By Uldis Tēraudkalns, CEO of Nexpay
There’s no shortage of macho chest-thumping, when it comes to the crypto community. And that’s not altogether surprising.
The value of global cryptocurrency markets, at the time of writing, now stands at just under $3 trillion. One year ago it was ‘just’ $474 billion. That’s an increase of 582% in 12 months. Push the dial back another 12 months to November 2019 and the rate of growth is 1,180%.
These are really impressive numbers, without doubt. But hold on a minute. Let’s put them up against legacy finance. Here, the global bond markets’ outstanding value increased to $123.5 trillion in 2020, with global equity market capitalization at $105.8 trillion. The total amount of money out there, excluding cryptos, is about $1.3 quadrillion.
Don’t mistake me. Blockchain is one of the most exciting developments in global finance. But a dose of realism is long overdue. Legacy finance does a lot of the heavy lifting perfectly adequately, although crypto’s messaging might have you believe the system is horribly broken. The crypto community can sometimes get a bit carried away with the “revolution” hyperbole, but there’s not always a need to reinvent the wheel. Blockchain and crypto currencies represent real milestones in human technological achievement, but it’s time that we start thinking of them as important additions to, rather than complete replacements of, legacy financial systems.
A virtual finance reality check
What’s the reality when it comes to crypto adoption 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, just 120 million involved bitcoin – likely to be the largest single crypto payment currency.
If virtual currencies are not yet dominating the financial scene in terms of total volumes, rather than headlines, what has been the response of the legacy, centralized banking community?
There are lots of big plans and ideas around. Central banks around the world are issuing – or talking about issuing – their own digital currencies (CBDCs). In fact, 87 countries (representing over 90 percent of global GDP) are now exploring the option. As recently as May 2020, only 35 countries were considering a CBDC. There are cross border payment tests underway. The newest is Project Dunbar – a partnership between South Africa, Singapore, Malaysia, and Australia. However, to date only seven countries have now fully launched a digital currency. Nigeria is the latest country to launch – the first outside the Caribbean.
When it comes to the global payments system, giants like Visa and Mastercard are experimenting with accepting stablecoins on their networks. In March, Visa announced it will settle transactions in dollar denominated stablecoins over its global rails. And during its earnings call in November, Mastercard CEO Michael Miebach acknowledged that crypto has undergone incredible growth and confirmed the company is focused on helping users get exposure. “We see significant volumes in terms of people actually investing in crypto and selling crypto,” he said. “[…] I think we have a role to play to facilitate consumers wanting to do that.”
However, neither of these offerings or planned offerings are seriously operational yet. While there is a considerable ‘crypto presence’ in ecommerce payments – 120 million payments involving bitcoin alone in 2020, remember – there is very little usage in POS or direct P2P transfers.
Beware of blockwash
And there are very good reasons for that. The vast majority of crypto used at POS is actually converted to fiat during the transaction and the payment itself happens on the old Visa/Mastercard network. Visa confirmed this in the March launch of its crypto offering. Cuy Sheffield, vice president and head of Crypto at Visa, said that his company has upgraded its settlement capabilities by settling and clearing fiat-denominated cryptocurrencies, treated like any of the other 160 fiat-denominated currencies Visa clears and settles.
Which rather seems like over-complicating a process for the sake of slapping a ‘blockchain’ sticker on it, just because it’s a trending topic. – a clear case of ‘blockwash’ and a trend I advise against.
In Europe, as an example, the Single Euro Payments Area (SEPA) has ‘SEPA Instant’, a 24/7 payment clearance platform for transactions up to €100k, with 10-second execution. This is going to cover 99.99% of all payments, and who would ask for better accessibility and execution speed?
When it comes to privacy and protection, a sweet spot for blockchain, there are already checks and balances in the current digital payments system, with clear rules on data privacy, cooling off periods, consumer rights, complaints procedures and many other aspects. That’s not necessarily the case for a CBDC that is fully-controlled by a central bank and where payments can be censored, frozen and reverted if enough pressure is exerted at the right points.
Crypto domination? Not yet – but it’s coming
But I’m realistic. Nothing is going to stop the existing, centralized, mainstream providers from experimenting with blockchain applications for payments. However, I believe the jury is going to be out for quite some time – certainly as far as the developed economies are concerned – before we know if these sorts of innovations are good for payments.
The equation is less clear cut in developing economies, where we may be witnessing another instance of ‘technology leap-frog’ – much as many developing countries skipped the stage of fixed telecoms infrastructure and went straight to mobile comms.
Blockchain is the best decentralized technology to date. It ticks the decentralization box really well but has shortcomings in other areas. If we want to see mass adoption of decentralized finance and virtual currencies, the real question we in the financial community should be asking is “what value do these innovations bring to the consumer – beyond fashionability?”
For all the current limitations – and these are being ironed out – today’s blockchain is good enough as a starting point for the entire world to go decentralized. Provided we use it for appropriate use-cases – such as smart contracts and asset tokenization – and don’t force-fit it onto legacy systems that are not broken.
As far as the next 12 months are concerned, I believe the biggest trend in 2022 will be projects trying to find the best combination of the centralized and decentralized worlds. There are going to be many new exchanges where you will be able to trade on a fast, cheap, centralized market, while retaining custody over your coins – either fully, or at least with a partial key-safekeeping solution.
These are the sort of stepping stones that will bring virtual currencies, dApps and DeFi into the mainstream. It won’t happen in 2022, but Crypto domination – whether that is a goal or not – is coming. Just not quite yet.
Uldis Tēraudkalns is the CEO of Nexpay, a Lithuanian fintech startup providing banking infrastructure for the digital assets industry. Uldis brings more than a decade of experience working in finance and managing venture investments. He has also served on the board of several companies. Uldis holds a master’s degree in finance from the Stockholm School of Economics and is one of the hosts of The Pursuit of Scrappiness, a leading business and startup podcast in the Baltics.
Nexpay is a Vilnius-based fintech startup that provides banking infrastructure for the digital assets industry. Established in 2017, Nexpay is helping over 400 businesses build the future of money with a range of payments and accounts products. Created by a team of banking and digital assets industry veterans, Nexpay’s mission is to provide the digital assets industry a reliable, convenient, and powerful alternative to legacy financial institutions. Nexpay is a licensed Electronic Money Institution 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.