by Ralph Payne, CFO, Copper
Over the past decade, crypto-assets and underlying blockchain technology have seen immense growth. Born from the global recession of 2009, Bitcoin was the first platform to emerge as an alternative to long-standing financial infrastructure. Since then, decentralisation has come to represent a path towards greater autonomy in a highly centralised world. As this movement persists, countries around the world continue to grapple with the growing legitimacy of crypto-assets. According to Morgan Stanley, crypto-assets have recently become a new institutional investment class.
Source: Update – Bitcoin, Cryptocurrencies and Blockchain
However, the regulatory environment remains highly inconsistent. Even today, some nations express unfriendly attitudes towards crypto-assets while working to restrict their use. Despite these efforts, the borderless, global reach of blockchain technology is challenging to contain. This functionality is precisely why countless industry projects continue to explore blockchain-based payment solutions.
Source: Crypto Regulations by Country
Unlike traditional financial institutions, blockchain networks are built to transcend national borders. As such, native crypto-assets are readily available to global markets without intermediary interference. However, challenges remain when applying the technology to payment networks.
The challenges of alternative payment networks
The decentralised nature of crypto-asset infrastructure presents significant hurdles to widespread adoption. To effectively compete with incumbent payment solutions, blockchain-enabled alternatives must evolve to rectify shortcomings.
Store of value and volatility
Even those with a basic understanding of crypto-asset markets are likely to recognise their volatility. The meteoric rise, subsequent collapse and recent recovery of crypto-asset prices have brought ample attention to the industry. The problem with this persistent volatility is its impact on value preservation. Because fiat currencies remain relatively stable, they are more effective stores of value and are better suited for executing payments.
Scaling blockchain networks
Operating a decentralised network presents unique challenges. Because there is no intermediary, transaction validation occurs via network consensus, not a central authority. As a result, transaction processing times on many blockchain networks continue to lag behind existing solutions such as debit and credit cards. For example, while the Mastercard network handles 5,000 transactions per second, the Ethereum network has never seen more than 1.35 million transactions in a single day. Decentralisation still comes at the expense of speed, and new solutions are necessary.
Source: 2nd Global Cryptoasset Benchmark Study
The benefits of alternative payment networks
Despite existing obstacles, alternative payment networks can be immensely beneficial for consumers and merchants.
Immutability and transparency
Blockchain networks are both immutable and transparent, making them ideal for maintaining accurate ledgers. For payment platforms, this means that every transaction can be traced back to individual parties and records remain tamper-proof.
Lower fees and faster settlement
Blockchain transaction and processing fees are far lower than those levied by conventional banks and financial service providers. In one of the starkest examples of this, the Binance exchange was able to send $600 million of Bitcoin for a little more than $7. When using a conventional bank, these fees would equate to tens of thousands of dollars. Further, unlike the standard one-to-three business day settlement periods set by banks, blockchain transactions are processed in minutes or even seconds.
Source: Blockchain.com
The evolution of alternative payment networks
Despite the many use cases for blockchain technology, alternative payment infrastructure remains one of the most popular applications. However, even as the next generation of blockchain networks emerge, scalability remains problematic. Further, crypto-asset volatility continues to challenge the viability of blockchain-reliant payment solutions.
However, among these obstacles there is immense potential. Most notably, the immutable and transparent nature of blockchain technology generates undeniable value for payment processors. Further, low transaction fees on blockchain networks result in substantial cost-savings. If Morgan Stanely’s findings are accurate, institutional involvement in crypto-asset markets will only expedite the transition to alternative payment networks.
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