It has been quite the wild ride for cryptocurrencies over the past 12 months, as not a day goes by without something newsworthy hitting the headlines. From the market volatility, to the Wolf of Wall Street style hedonism (complete with South-Pacific party boats and Bitcoin themed rap) to the launch of sensational J-pop crypto band Kasotsuka Shojo (Virtual Currency Girls), and rapper 50 Cent becoming an ‘accidental Bitcoin millionaire’ overnight, the buzz around cryptocurrency is almost deafening.
Adding to the noise, experts and advocates are becoming increasingly vocal on the fundamental question to cryptocurrency’s longevity: is it the biggest game changer since the internet, or is it nothing more than a speculative bubble, a boom that’s waiting for its inevitable bust? Regardless of which view one may hold, the next question we should all be asking ourselves is “what does cryptocurrency really have the potential to become?”
Most businesses are currently taking a cautious approach to cryptocurrencies given their volatility and that it’s very much unchartered commercial territory. However, some are starting to see it as an enabler for innovation, most notably Kodak’s ICO and Blockchain solution for photographer image rights.
Interestingly, tech giants Microsoft and Facebook are not jumping on the bandwagon (or party boat) just yet. In January 2018, Microsoft suspended accepting Bitcoin, and Facebook banned all ads promoting cryptocurrencies and ICOs, resulting in yet another plunge in Bitcoin prices.
Credit card issuers are taking a similarly cautious approach. Concerned about customers racking up and defaulting on debt incurred by purchasing volatile cryptocurrencies, some have banned customers from using their credit card to make the purchase. In the UK, Lloyds has banned Bitcoin purchase with Lloyds, Bank of Scotland, Halifax and MBNA credit cards. In the US, Bank of America, Citigroup, JP Morgan, Capital One and Discover have implemented similar bans.
Governments, too, are proceeding with caution, with an increased focus on the need for taxation and anti-money laundering/anti-terrorism regulations. However, much to the dismay of the ‘crypto-anarchists’ and cryptocurrency hardliners, some governments are reportedly looking to develop their own cryptocurrencies. For example, Venezuelan president Nicolas Maduro recently announced the launch of the oil-backed ‘Petro,’ the first cryptocurrency ever to be backed by an asset.
The case for cryptocurrency in commercial payments
Against this backdrop, Blockchain pilots for payments are proliferating among mainstream financial institutions, and with that, the use of cryptocurrencies across the commercial payments space are perhaps not as far-fetched as once thought.
In 2017, the major card schemes (Visa, Mastercard and American Express) all intensified activity around Blockchain-based payments processing, suggesting that the infrastructure for transacting cryptocurrencies in commercial payments is already becoming a reality. In addition, the fact that some regulators and central banks are looking to bring cryptocurrencies mainstream could lend greater credibility to these digital currencies and could provide some stability amid the historically volatile nature of these unregulated markets.
So given that the adoption of cryptocurrencies in commercial payments may be becoming a possibility, what would be the opportunities and challenges?
Security is clearly one of the hero benefits of a cryptocurrency-based payments system. In the current procure-to-pay process, countersignature and authorisation hierarchies are often in place to ensure control and visibility of payments over a certain value. Cryptocurrencies offer a similar level of control; the owner’s ‘key’ (digital signature) is required to access and release ‘coins’ in the secure wallet, with the option for multiple keys (digital signatures) to authorise a payment. However, with a recent bout of high-profile cryptocurrency security breaches, many corporate decision-makers may be left wondering just how secure the system really is. As my colleague Chris Holmes (SVP, KAE) highlighted in his closing presentation at the Commercial Payments International (CPI) Global Summit in September, it must be remembered that claims around security are based on current computing power and capabilities. The advent of quantum computing, where the computers of tomorrow will perform processing, memory and learning tasks at much faster speeds than today’s tech, could make it even easier for criminals to commit fraud and further knock cryptocurrency’s security halo.
Cash Flow Challenges
Cash flow and extended payment terms are among the core components in the value proposition of commercial cards and trade finance solutions, a benefit which would not be offered through a cryptocurrency-based solution. Adopting cryptocurrencies could have an impact on cash flow since (for now) they work like digital cash and do not have a credit facility. In fact, usage of cryptocurrency over the Blockchain could increase the need for additional lines of credit, in which case interest rates and charges could counteract business savings on lower transaction costs. In this sense, cryptocurrency would most likely serve as a complementary cross-border solution replacing EFT only, rather than as a replacement for credit-based solutions such as commercial card programs.
Faster, cheaper cross-border payments
Outside of the Blockchain universe, real-time and faster cross-border payments are already a hot topic yet are largely underdeveloped when you think about ‘true’ real-time and fast cross-border payments. Some cross-regional examples are seen in Europe and Asia however most other schemes are isolated to specific countries.
Rolling out a truly global system based on Blockchain technology is receiving mixed reviews. Is it less expensive and more commercially viable to use and develop the current payment infrastructure or will it well be more efficient to build a new Blockchain based infrastructure? For the latter to happen, there must be international agreement of standards, etc. which based on the mixed current opinion on cryptocurrencies and Blockchain may be some way off.
Payments made over the Blockchain using cryptocurrencies are likely to have much lower transaction costs and offer greater transparency over status of transactions, and therein lies the main appeal to businesses.
Commercial examples in the cross-border Blockchain world do exist. Ripple has been making waves in the cross-border space through partnerships first with American Express and Santander to speed up cross-border payments between the UK and the US, and now with MoneyGram, which announced it will use its cryptocurrency XRP to speed up and reduce the cost of transferring money through xRapid, the cryptocurrency’s network. In both cases, using Ripple’s cryptocurrency is speeding up cross-border transactions as well as bringing the transaction cost down.
Given payment providers’ and businesses’ increasingly holistic approach to payments (i.e. instead of being product-centric, choosing the right payment method for each payment type), it’s unlikely any Blockchain-based solution would immediately make existing B2B payment methods redundant, especially where domestic transactions are concerned.
The ultimate challenge for commercial payments providers and FinTechs in offering both Blockchain and cryptocurrency as a viable solution, will be to overcome security concerns, make it a seamless user experience that, despite running on different rails, manages to run smoothly alongside existing commercial payment solutions.
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