Cryptocurrencies Have Competition

3 months ago
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Some of the key advantages of blockchain technology, in terms of payments, are that access is not restricted through a gatekeeper, nor are payments subject to tolls along the way to their destination. For example, if you want to send a payment, other than using cash, you must use your bank's check, your bank's debit card, a bank credit card, or even the bank's bill pay service. You are largely dependent on centralized services provided by the bank. As far as payment tolls, yes you can send money for free. However, it takes a few days for ACH or SWIFT to do their magic. Otherwise, you must pay a fee to wire money or use a third party system like PayPal to get a payment sent. Credit cards are largely popular because they simplify the payment and settlement with merchants. Although, on the merchant end, they won't see their money for a few days.

There are some improvements to payments in the works in response to several factors. One factor is that China is working on a Central Bank Digital Currency, CBDC. This has spurred the US Government to want to invest in something similar to avoid being left behind. Other improvements in the works overlap a bit. Same day ACH and Real Time Payments both aim to make it faster for people to send and receive money. They are competing technologies. Both of these, however, are domestic services. For international payments, work is also underway to replace the SWIFT system. Ripple has been working hard to position themselves as the leader in international payments and settlement, of which XRP would play a role.

CBDC

A Central Bank Digital Currency seems like a redundancy. After all, most banks and other financial services do not deal in actual dollars. They deal in transactions on digital ledgers. Except that not every citizen has access to banking services. For whatever various reasons, people fall out of favor of the banking system and end up unbanked. They resort to paying things with cash, money orders, or through payment services. When they receive checks, they must go to a check-cashing service where they pay a fee to collect their payment in cash. Including the unbanked in massive economic stimulus is slow and inefficient, as the Government discovered when attempting to issue stimulus payments. Governments are exploring how to bring a CBDC into existence.

A CBDC would work in conjunction with having a government account where people can receive payments. The danger is that this would take some business away from banks. Why have a bank account when you can have a free Fed account? We can expect that to be an argument. However, we should consider that millions of people don't have bank accounts because banks did not want them as customers. Therefore, it isn't much of a loss. In short, a CBDC would pave the way to including a segment of the economy that is marginalized.

Instant Payments

The work on instant payments has been a dream for years. It has been long recognized that our financial systems are an anchor to commerce. When you make a credit card payment, for example, the money does not settle in the merchant's account for almost three days. The same occurs with ACH payments such as utility payments and car payments that draft from your checking account. The money is authorized and deducted from your account on one day. However, it is not available to the merchant until days later when it settles. The problem is payments and settlement take too long. Many countries are working on solutions, or have instituted solutions for instant payments.

In the United States, work has been underway for many years to institute same-day ACH. The goal of same-day ACH is that if you initiate a payment in the morning, the cash will transfer and settle by the afternoon. And afternoon payments should transfer and settle by the early evening or next morning, depending on when the payment was initiated. This change to ACH payments has been excruciatingly slow. Testing was scheduled to begin in October 2020, which will likely be delayed as a result of COVID disruptions.

In competition with same-day ACH is Real Time Payments, RTP. The value proposition of RTP is that payments will transfer and settle within seconds or minutes. You can call your electric company, send your payment, and have the agent confirm receipt of the payment in short order. RTP would be available for transfers up to $100,000. Fortunately, RTP is making headway among banking providers.

Some of the perks of instant payments, besides faster transactions, include one-way payments, peer-to-peer payments, and even messaging. One-way payments means that payments could not be reversed or charged back. Once a payment is sent, it is final unless there was an error. Instant payment would also open up the means for using your bank account to pay other people directly, peer-to-peer, from one account to another, like we use PayPal or other services. Finally, the messaging component would be useful for commercial applications such that a vendor could send a quote, the buyer could send purchase order, vendor could send invoice, and buyer could send a payment. The whole audit trail would be available as a part of the transaction history.

Think about what instant payment would mean for merchant accounts for credit card payments. As a vendor, you would prefer sales to be final, no chargebacks or canceled payments. You'd even pay a premium via discounts for instant payment rather than credit card payments. How would instant payments affect add-on services like PayPal and Cash App? Western Union and Moneygram? Combined, instant payment and CBDCs can dramatically change the money transfer landscape.

And Now Crypto

Some of the key advantages of crypto over traditional banking have been that you don't need a bank to hold your money or make payments, low transaction fees, and peer-to-peer payments. These are all things that CBDCs and instant payments are designed to address.

Much of the allure of crypto has been that the unbanked are able to participate in the financial market without having to go to a bank. What happens when every citizen has a Fed account that can't be shut down? It can't be overdrawn (double-spend). Banks would not be able to cut you out because you aren't profitable.

Instant payment would actually turn out to be better than low transaction fees for crypto. Instant payments charge no fees at all.

Instant payments would also undercut the peer-to-peer advantage of crypto payments. This one is a mixed bag. For most people, sending payments to friends, family, or known merchants won't be problematic. It is unlikely that a payment would be blocked. However, due to centralization, an account could still be seized or blocked. But, most people aren't conducting questionable activities with their bank accounts and never face these adverse situations. For most retail bank customers, account seizures or blocks are a non-issue. Therefore, they would not perceive more value in decentralized accounts to send money to others.

I'm not saying that blockchain is doomed in the payment space. Rather, the value propositions often cited for crypto have been the instant, low-cost, and decentralized peer-to-peer payments. For the typical consumer, these benefits are already in the works with CBDCs and instant payments. Advocates for crypto are going to have to make the case for other benefits that are compelling to the average user of the new and improved upcoming financial services to convince them that crypto is a better alternative.

Personally, I don't engage in questionable activities, which makes my use of traditional banking extremely unexciting. I use crypto because I enjoy the technical aspect and the investment opportunities. For example, crypto pays much higher interest rates than what I can earn with fiat. I may not be a crypto zealot; but, I am no fool. Crypto offers opportunity to preserve and grow capital that is better than what is available to me in fiat. However, that doesn't mean that there are no opportunities to preserve and grow capital in traditional markets. They just don't perform as well and are currently mired in all kinds of regulations. But, in terms of currency, fiat and crypto are interchangeable for me. Instant payments will solve a great many challenges in my life that crypto cannot solve at the moment. Money is accepted everywhere. Crypto requires some work to find somebody willing to accept it. Things are changing. But, in the meantime, banks are trying to take back some inches on the field.

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