Will bitcoin disrupt the payments landscape?

by Stephen Lemon, VP of Business Development and Co-Founder of Currencycloud

Have you heard about the rare Beanie Babies being sold for up to £20,000 on eBay? You may be shocked to find that some of these once ubiquitous toys could be worth so much now and that some people consider them a serious financial investment.

Much like these 90s stuffed animals, Bitcoin is a hot commodity at the moment. The currency has recently reached its highest rate ever in excess of $17,000. It’s therefore no surprise that many people are viewing it as a good investment. One man in the Netherlands even uprooted his family to a campsite and sold everything they owned to buy bitcoin in the hopes of a cryptocurrency boom.

Businesses are also not immune to the draw of cryptocurrencies and some are jumping on the bandwagon. In fact, IBM recently announced a project using blockchain, bitcoin’s base technology, to make international payments in developing countries more efficient and affordable. With all the buzz around it, could cryptocurrencies be the solution for more efficient international payments?

In my opinion, as it currently stands the answer is ‘no’.

Cryptocurrencies are not the solution; many of the real costs in cross border money transfers lie in the onboarding of customers and meeting regulatory requirements. At the moment, bitcoin and similar cryptocurrencies only address a miniscule amount of these real costs, such as the actual transaction cost. Currently, they don’t really provide savings over newer, completely digitalised money transfer schemes.

International money transfers need local sources of liquidity, and another problem with bitcoin and other cryptocurrencies is that they are not the world’s reserve currency – and won’t be any time soon. This means that using them for international money transfers adds an additional layer of risk.

It’s simple; in its current configuration, bitcoin does not address the real issues in cross border money transfers: compliance and regulation. But cryptocurrencies have yet another problem: insufficient liquidity.

This means that bitcoin transactions are still too slow to execute in and out of fiat currencies. A final exchange rate (and the ultimate cost) is often not known until up to 30 minutes or more after the trade has been executed. This is just not good enough in a world where currency exchange happens instantly.

Yet bitcoin’s underlying technologies – blockchain and distributed ledgers – do have the potential to revolutionise financial services. We’re already seeing smart applications using blockchain as an alternative to traditional payment rails, in ‘hard to do’ and illiquid corridors. And especially so with exchange controlled currencies. At Money2020 in Las Vegas this year, we saw blockchain-built apps entering the mainstream. However, it will take some time before these technologies are used by the industry as a whole for major routes – if at all.

These technologies are being experimented with in many other ways at the moment, from trade finance, to smart contracts, to derivatives – anything where there’s an asset being transferred that requires security and trust between the two parties. ​

It will be interesting to see how these technologies will be used in the financial services and the payments industries in the future.

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