Movers and SHAKERS
Cryptocurrencies May Drive Innovation in Global Payments Systems
(Note: companies that could be impacted by the content of this article are listed at the base of the story [desktop version]. This article uses third-party references to provide a bullish, bearish, and balanced point of view; sources are listed after the Balanced section.)
While Bitcoin was released in 2009 and is considered by many to be the first decentralized cryptocurrency, others have followed including Tether, Ethereum, Litecoin and others. Mass-market adoption has been hindered, in part, by their volatility which has made them poor stores of value and mediums of exchange. Further, cryptocurrencies have been met with skepticism by various governmental bodies that see risk to existing monetary and central banking institutions. Mark Zuckerberg, CEO of Facebook, recently testified in front of the United States House of Representatives Committee on Financial Services to discuss Libra, a blockchain digital currency proposed by Facebook and the Libra Association, an independent, not-for-profit membership organization headquartered in Geneva, Switzerland, of which Facebook is a founding member. Reaction to his testimony has been mixed. Do the risks of global cryptocurrencies outweigh the benefits? While concepts are evolving, we look at the bull and bear arguments related to cryptocurrency.
Enhanced transparency. According to an article on WALLSTREET.com, while the use of cryptocurrency is anonymous, the transactions themselves are all stored on an open ledger using blockchain. Transactions are available for verification by anyone at any time.
The catalyst for innovation. Cryptocurrencies are spurring innovation in global payment systems. Product innovation and new entrants could lower costs and enhance accessibility. Libra Association members believe there is a need for a global, digitally native currency that brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance, and fungibility.
Accessibility. With cryptocurrency, it is possible to transact no matter your location. Everything can be managed on a mobile device.
Enhanced privacy. Cryptocurrency is completely anonymous which can be appealing for those that value online privacy and/or are wary of revealing too much of their digital data. On the other hand, anonymity has led to the adoption of cryptocurrency by criminal elements that use it to bypass surveillance and anti-money laundering efforts.
Potential for nefarious activity. The absence of trusted intermediaries in a cryptocurrency network to verify transactions can lead to problems. Concerns about money laundering, the use of crypto currency to finance illegal activities and make unlawful transactions underscore the need for greater accountability, oversight and regulation, including intermediaries to verify transactions as legitimate and accurate. Because cryptocurrency is a digital currency, there are real concerns about the potential for hackers to breach the security of third-party wallet services.
Who really understands how they work? Perhaps the most challenging obstacle in terms of large-scale adoption of the various cryptocurrency options is that it can be a difficult subject to understand. The concept of a decentralized financial system that is stored via blockchain can be challenging. Due to its difficulty to comprehend, the public may be very wary of taking advantage of the benefits it can offer.
Volatility. One of the chief obstacles for using cryptocurrencies has been the volatility in their value. Bitcoins are often traded like speculative investments rather than widely used as a medium of exchange. While some merchants accept payment in Bitcoin, most do not. Libra is being designed to overcome these drawbacks by being backed with a reserve of real assets and supported by a competitive network of exchanges buying and selling Libra.
Kind of like a prepaid credit card. Cryptocurrency-based payment systems work differently from credit cards. Instead of a payment being authorized by the payer and then taken from the account by the payee, the payer transfers cryptocurrencies (coins) directly to the payee. As a result, businesses may need to ensure crypto transactions are pre-funded making cash management more challenging.
Crypto currencies are relatively new and evolving. As society becomes increasingly mobile, including using mobile devices for entertainment and to transact, bank, and exchange data, global payments systems are evolving to lower transaction costs, increase accessibility and speed transaction times and protect privacy. Ideas proposed by the Libra Association have stimulated discussion and raised new questions regarding the evolution of cryptocurrencies. Some question the need for cryptocurrency versus efficient digital payment systems. Mainstream adoption may require collaboration between Big Tech (Facebook), Big Finance (Large Banks, Visa, MasterCard, American Express) and government agencies to establish standards thus creating opportunities for smaller players in the ecosystem. In August 2019, the Federal Reserve Board announced plans to develop a round-the-clock payment and settlement service, FedNow Service, to help ensure that real-time payments are available to everyone and to allow for more efficient and widespread access to innovative payment capabilities. Regardless of how it all plays out, innovation is almost certain to occur and create opportunities for investors.
Testimony of Mark Zuckerberg, Founder, Chairman and Chief Executive Officer, Facebook, Hearing Before the United States House of Representatives Committee on Financial Services, October 23, 2019.
An Introduction to Libra, White Paper, Libra Association Members, July 23, 2019.
The Pros & Cons of Cryptocurrency, WALLSTREET.com, Wall Street, September 18, 2018.
The Pros & Cons of Cryptocurrency, bizcatalyst360.com, Chigozie Ezugwu, 2019.
‘Magic Internet Money’ May Be Too Volatile to Attain Gold Status, Bloomberg, Olga Kharif, October 30, 2019.
Cryptocurrencies and Their Potential as Global Payments Solutions, American Express.com, Frances Coppola, 2019.
Visa Exits Facebook’s Libra Cryptocurrency Group, Forbes, Michael del Castillo, October 11, 2019.
Federal Reserve Announces Plan to Develop a New Round-the-Clock Real-Time Payment and Settlement Service to Support Faster Payments, Federal Reserve Board Press Release, August 5, 2019.
Delivering Fast Payments for All, Board of Governors of the Federal Reserve System, Speech by Federal Reserve Board Governor Lael Brainard, August 5, 2019.