Tuesday , January 22, 2019

COMMENTARY: Why Cryptocurrencies Are a Solution in Search of a Problem

When you look at the benefits that cryptocurrencies offer, it’s somewhat surprising that they aren’t an established method of payment yet. They are cheaper than other payment methods, they allow fast global money transfer, and they provide built-in security and encryption. However, cryptocurrencies haven’t really taken off and are more a means of speculation than that of payment for most people. 

Christine Lagarde, managing director of the International Monetary Fund, made a speech in November in which she talked about governments and central banks making digital currency available. Should they do that to make all of the advantages of cryptocurrencies more accessible to merchants, consumers, and the economy in general?

Gladis: “It would take many years to establish cryptocurrencies as a widely accepted form of payment, even if central banks take the lead. And why should they do that?”

Central banks providing cryptocurrencies? It’s probably not what the fintech experts in Singapore wanted to hear during that speech. Many crypto advocates promote independence and freedom, and regulation by government goes against that. But, taking a practical perspective for a moment, what if that happened? Could that be the silver bullet for cryptocurrencies’ success?

Let’s take a look at what could be the potential positive and negative outcomes of something like this.

Trust Could be Established

Centuries of trust have been built on the abilities of banks, governments, and economies to maintain paper currencies’ worth. That trust has been established by governments and regulators keeping our money and financial systems stable over decades, despite a few black Fridays and currency crises. Therefore, if central banks were to take the lead on cryptocurrencies, that may build trust with both consumers and corporations. 

That would be a big leap forward because, until now, cryptocurrencies have been a risk due to their volatility and due to criminals using them for wrongdoing, like collecting ransom.

A major reason why cryptocurrencies have been heavily used by criminals is their anonymity. Transferring the regulation to a central bank does not necessarily mean an end to anonymity. But, if a central bank takes over control, it wouldn’t only want to regulate the money supply. It would also set thresholds against fully anonymous accounts in setting up “know your customer” and documentation standards as we have them in all developed economies. This would help prevent crime and build trust—the most important precondition for a currency.

But Convenience Is Missing

Let’s assume that trust is no longer an issue. What else would it take to convince consumers of cryptocurrencies’ value? Convenience is key.

Now that we can pay by tapping our cards or phones with convenient contactless NFC payments, it will be hard to sell less familiar crypto payment apps to consumers. And, if you forget your password for your cryptocurrency wallet, you can lose that money. This will present a challenge for cryptocurrencies’ acceptance.

And Merchants Take Their Lead From Consumers

And what about the potential impact on merchants? Cryptocurrencies can be less expensive, global, and secure compared to existing payment options. However, merchants already carry the burden of offering many payment methods, especially when they sell online into different countries. Merchants may want global reach and definitely want conversions, but they will not want another payment option unless consumers adopt cryptocurrencies across countries, age groups, and genders. 

We are nowhere near that reality yet, and the effort involved in adding a new payment option such as a cryptocurrency to online and retail stores is massive. For example, the online-shop software needs to be upgraded, possibly individually programmed and tested. In-store cash registers need to be upgraded and tested, too. In addition, the accounting department has to introduce new workflows to incorporate this new payment option. 

Merchants strive to meet customers’ desires and needs, – but there is no widespread consumer adoption of cryptocurrencies on the near horizon.

So What Does the Future Hold?

Taking all of this into consideration, it would take many years to establish cryptocurrencies as a widely accepted form of payment, even if central banks take the lead. And why should they do that? To make payments a little cheaper and a bit more global? 

From a business-to-consumer perspective, payment is a well-solved problem. In geographies like South America or China, where money transfers are subject to limitations, cryptocurrencies won’t help because governments will still legally enforce such limitations, whatever the currency. 

It feels like cryptocurrencies are a solution in search of a problem, and the payment industry has more pressing issues to solve, like implementing omnichannel payment solutions and preparing for payments with connected devices and the Internet of Things. I don’t see cryptocurrencies becoming widely adopted any time soon. 

—Ralf Gladis is the founding director of Computop, Bamberg, Germany.

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