Cryptocurrencies – a medium of exchange created and stored electronically, using Blockchain technology to control the creation of monetary units and to verify the transfer of funds. This article outlines the potential for digital payment, how it impacts the financial sector, and how the society can benefit from blockchain technology.

As financial markets do not regulate a cryptocurrency, its quotation relies on its perceived inherent value, including: the technology itself, integrity of the code as well as decentralized network.

Moreover, when referring to cryptocurrency, one should always consider the following attributes:

  • Code’s strength to counterfeiting
  • Transaction verifying through distributed ledger or blockchain
  • Limited supply or ability to divide into smaller fractions
  • Nearly instantaneous and irreversible transmission of value without the need of a third party intermediary
  • Decentralized network
  • Public knowledge that a transaction has been posted to a global public transaction ledger
  • Personal data security enabled by public-private key

Cryptocurrencies, especially the ones like Bitcoin and Etherum got accepted by a very large audience ranging from investors to consumers and from regulators to merchants. Thus reaching a critical mass to be recognized as an alternative mean of payment to store and transmit units. Such broad acceptance is a real door opener for technology driven markets to disrupt conventional ones and force regulators to embrace a change that will be of better use if and when monitored. This has the potential to provide customers with a global payment system, anywhere and anytime, from which the only restriction into participating lies into having access to the technology instead of owning a bank account and credit rating.

The debate is no longer of whether cryptocurrency will survive, but rather how it will advance, and when it will reach maturity.

Despite the vast potential of this new technology, and its proven ability to survive several formidable tests of its legitimacy, the current state of the market remains fragile. This is mainly due to the threats such as the Bitcoin Exchange bankruptcy, tax evasion challenges or even terrorism could undermine the permanent hatch of cryptocurrency.

Financial sector heritage- tradition v. disruption

Traditionally, banks have connected those with money to those who need it. However this “middleman” or third party position has seriously evolved over the past decade or so with the raise of internet banking and so called alternative means of payment such as PayPal, Sofort, iDeal and to some extend SEPA Direct Debit. A new challenger is also joining the party is disrupting the payment industry with the opening on Banks’ API through PSD2. However, even the newest forms of payments still ultimately rely on traditional financial institutions to process transactions.

Whereas cryptocurrencies enable a fast, secure, low- cost opportunity for consumers to use, store, and transmit money over the Internet, such technology offers the potential to disrupt and limit the role of traditional financial institutions in clearing and settling payments. Transactions are processed using cryptographic code verification that clears and settles transactions within minutes, at zero or nominal cost. This is to be offset against the current wire transfer or credit cards clearing that still rely on value-date that varies between 1 to 3 days (although instant pre-note can be displayed) and carry a processing cost for the merchants.

Translating Proof-of-Concept into trading between consumers and merchants

Cryptocurrencies offer customers cheaper and faster peer-to-peer payment options than those offered by traditional credit card schemes or alternative means of payment, without the need to provide personal information. While cryptocurrencies continue to gain some ground, price volatility and the opportunity for speculative investments have a negative effect on encouraging consumers to use cryptocurrencies to purchase goods and services instead of trading it.

It is likely that consumers will accept and adopt cryptocurrency on a broad scale only when they gain better knowledge of it and see improved availability, reliable cash exchange and a reliable consumer protection in place. This level of acceptance will be more likely when people have access to innovative offerings and services not otherwise available through traditional payment systems.

A common misconception about cryptocurrencies is that the transactions are completely anonymous. What cryptocurrencies offer is the ability for consumers to complete transactions without having to provide merchants with personal information for the purpose of verification or storage. From a legal perspective, the transaction can be traced to the person/entity (if illegal activity is suspected) using a combination of identifying the destination of the transaction through the publically available transaction ledger. Nevertheless, in the current environment of rising concerns of identity theft and data privacy, this “pseudo- anonymity” does offer advantages to consumers.

Another challenge for merchants is the volatility of cryptocurrencies. Currently, the market is illiquid, disjointed and highly volatile. The lack of liquidity leads to significant costs associated with exchanging currency into cryptocurrency and vice versa. This translates into large bid/ask spreads and/or significant fees. Such price volatility understandably brings a significant FX risk that currently discourages both parties to hold a cryptocurrency for a significant length of time.

Can blockchain bring opportunity to rise to Emerging countries

Perhaps the greatest opportunity for those involved in the cryptocurrency ecosystem is in the potential this technology has in developing economies. Rapidly growing technologies have already proven to enable emerging economies to pace their development. For instance mobile phones made telephone lines building redundant. We could imagine that blockchain through cryptocurrencies will provide a platform to easily develop financial infrastructures and better fight against corruption. Furthermore, cryptocurrencies on top of innovation carries a real potential for micropayments and cross-border funds transfer, which could be a major change in the way emerging population deal with cash transfer inside their borders as well as with relatives from abroad.

Disrupt and divide

As a disruptive technology in an industry still strongly ran by “tradition”, blockchain and it cryptocurrencies will continue to divide opinion and face skepticism. As regulatory standards are adopted and refined we will see greater confidence from all market participants.

Cryptocurrencies are only the tip of the iceberg covering a much stronger technological tool: blockchain. This technology has the potential to open door to new ways of trading in many industries, from the Health sector to protect patient confidentiality to VAT anti-fraud. New protocols such as Ethereum cryptocurrency, coupled with “smart contract” technology could bring the necessary trust lead (i.e audit trail) in for instance releasing funds at product’s reception- to take use of blockchain to the next level.

 

Yannick Decaumont

Yannick Decaumont is PAYMILL Managing Director and has years of experience in the financial services sector. Previously, he worked for the Swiss company Klik & Pay and the global financial institutions UBS and Credit Suisse.