Piers Marais, Product Director at Currencycloud, writes for Payment Expert on whether digital currency can be a crucial factor for businesses to unlock new payment journeys and engage new demographics for firms.
Digital currencies – often known as digital assets or cryptocurrencies – aren’t new. Satoshi Nakamoto created Bitcoin back in 2009 as the world’s first peer to peer electronic cash system, but in the 13 years since, clarity over the different terms involved hasn’t been apparent for many.
A digital currency is one only available electronically. Within this broad definition, there are several subtypes. The most popular, cryptocurrency, is a digital currency which uses cryptography to secure and record transactions. Cryptocurrencies are viewed and used by many as digital assets – vehicles for investment rather than payment.
As consumer usage grows, and the payments ecosystem has evolved and developed, there have been instances where Bitcoin, Ethereum, and other cryptocurrencies have been used by customers to purchase products and services.
Naturally, questions are now being asked about how cryptocurrencies could become entrenched in the mainstream, as commercial and financial worlds might also be able to get involved.
The next big thing?
Cryptocurrencies have made strong in-roads in the last few years and have several technical benefits. They can potentially open difficult remittance corridors in markets with controlled currencies which require pre-existing relationships with liquidity providers. In this instance, transacting is cheaper, quicker, and easier.
There is, however, the underlying question of whether these currencies are truly forms of money, or whether they are assets and investment vehicles. Most holders use them to generate profits rather than as payment methods, and it’s fair to say that they currently behave more like assets.
For businesses, there are some clear potential use cases. A small subset of organisations accept cryptocurrencies in markets with difficult remittance processes. Here cryptocurrencies help when instant payment is necessary because of operations across different time zones, and occasionally to circumvent slower payment processes. While there are some applications, we need to weigh up whether the current commercial finance system is broken, and if it is, whether cryptocurrencies are the solution.
Retail customers use digital currencies because they’re exciting. But businesses need to think beyond this to the practical benefits, and in this case, the risks. It’s unlikely that big companies will entrust their funds to nascent processes and volatile values as there aren’t the risk management tools and processes in place.
However, though the current system isn’t ‘broken’ as such, there’s no doubt it can be improved. Settlement times and payment processes are too long, and other inefficiencies mean businesses can often wait days for funds to clear. This isn’t ideal, and digital currencies could provide a solution – in the right form.
A way forwards?
Central banks across the world have toyed with Central Bank Digital Currencies (CBDCs) – not a cryptocurrency treated as an asset, but a purely digital version of the fiat currencies underpinning global economies.
If central banks were given a blank slate and the opportunity to rebuild financial services from the ground up, it’s safe to assume they would all use digital currencies. The important distinction is that unlike cryptocurrencies, these will not be bought and sold in the same way, and because they will be tethered to the fiat currency value there will be more foreseeable fluctuations in value, providing stability and predictability.
If CBDCs became widespread and interoperable, adoption is probable – and if central banks did choose to introduce them, it’s likely that the inertia currently standing in the way of adoption would shrink. They would bring several benefits to consumers and businesses alike: different interest rates could be implemented depending on transaction types and the situation of each payment; and smart contracts could transform commercial finance.
The key benefit is regulation. Once digital currencies are underpinned by rules, they will have the opportunity to go truly mainstream. This is a key differentiator from cryptocurrencies and an important reason why CBDCs might be able to be used by businesses and wider financial processes.
The problem with cryptocurrencies is that they’re private – that means if you own it, you assume all the risk and the custody, so if you lose it, you have no recourse. But CBDCs can provide an alternative, including securing the payment process and guaranteeing payment once the currency has been transferred. These are key things a business would consider in choosing, or not choosing, to use digital currency.
This is key when it comes to the adoption of any new currency, be it crypto, fiat, or digital – without trust, both that it will hold value and is reliable to use, the people who would actually spend it day in day out will stick to what they know. Political and financial bodies i.e. governments, regulators, and banks, are responsible for building that trust. Guaranteeing digital currencies through CBDCs would go a long way to doing so.
It’s safe to say that there’s a lot of potential for digital currencies to go mainstream, but several pieces of the jigsaw are still missing, and the ones we already have aren’t necessarily in the right places. It’s also important to remember that the ‘success’ of bringing digital currencies into the mainstream depends on what we mean by the term.