small and medium-scale businesses? What are the benefits and advantages they stand to gain?
Improved payment efficiency
Most businesses offer more than one method of payment for flexibility. Traditional banking options include cash, cheques, wire transfers, debit/credit cards, and other technology solutions such as digital wallets. But the increasing adoption of digital assets such as CBDCs means that small businesses can now receive payments in digital currencies, effectively avoiding some of the issues with traditional payment platforms.
CBDC transactions are faster, traceable, and can be integrated into existing payment systems. The increased efficiency may be the critical difference in growing the business operations such as cross-border transactions.
Although CBDCs may be issued on blockchains, the blockchains are often centralized and maintained by the central bank. This provides arguably the highest level of digital security for online transactions. CBDC units are fungible and can be tracked once transactions are initiated. The ease of this makes it suitable for small businesses looking for simple but secure payment systems without paying high fees.
Integrating digital ID into CBDC payment systems ensures that transactions are only initiated and terminated by the authorized individual, agent, or organization.
Enhanced regulatory compliance
Most countries and international organizations have tax and anti-money laundering laws and regulations businesses of all sizes must operate by. Know your client (KYC) requirements, for example, are the most common anti-money laundering (AML) requirement for companies involved in financial transactions. How do small businesses run by one person or a small staff adhere to financial regulations?
CBDC makes financial accounting easier, thanks to its transparent nature. Small business owners can integrate tax software to track CBDC transactions. Digital ID systems also help track small businesses’ labor, environmental, and insurance compliance.
Access to new markets
Business development strategies involve research to build market intelligence and find an advantage in competitive areas, as well as opportunities to collaborate and leverage existing structures to explore new markets. Integrating CBDC and digital ID can facilitate such explorations so small businesses can expand their reach.
Businesses that accept CBDC and other digital assets join a small but growing group of businesses patronized by digital asset holders. It also helps companies position themselves as early adopters of CBDCs, granting them business clout and authority – two critical assets for entering new markets.
Improved financial inclusion
One of the goals of CBDC is to increase financial inclusion, reaching 22% unbanked Americans. Small businesses that adopt CBDC technology contribute to that goal and qualify for some benefits from the government. A proposed benefit is a temporary tax relief for businesses that adopt CBDC payment early. If that works, small businesses may earn back some tax deductions by advancing financial inclusion policies to reach the unbanked.
Digital ID solutions also allow people to use CBDC without owning bank accounts. CBDC, while designed and deployed by central banks, can run parallel with bank accounts; users only hold their private keys to individual assets.
CBDCs are predicted to reduce the costs of printing and maintaining fiat currencies at the federal level. The benefits may include lower debt, inflation, and expenses of goods and services. For customers, it decreases the cost of carrying cash around, and of cashless transactions. All these make it easier for customers to patronize small businesses, local brands, and retailers where they can purchase goods at friendly prices.
Small businesses may have benefits such as lower business costs due to a more resilient payment system, reduced workforce, and lower interest rates on loans they take. Digital ID integration may also reduce costs associated with cybersecurity, fraud, and losses due to identity compromise.
Improved customer value
Businesses constantly seek to improve value and value delivery to their customers. This is possible with the advantages that CBDCs and digital ID systems offer. For example, the flexibility of paying with CBDCs may attract more customers and help businesses deliver targeted solutions to customers who prefer that method. Improving value and customer relationships always impacts businesses positively.
Small businesses looking to improve security, payment processing, and access to new markets while reducing running costs may find CBDC and digital ID solutions beneficial. It is essential for businesses to carefully plan the integration of new technology for seamless and effective adoption. The key factors to consider are the immediate business needs, the timeline for adoption, the costs, and the company’s goals and objectives.