2021 will be remembered as the year that cryptocurrencies become a full time presence on Wall Street and a top agenda item at the world’s central banks.
The potential for cryptocurrencies to digitally enable the financial lives of world’s 1.7 billion unbanked is gaining interest as well as increasing incumbent concern.
- Who needs an ATM when digital cash is available on your smartphone?
- Why pay high currency conversion fees if a digital currency works across border?
- Is a traditional bank account and its ledger-based approach really necessary when low value retail and casual transactions are the use case?
We already see that cryptocurrencies are filling multiple roles. Here’s a bit of history that brings us to today’s discussion.
The progenitor of all this, bitcoin, has firmly established itself as a store of value. Major investors, their bankers, and money managers have peeled off a corner of their assets for placement into the first blockchain-based cryptocurrency. Its appalling energy consumption notwithstanding, bitcoin is more popular, and profitable, than ever. Its volatility is catnip to traders. And the bitcoin exchange services of the Cash App, PayPal and now Venmo are major revenue drivers for those firms.
That volatility inhibits bitcoin’s utility as a payments method when low cost, low friction, and certainty are required. Who wants to be concerned about major currency fluctuations during the time it takes to complete a transaction?
Into that gap, multiple companies have proposed, and some deployed, stablecoins, a cryptocurrency backed and pegged to the value of a fiat or soveregin currency like the US dollar or euro. The goal is to simplify exchange within a given country and especially across borders. That proposition has appeal.
A major player in this category is Facebook’s Diem, the current incarnation of its original Libra initiative. Diem’s plan is to employ a few single-currency stablecoins tied to specific major national currencies for use within those countries and regions. A generic, multi-currency Libra Coin, its value tied to a basket of those major currencies, is optimized for cross-border transactions.
Diem is serious in its trust building efforts. Diem is seeking financial services licensing in Switzerland to increase trust in its governance and lower the significant resistance of central bankers around the world. And every Diem coin is in fact backed by fiat currency on deposit. Its “new money” proposition is backed by “old money” in an account.
Central Bank Digital Currencies
Central bankers are not known for innovation. Their role is to maintain stability and trust in the status quo. Their collective reaction to bitcoin’s emergence was a predictable immune response and most broke out in a rash when Libra was announced.
But in the decade since bitcoin emerged, more central bankers have warmed to the concept to varying degrees. Countries as diverse as China and the Bahamas have launched their own CDBCs, digital representations of their currencies, legitimate obligations of the state, backed by their “full faith and credit.”
Other countries, like the US, are evaluating the concept but have made no commitment to issuance.
CDBC use cases may be both broad and narrow. Incumbents in the banking and payments industry, already well down the path of moving money electronically, see few uses. Cash replacement is one area of interest. As use of the physical token declines, some members of the economy may be left out. Digital cash may help. The Bahamian Sand Dollar is meant to reduce reliance on the physical transport of cash and speed payments across an archipelago of islands often swept by hurricane disruptions.
At a very different pole, China’s digital yuan is already in pilot in multiple cities around the country and China wants to make it possible for foreign visitors to use it during the Beijing Winter Olympics next year.
Despite statements to the contrary, China’s CDBC could be employed for geopolitical goals as a challenge to the US dollar’s traditional role as the global reserve currency and its traditional role in global trade. Given China’s dominance in global trade, use of the digital yuan could be required of some trading partners, particularly those along China’s Belt and Road corridor.
And for all countries issuing CDBCs, there is the advantage of the increased visibility of digital cash transactions that eliminates the anonymity of physical cash.
Cryptocurrencies are not going away.
Making Cryptocurrencies Useful for Payments
Both “corporate” stablecoins and CDBCs have multiple virtues. They clear immediately. They are push payments with no credit risk. They settle immediately. Therefore, these transactions should be inexpensive.
That may drive merchant and enterprise interest in accepting them. What’s not to like about immediate funds availability in a payment that doesn’t cost much?
Issuance is one thing. But usage is quite another. The consumer / payer side of the transaction is an unknown. What’s in it for the consumer?
That said, there are those who both believe payers will adopt crypto-based payment method and that merchants, particularly those selling cross-border, will be quite ready to jump on board.
That’s the topic of this Payments on Fire® episode.
First for Diem Acceptance
In this episode of Payments on Fire® we welcome Ran Goldi, CEO of First Digital Asset Group to talk about his broad fintech experience, cryptocurrencies, and his progression into starting First.
First is admittedly way out in front of the market. Diem won’t launch its limited USD backed stablecoin until later this year. But Goldi’s team has already taken key pages out of the fintech playbook:
- Connect merchant shopping carts to the First service and the Diem rails
- Handle authorization and approvals
- Provide risk and fraud management
- And put an API in front of it all to speed consumption of First services
Goldi’s a lot of fun to speak with and his experience gives him an authentic voice in this discussion regarding what is, in fact, the future of money.