Crypto Cross-Border Payments Will Become a Thing, But Not With Bitcoin
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Today’s Bitcoin and the one in 2017 are very different in the eyes of governments and enterprises. But how will this impact the industry?
The crypto market has changed drastically in the past few years. Digital asset regulation was previously almost non-existent, and it was trendy for traditional finance company executives to call Bitcoin “a fraud,” like JPMorgan CEO Jamie Dimon did back in September 2017.
Fast forward to 2020. Last year, we could have witnessed a paradigm shift towards digital asset adoption around the world. Instead of banning or restricting access to cryptocurrencies, governments worldwide have entered into a heated race to create central bank digital currencies (CBDCs).
CBDCs are an excellent way to make the current, somewhat obsolete payment systems more efficient while granting governments control over their economies. And it looks like many central banks are exploring this area, including China, Sweden, Singapore, Estonia, Japan and the UK, as well as the Bahamas, which launched its digital sand dollar last October.
By now, it has become clear that enterprises and national governments share different views about crypto compared to a few years ago . But is this enough for cryptocurrencies to reach mainstream adoption and allow Bitcoin to become the most significant asset for cross-border payments?
Crypto attitude shift among governments and enterprises
In addition to central banks, the corporate world is showing increasing demand for cryptocurrencies, with institutional investment in BTC rising to record levels throughout 2020 and early 2021. As a result, the perception towards Bitcoin has changed drastically, and JPMorgan strategists now argue that the world’s top cryptocurrency will compete with gold as an alternative asset in the long run.
Yet, BTC adoption by institutions is still in the early stages. But as crypto gets embraced by more corporate players and as enterprise-grade standards and infrastructure are built around the industry, its market growth will expand.
Companies that we previously believed to be against cryptocurrency proved us wrong, showing their interest and commitment to the industry in the past few months. For example, Mastercard and Visa, two traditional finance companies, made crypto purchases harder back in 2018. Yet recently, they both announced plans to integrate digital assets into their vast payment networks, with PayPal rolling out a cryptocurrency service in the US at the end of 2020.
The surging corporate and governmental interest in cryptocurrencies signals that this new asset class is here to stay. With that said, many banks and traditional payment systems need proper education about crypto as digital asset firms still have to prove their legitimacy in order to work with legacy players. For that reason, while under development, the industry lacks an efficient cryptocurrency infrastructure.
Bitcoin versus stablecoinsthe future of cross-border crypto payments
But even with mainstream adoption and effective regulation around crypto, will individuals, businesses and governments use Bitcoin for cross-border payments? Not really. Even though Bitcoin’s payment network is much more efficient than those used for cross-border transactions in the traditional world of finance, the cryptocurrency is seen and used more like a store of value than a currency.
Bitcoin’s supply is limited to 21 million coins with a deflationary mechanism called the “halvening” that gradually decreases the total number of new coins miners can mint. In addition to that, the cryptocurrency has an excellent track record of high growth and long-term investment, making Bitcoin extremely valuable as an asset that can both cope with inflation and maintain its purchasing power.
However, due to Bitcoin’s (and most cryptocurrencies’) high volatility and often extreme price swings, it isn’t fit for international settlements. Also, BTC transactions go through a network with limited scalability that can process up to seven transactions per second (TPS). Visa’s payment system can achieve a TPS of 1,700.
For these reasons, if international crypto payments go mainstream, it certainly won’t be via Bitcoin. Instead, individuals and organizations will choose to send funds across borders using stablecoins, digital assets pegged to the value of fiat currencies.
Stablecoins feature relatively low volatility, allowing parties to transfer funds without intermediaries to achieve rapid, inexpensive and limitless transactions. Deloitte estimates cross-border crypto remittances are processed in real-time (between four and six seconds) while costing 40-80% less than international transfers via existing fiat-based solutions.
Stablecoins are not a threat to governments anymore
Besides that, stablecoins can be programmed via smart contracts to provide new, innovative use cases via next-generation financial services. The DeFi industry is an excellent example of widely using fiat-pegged digital assets for lending, borrowing, yield farming and other alternative savings solutions. Furthermore, cross-border digital asset transfers are irreversible, secured via public-key cryptography and easily traceable on the blockchain by both the sender and the recipient.
In the past, governments have viewed stablecoins as a threat to their national currencies’ sovereignty, especially by the United States, which seeks to maintain the USD’s dominance across the world. However, as CBDCs are gaining traction worldwide, many central banks have changed their minds about fiat-pegged digital assets. As a result, we will likely see multiple governments creating their own stablecoins or regulating existing ones on the market in the next few years. By locally regulating stablecoin issuers, central banks can control how the assets impact or influence the economy.
In addition to stablecoins, as the world moves towards crypto adoption, lawmakers will follow to provide a legal framework for the asset class. And we will likely see regulations for cryptocurrencies similar to how electronic money is controlled at present. Such a move will create regulatory certainty and set the stage for the development of proper infrastructure supporting digital assets, boosting their adoption worldwide.
Regulationthe key to reaching mainstream adoption
In the past few months, cryptocurrencies have experienced a rapid surge in interest from institutional and retail investors. Today, businesses hold over 6% of the circulating Bitcoin supply, with publicly-listed companies like MicroStrategy and Tesla keeping a part of their cash reserves in the cryptocurrency.
I expect the crypto industry to go through a positive development in 2021 and beyond, considering their rising adoption. As investors become increasingly familiar with digital assets, the more money institutions will pour into this new asset class.
When so many high-net-worth players enter the industry, regulators will feel the pressure to provide more clarity around crypto. As a result, we will eventually have a healthy, fast-growing and thriving digital asset spacend that’s when cryptocurrencies will reach mainstream adoption.
Petr Kozyakov, co-founder and CEO of Mercuryo. Petr is a businessman with skills in sales, strategic development, partnership negotiations and client relations. He has a strong background in the payments industry and extensive experience working with European markets. His responsibilities at Mercuryo include interaction with payment partners and banks, launching new products, obtaining licenses and the company’s strategic development. Petr also has vast experience working with banks and financial institutions to launch and build new financial products.
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