This November, The Fintech Times is looking to broaden the understanding of digital currencies, ranging from blockchain’s use outside of crypto to CBDCs, in an attempt to replace the notion that digital currencies are a synonym for crypto.
Talking to industry experts, we’ll be looking at the use of blockchain as a form of payment, and how the adoption of the technology could revolutionise what we understand about and expect from this form of paytech.
As a combined outcome of both the 2020 and 2008 recessions, consumers have been seeking out safer and more reliable ways to store and protect the value of their money. The growing distrust of traditional financial providers has led many to seek out alternate methods of processing transactions.
The popularity of the blockchain has resulted in a huge level of disruption to the industry, and rewired what we thought we knew about conducting payments.
At its very basic core, a blockchain is a database of information that records the provenance of a digital asset in a way that makes it very difficult to change. It is a digital ledger of transactions and provides an open database of every transaction involving value.
“Blockchain is the technology that sits beneath cryptocurrencies,” explains blockchain and crypto author and consultant Kate Baucherel “It’s the ledger of all the transactions that take place in a particular coin – Bitcoin has its own blockchain, the original invention proposed by Satoshi Nakamoto thirteen years ago – and every other coin also has its own blockchain.”
How is the blockchain being used for payments?
“Blockchain software platforms are being used to pay for the transactions that take place and for buying digital assets such as artwork or game pieces,” Kate continues. “They can be embedded within larger systems, such as foreign currency payment platforms in high street banks that use a cryptocurrency under the hood to do fast conversions. They’re also being used for direct payment of goods and services, and can even be used to buy your morning coffee.”
Many established financial service providers, like Visa and Mastercard, are making developments to their services to facilitate payments through the blockchain, whilst also collaborating with separate digital asset managers to evolve the worldwide payments network. For example, Visa recently worked with Zipmex to launch products in Southeast Asia, whilst Mastercard launched their Start Path programme around a similar time.
The programme is accelerating the growth of blockchain technology, making it safer and easier for people and institutions to buy, spend and hold cryptocurrencies and digital assets.
The use of ewallets and POS terminals are also becoming increasingly widespread, and are set to account for £11 billion of online spending over the course of the next five years.
“Card solutions adopting decentralised technologies are actively developing now,” comments Ilia Obraztcov, the CEO of Smartlands Group. “Bank cards are issued for users that allow you to pay with the card while inside the card the balance in a cryptocurrency. There are many of them, and they are now growing well.”
The capabilities of blockchain payments have also caused disruption to traditional cross-border payments, and software providers continue to pilot new blockchain-enabled cross-border payments solutions that connect global payment infrastructures, as Mohammad Raafi Hossain, the CEO and Co-Founder of Fasset explains: “Blockchain cross-border payments help to eliminate intermediaries and lower transaction fees by 40 to 80%, while providing greater security through verifiable transparency of transactions.
“With blockchain underpinning digital currencies, El Salvador’s move to make bitcoin a legal tender was in part to cut these costly fees that went to remittance transfer providers. Each year, transaction fees would cost El Salvador $6 billion, or approximately 23% of the country’s gross domestic product. For emerging economies and frontier markets in particular, this is a huge cost. As such, blockchain technology can further facilitate greater financial inclusion for people in developing nations and allow them to benefit from accessing digital finance and removing barriers from costly transactions.”
Yet as popular as it’s become for facilitating payments, the blockchain has also been utilised as a Store of Value, as Angus Cepka, Product Manager at Nivaura explains: “While cryptocurrencies are being used for some forms of payments, they are now predominantly being seen as a form of Store of Value, which means many investors buy to hold and or take advantage of the volatility. With the growing DeFI industry, which is now coming under greater regulatory scrutiny, we will likely see greater usage of crypto to access these ecosystems e.g. by depositing cryptocurrencies as collateral to borrow fiat stable coins.”
The blockchain is even being developed to transform how wages are being paid; so instead of being paid per hour, or by the week, the blockchain is allowing workers to be compensated for their time by the second, as London-based fintech investor Viktor Prokopenya comments: “These are great advances for emerging economies where there is a lack of a centralised banking system or a strong monetary framework.
“For instance, there is a company called SuperFluid which is experimenting with the entire concept of payments. Instead of, for example, getting paid a salary once a month, SuperFluid are transforming payments into streams so that you are paid by the second, by the day, or whatever metric you choose.
