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Global payments revenue grew by 11 percent from 2016 to 2017, according to the McKinsey Global Payments Report, and is projected to grow a further 9 percent per year until 2022.
Counter-intuitively, this can be partly attributed to the declining cost of payments, McKinsey says.
As cheaper electronic payments continue to replace cash and cheque, the margins on payments grow, making them more profitable for banks and other payment processors.
As such, there’s always a powerful incentive for payment providers to continue hunting for efficiency, even when consumers are already paying no transaction fees. One area of improvement is the complex web of relationships between the multiple parties on the back-end of each payment.
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But once you go beyond simply digitizing payments and start digitizing currency itself, you have new ways of improving efficiency in that area.
Central bank digital currencies (CBDCs) are one way of digitizing currency. Blockchain-based stable coins are another.
Stable coins are a type of cryptocurrency engineered for price stability. They can be pegged to currencies such as the US dollar, the price of gold or even measurements such as the consumer price index in a specific region.
The most common method of achieving this price stability is simply to hold a certain amount of backing assets and to guarantee users that each unit of the cryptocurrency can be redeemed for the backing asset on demand.
For example, a USD-pegged stable coin could be issued by a private company and collateralized 1:1 with USD held in a bank account. Then customers could be given an open invitation to sell back the cryptocurrency in exchange for USD at any time, at a cost.
The best known stable coin to date is probably Facebook’s Libra, which was caught in a crossfire of opposition from regulators as soon as it showed its whitepaper.
Stable coin opponents say that the issuance of currency is solely the domain of governments, and that privately-issued stable coins are a dangerous return to the era of wildcat banking and company scrip.
Meanwhile, proponents argue that opposition is innately self-defeating, because if stable coins are useful then they’re a net positive force, and if they’re not useful then people won’t use them anyway, so there’s nothing to worry about.
This viewpoint is partially echoed by research from the International Monetary Fund (IMF), which argues that consumers will only graduate towards a new payment method that’s useful compared to an existing type of payment.
In that light, it can be useful to break down exactly what makes stable coins useful where.
Weighing the pros and cons of intermediaries
One way to gauge the usefulness of cryptocurrency payments is to look at whether the services provided by payment intermediaries are useful in a given situation.
This is because, as with cash, you prove your ownership of cryptocurrency simply by possessing it, while merchants confirm that they have received payment by actually receiving it.
By contrast, when you make a bank transfer or card payment, a series of third parties check whether you have the money, verify this to the merchant and confirm to both of you that the transaction has occurred, while initiating it.
Stable coins automate away payment intermediaries with blockchain technology, cutting overhead costs but also eliminating all the services those intermediaries provide.
There are a couple of places where this is universally useful for both buyers and sellers. One of them is illicit transactions, where both parties would actively prefer not to have any intermediaries. The other is situations where a cheaper transfer trumps everything else.
But most use cases for stable coins are more situational, and how useful they are depends on the specific situation.
For example, an online shopper might want to use a credit card so that they know they can request a chargeback if needed, but the merchant might prefer stable coins to avoid the risk of chargeback fraud.
The problem is that the payment stack as we know it does not consist of universally useful services. It’s more of a one-size-fits-all bundle of different functions and features that tends to favour shoppers over merchants. At the same time, many of its problems are a consequence of its complexity and multi-party nature. This leaves many situations where stable coins present a more useful payment method.
But in their current form, lacking a well-developed ecosystem, cryptocurrency payments tend to cut out all intermediaries, rather than selectively presenting the services that an individual wants to have. This is an equally ham-fisted dynamic.
The state of the adoption
As the industry matures, stable coins might find that “sweet spot” of usefulness on a more granular level, where users can access the intermediary services useful to them.
There are three factors pointing at this as a potential future:
- Payment services have a history of trying to cut costs to maximize their own revenue. This suggests we’ll see the existing players try to cut each other out.
- Users tend to migrate towards the best payments available to them.
- There are no perfect one-size-fits-all payment services.
Consider the proposed Libra network, whose Association initially included Visa and Mastercard, as an example of this principle in action:
- Visa and Mastercard would have profited from the pool of user funds backing Libra, taking some of the revenue that used to accrue in the consumers’ banks, and passing the savings onto the consumers.
- Consumers would have recognized Libra as the cheapest remittance option.
- Third-party developers add specific extra services to be used optionally, such as Facebook’s Calibra wallet adding customer service and KYC checks, but not being mandatory for Libra users.
Stable coins aren’t the only digital currency game in town, and there’s a rich field of central bank digital currencies (CBDCs) emerging alongside them.
But stable coins can do things that CBDCs can’t. Chiefly, they can be backed by any combination of assets, rather than being forced to serve as a national currency. This lets the stable coin itself simulate the price of any asset. With suitably mature infrastructure around it, stable coins users can then seamlessly swap between any different type of asset without paying extra exchange or brokerage fees.
When viewed through this lens, where the ultimate winner will be whatever digital currency can offer the most personalization and flexibility for the end user, stable coins may come out on top.
From time to time, we invite industry thought leaders, academic experts and partners, to share their opinions and insights on current trends in blockchain to the Blockchain Pulse blog. While the opinions in these blog posts are their own, and do not necessarily reflect the views of IBM, this blog strives to welcome all points of view to the conversation.
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