Crypto Dominance: Are We Missing the Point?
By Uldis Tēraudkalns, CEO of Nexpay
There is no shortage of machos when it comes to the crypto community. And that’s not entirely surprising.
The value of the global cryptocurrency markets, at the time of writing, now stands at just under $ 3 trillion. A year ago it was “only” $ 474 billion. That’s an increase of 582% in 12 months. Push the dial another 12 months to November 2019 and the growth rate is 1,180%.
These are truly impressive numbers, without a doubt. But wait a minute. Let’s oppose them to wealth finance. Here, the outstanding global bond markets grew to $ 123.5 trillion in 2020, with a global market capitalization of $ 105.8 trillion. The total amount of money available, excluding cryptos, is around $ 1.3 quadrillion.
Do not mistake yourself. Blockchain is one of the most exciting developments in global finance. But a dose of realism is long overdue. Legacy finance is doing a lot of the heavy lifting in a perfectly adequate fashion, although crypto messaging might have you believe the system is horribly broken. The crypto community can get a little carried away with the hyperbole of ‘revolution’ at times, but it doesn’t always have to be reinventing the wheel. Blockchain and cryptocurrencies represent real milestones in human technological achievement, but it’s time we started to see them as significant additions, rather than complete replacements, to existing financial systems.
A virtual financial reality check
What is the reality regarding the adoption of crypto in digital payments? There were over 700 billion digital payments in 2020, with a total transaction value in 2021 of $ 6.75 trillion. Of those 700 billion payments, only 120 million involved bitcoin – possibly the largest crypto payment currency.
If virtual currencies do not yet dominate the financial scene in terms of total volumes, rather than headlines, what has been the response of the traditional centralized banking community?
There are a lot of great projects and ideas around. Central banks around the world issue – or talk about issuing – their own digital currencies (CBDCs). In fact, 87 countries (accounting for over 90 percent of global GDP) are now exploring this option. As of May 2020, only 35 countries were considering a CBDC. Cross-border payment tests are underway. The most recent is Project Dunbar, a partnership between South Africa, Singapore, Malaysia and Australia. However, to date only seven countries have fully launched a digital currency. Nigeria is the latest country to launch – the first outside the Caribbean.
When it comes to the global payment system, giants like Visa and Mastercard are experimenting with accepting stablecoins on their networks. In March, Visa announced that it would settle dollar-denominated stablecoin transactions on its global rails. And during his earnings call in November, Mastercard CEO Michael Miebach acknowledged that crypto has seen incredible growth and confirmed that the company is focused on helping users gain exposure. “We are seeing significant volumes in terms of people actually investing in crypto and selling crypto,” he said. “[…] I think we have a role to play in facilitating consumers who wish to do so. “
However, none of these offers or planned offers are yet seriously operational. While there is a considerable “crypto presence” in e-commerce payments – 120 million payments involving bitcoin alone in 2020, remember – there is very little use in direct POS or P2P transfers.
Watch out for blockwash
And there are very good reasons for this. The vast majority of cryptocurrencies used at points of sale are actually converted to fiat during the transaction and the payment itself is made over the old Visa / Mastercard network. Visa confirmed this when it launched its crypto offering in March. Cuy Sheffield, vice president and head of crypto at Visa, said his company has improved its settlement capabilities by settling and clearing fiat-denominated cryptocurrencies, which are treated like any of the 160 other currencies denominated in fiat that Visa compensates and settles.
Which seems rather too complicated a process for the simple pleasure of affixing a “blockchain” sticker, simply because it is a trending subject. – an obvious case of “blockwash” and a trend that I advise against.
In Europe, for example, the single euro payment area (SEPA) has “SEPA Instant”, a 24/7 payment clearance platform for transactions up to € 100,000, with execution in 10 seconds. This will cover 99.99% of all payments, and who would ask for better accessibility and better execution speed?
When it comes to privacy and protection, a sweet spot for blockchain, there are already checks and balances in the current digital payment system, with clear rules on data privacy, cooling off periods, rights of individuals. consumers, complaints procedures and many other aspects. This is not necessarily the case for a CBDC that is fully controlled by a central bank and where payments can be censored, frozen and canceled if enough pressure is put in the right places.
Crypto dominance? Not yet – but it happens
But I am realistic. Nothing will prevent existing, centralized and traditional providers from experimenting with blockchain applications for payments. However, I think the jury will be out for a while – certainly when it comes to developed economies – before we know if these kinds of innovations are good for payments.
The equation is less clear in developing economies, where we may be seeing yet another example of a “technological leap” – just as many developing countries have skipped the stage of fixed telecommunications infrastructure and moved straight to mobile communications.
Blockchain is the best decentralized technology to date. It ticks the box of decentralization very well but has shortcomings in other areas. If we are to see the massive adoption of decentralized finance and virtual currencies, the real question we in the financial community should be asking ourselves is’ what value do these innovations bring to the consumer – beyond fashion? ? “
Despite all the current limitations – and these are being ironed out – today’s blockchain is good enough as a starting point for the whole world to be decentralized. As long as we use it for appropriate use cases – such as smart contracts and asset tokenization – and don’t force-install it on existing systems that aren’t broken.
Looking at the next 12 months, I think the biggest trend in 2022 will be projects trying to find the best combination of centralized and decentralized worlds. There will be plenty of new exchanges where you can trade in a centralized, fast and inexpensive marketplace, while still retaining custody of your coins – either entirely or at least with a partial key retention solution.
It’s the kind of stepping stone that will bring virtual currencies, dApps, and DeFi into the mainstream. It won’t happen in 2022, but crypto dominance – whether it’s a goal or not – is coming. Not quite yet.
Uldis Tēraudkalns is the CEO of Nexpay, a Lithuanian fintech startup providing banking infrastructure for the digital asset industry. Uldis brings over a decade of finance and venture capital investment management experience. He has also served on the board of directors of several companies. Uldis holds an MA in Finance from the Stockholm School of Economics and is a host of The Pursuit of Scrappiness, a leading podcast on businesses and startups in the Baltic States.
Nexpay is a Vilnius-based fintech startup that provides banking infrastructure for the digital asset industry. Founded in 2017, Nexpay helps over 400 businesses build the future of money with a range of payment and account products. Created by a team of banking and digital asset veterans, Nexpay’s mission is to provide the digital asset industry with a reliable, convenient and powerful alternative to traditional financial institutions. Nexpay is an electronic money institution authorized, authorized and regulated by the Bank of Lithuania.
To find out more, visit www.paynexpay.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.