“This presents an innovative solution to the saturated business model that is subscriptions. Think NetflixXSuperFluid: free platform with no subscription fee per month where you start watching Squid Game and then a minute in, you realise that it’s not quite your cup of tea so decide to stop watching it having only incurred £0.001 of the streaming fee. That is how Blockchain can begin to transform everyday situations.”
Of the most recent innovations to blockchain payment technology, developments to the speed of transactions appear to be very much at the forefront of the conversation. Transactions involving first-generation coins such as Bitcoin have been hindered by speed and cost issues in the past, and although Bitcoin nodes – additional layers that sit upon the blockchain – do offer added levels of security, the network is still limited by its capabilities to process up to seven transactions a second.
Hence why innovations such as the Lightning Network, which works in tandem with the blockchain, have been so warmly welcomed. For the Lightning Network to process transactions rapidly without the need for block confirmations to be made, two peers need to want to buy and sell from each other, and a BTC lightning wallet must be attached to the blockchain. Mini-ledgers facilitate the transaction, and both parties must sign and agree to a revised balance sheet.
Nick Saponaro, the CEO of Divi Project, explains the benefits and pitfalls of the network: “The Lightning Network, which is a Layer 2 technology built on top of the Bitcoin Network enables collateralised ‘payment channels’ to be established in a peer-to-peer fashion. This advancement enables users to send funds instantly, anywhere in the world.
“While Lightning is a remarkable innovation, it is not without its own set of caveats. Most notably, the balancing of channels in the network becomes problematic at scale. The network relies on liquidity being available throughout the network so, without significant participation, the channels can become depleted, causing issues.
“However, in recent months, liquidity on the Lightning Network has quadrupled and rebalancing innovations are being rolled out rapidly. As with any new technology, solutions are being built with fervent speed. If Lightning succeeds, we will have no need for centralised payments networks like Visa, SWIFT, and the like. We will be able to transact instantly, globally, at scale, and for near-zero cost.”
Kate Baucherel adds: “One UK application that has focused on this is Bottlepay, which uses the Bitcoin Lightning Network to do fast micropayments in pounds, euros or Bitcoin. There are plenty of others, including some challenger banks such as Revolut or Zumo who offer crypto alongside fiat payments. The picture is different in every economy, though, as technology is developed to meet the needs of users on the ground.” It appears that Kate has landed right on the money with her thoughts on blockchain innovation, as it’s recently been announced that Bottlepay has recently been acquired by NYDIG in a deal worth $300 million.
Speaking on the volatility and pitfalls associated with blockchain-based payments, Tan Tran, the CEO of Vemanti comments: “Even though cryptocurrencies are being used to pay for goods and services, the number of transactions is nowhere near traditional payments due to factors such as volatility and security.
“Fiat-backed stablecoins are supposed to address those problems, allowing transactions to be carried out between counterparties without financial intermediaries. However, not every stablecoin is fully-backed by fiat on a 1:1 basis. This is where having enforcement guidelines for cryptocurrency issuers will be helpful in terms of accelerating user adoption of blockchain-based payments.”
Kate Baucherel reinstates this point by adding: From our viewpoint in a country with good financial and monetary stability, volatility of cryptocurrency is a concern and poses risks to anyone who might consider investing in such a new asset.
“However, the speed of payment on things such as the Lightning Network means that there is no change in value during a transaction. The other thing to be aware of is the security around crypto accounts. Individual users are responsible for the crypto they hold in wallets or exchanges and must practice good cybersecurity to protect their assets.
“There are also different tax treatments for crypto payments at the moment, which users must be aware of. In cases where the user doesn’t really touch the crypto at all – foreign currency exchange, for example – the risks are minimal, on a par with the use of any other software tool.”
Angus Cepka agrees, and explains why the volatile nature of the blockchain is causing friction in its adoption for payments: “There is a lot of development work going on for merchants to accept various forms of digital assets as payment, either cryptocurrencies and or stable coins, but there is still significant friction that results in the requirement on the payment provider that accepts crypto to immediately sell it and then provide fiat to the merchant. During this period there is the risk of slippage, and double spending on slower blockchains such as Bitcoin.
“In theory, blockchain/crypto payment solutions should be peer-to-peer, which would eliminate the intermediary and drastically reduce fees. However, this is a long way off and assumes public comfort with utilising crypto/blockchain technologies in everyday life.”