Young Pham at CI&T explains how cryptocurrencies are changing the payments landscape
Speculation that Amazon could venture into the bitcoin payment landscape is one of the latest stories in a flurry of news coverage that continues to surface with cryptos. While it’s been denied as a rumour, the company’s recent advertisement for a digital currency and blockchain expert signals a wider trend: crypto is entering the mainstream, whether you like it or not.
From the ongoing volatility of bitcoin to the surge in dogecoin, and even the UK considering britcoin as a central digital currency, it’s hard to keep up with this fast-moving landscape. Not to mention Elon Musk throwing his hat into the ring earlier this year, then taking it out, only to gravitate towards it again.
Perhaps just as extreme are industry opinions on the widespread use of crypto – between those who see it as the future of DeFi and payments, and those who see it as far too risky to earn a place in a heavily regulated market that is mainstream finance.
As cryptocurrencies continue to make waves – chopping and changing in a volatile landscape of inflation and Covid-hit economic recovery – how should financial institutions be preparing for this uncertain future?
Seeds of change
Cryptocurrencies may have started off as a speculative investment vehicle, but they have come a long way over the past decade. By 2026, the cryptocurrency market size is expected to grow to 2.2 billion, with a CAGR of 7.1%. With merchants like PayPal and Visa some of the most high-profile companies to recently announce the acceptance of payments in bitcoin, the digital currency has fast become a mainstream payment method – all despite its volatility.
While this signals an inevitable step towards modernisation among financial institutions, payments are actually only a small aspect of what bitcoin and other cryptocurrencies enable. These are unique in the sense they have programmatically financial instruments. Subsequently, the ecosystem of technology being built on top of that foundation is enabling multiple use cases. Solutions like the Lightning Network on top of bitcoin for fast, small payments, or collateral-based loans for fast liquidity, start to create a greater and more diverse number of possibilities.
It’s no coincidence we’re seeing interest in cryptocurrencies skyrocket. The pandemic has accelerated the shift towards a cashless society, with large retailers now more inclined than ever before to move towards a 100% contactless model. But this is more than just about being contactless in an age of social distancing. For retailers, the cost of handling cash across thousands of different stores is an added expense that they want to divest. Over the next couple of years, we can expect the adoption of cryptocurrencies to become more widespread as a greater number of businesses move towards digital payment structures.
This also raises questions about the use of cryptocurrency on an international scale. In fact, a major benefit to bitcoin is how its design lends itself to greater international cooperation, through a fixed, known, and pre-defined monetary policy. Crypto presents a ‘neutral’ financial instrument, which can be transferred in a fully decentralised and permissionless way. It means every international participant can join on an equal footing, levelling the playing field between richer and poorer countries and opening huge opportunities for international commerce.
It’s also far more secure than people give credit for. The cryptographic certainty of cryptocurrencies provides financial institutions with an extra layer of security by eliminating forgery and counterparty risks. Just as digital infrastructure, protocols and processes help financial institutions protect against scams and money laundering with assets, crypto could offer a more secure and scam-proof model.
Despite the volatility of cryptocurrencies, their surging popularity doesn’t look set to slow down. The uncertainties of the past 18 months have forced many businesses to challenge old paradigms and find better, more efficient ways of doing business. Many are looking to cryptocurrencies and underlying blockchain technology to provide a welcome boost.
Established financial institutions can’t afford to sit back and do nothing. Failure to incorporate this technology into their offerings and they stand to lose out to smaller, more nimble competitors.
There are already established paths which financial institutions can take. Most notably, they can create financial instruments based on bitcoin. When adopting this approach, many institutions offer custody services or other investment options, either directly or via other investment vehicles such as Funds, Trusts or ETFs. Another mechanism is the use of a credit system based around collateralised bitcoin loans, which can subsequently be used to makes payments in a designated currency.
Interestingly, central banks are looking at issuing new digital currencies similar to cryptocurrencies like bitcoin to allow for more swift monitory policy changes. This would enable a better view of financial performance and currency usage. The move into new digital currencies is expected, and we should see this approach being adopted across multiple jurisdictions over the medium term.
An offering as big as the Internet
Cryptocurrencies have the potential to revolutionise the way we use and interact with money, opening up a completely new set of services to offer and monetise. This level of opportunity can even be compared with the early days of the Internet, where organisations were looking at how they could become internet service providers and monetise this offering. The banks and exchanges looking at bitcoin today are the ISPs of yesterday, who looked at ‘access to the internet’ in a similar way. That period told us that the businesses whose offerings were developed on top of the internet were the most promising. There is no telling what unique and exciting form these new services will take; however, once they do arrive, we can be sure we’ll wonder how we ever managed without them.
New world of commerce
Crypto is solidifying its place in the payments and transactions landscape, despite its unpredictable nature – to the extent that it is already playing an influential role in changing monetary policy. It’s safe to say that for this reason, the growth we’re seeing in new cryptos will not be a short-lived trend and we will see the use of crypto go beyond the payments landscape. The drivers of this new world of commerce will be those financial institutions who keep up with, and get to grips with, the full potential of cryptocurrencies.
Young Pham is Chief Strategy Officer at CI&T
Main image courtesy of iStockPhoto.com