To start, try to forget what you have associated the term ‘cryptocurrency’ with. Because of past experience the first thoughts that come up are ransomware, the dark web, and most importantly, Bitcoin. These thoughts bring fears of speculation, extreme volatility and a distinct difference to real money. Don’t allow the bad behavior of cryptocurrency players in the past deter you from seeing that there is a real opportunity developing.
Putting the concept of cryptocurrency in the simplest terms, the same way as a dollar note represents some monetary value held inside your wallet that can be exchanged for goods or services, a cryptocurrency token represents a specific value stored in a digital wallet that can also be spent to buy something. Changes in that token are registered in a distributed ledger or blockchain. So far, the most widely known versions of cryptocurrency include Bitcoin, Etherium and XRP.
Initially, the early cryptocurrencies were promoted as secure, anonymous ways to pay. They were touted as being invisible to supervising regulators by bypassing the receiver’s transaction history in the regular online business bank account. However, over time, these forms of cryptocurrency have become more like speculative investments than preferred forms of payment. Merchant acceptance of these has declined sharply due to the volatility of their value and the difficulties and expense involved in converting them into bankable payments.
Most importantly, the newer forms of cryptocurrency tie the digital currency’s token value to a fiat currency like the dollar, euro or yuan, issued by a nation’s central bank, specifically to eliminate the volatility and to make conversion more straightforward and more cost-effective when funds arrive at the corporate bank account.
Previous types of cryptocurrency had little impact on the levels of transactions concluded with older forms of payment. So what makes this one different? Now, many EMIs and fintech providers are committing to make the process of purchasing, holding and selling decentralized tokens easier. Example: PayPal now allows users to buy, hold and sell several cryptocurrencies, all fee-free.
A new form of cryptocurrency called stablecoins has been developed. It was designed to solve the difficulty of spending or converting cryptocurrency into funds for payments to be credited into your corporate bank account. The value of a stablecoin is pegged to a specific currency and they are usually issued by a recognized banking organization. This means that stablecoins have to be permissioned, where the issuing entity acknowledges and allows access to the blockchain for the respective currency. Bitcoin, by comparison, is permissionless, which is one of the reasons it has been so volatile and associated with dark-web enterprise.
One example of a stablecoin is the JPM Coin issued by global banking conglomerate JPMorgan Chase. The stated aim is to lower interbank transfers costs by eliminating the need for intermediary banks and credit unions that charge for services. Currently, it is redeemed at 1 token = 1 dollar value, and other fiat currencies will be supported in the future.
Facebook has now replaced its older stablecoin Libra with Diem, a security-backed stablecoin controlled by a consortium called the Diem Association.
In a separate class, Central Bank Digital Currency (CBDC) is a category of stablecoin that is issued and controlled by the central financial institution of one specific country. The ultimate goal is to replace paper currency with digital currency completely, giving increased security through blockchain technology. One instance comes out of China with its trials of digital yuan (aka eCNY). China’s state-controlled financial service providers issue digital wallets to customers and are responsible for conducting anti-money laundering compliance and KYC.
As more funds are stored in digital wallets instead of bank accounts, traffic will shift away from traditional debit card usage backed by deposit accounts to debit card usage associated with a digital wallet.
The major impacts of this are:
- Improved accessibly for purchasing by consumers without a bank debit card, especially for online purchases, airline reservations, eGaming, etc.
- Funds would be available for access everywhere, anytime
- Immediate settlement will become the new norm, speeding up receipts directly into the vendor’s business bank accounts
- Cryptocurrency licensing procedures will become more standardized because the value of the token will be stabilized.
What does all of this mean for the operation of merchants’ business bank account and their financial service providers? When digital currency platforms such as Coinbase and Fold work with Visa and Mastercard to enable digital currency conversion in real-time, the greatest effect will be a downturn in cash and checks usage. As the less bank-tied customers are given the option to store their money in their digital wallet, they will no longer need a debit card linked to a funds-rich bank account.