The cryptocurrency market has grown tremendously over the past eighteen months, and mainstream use cases associated with digital currencies continue to emerge. With the surging interest in crypto comes pertinent questions about what specifically is driving the growth, who is using the technology and for what purposes, how regulatory efforts will affect the market, and more.
To learn more about the future of payments and how traditional and digital payment ecosystems will co-exist in the future, PaymentsJournal sat down with Nabil Manji, Senior Vice President, Head of Crypto and Emerging Business at Worldpay from FIS, and Tim Sloane, VP of Payments of Innovation at Mercator Advisory Group.
Crypto users and reasons for expansion
According to Mercator research, just under 20% of American adults hold cryptocurrency. There is a stark division by age bracket: 34% of respondents ages 18-44 own crypto, compared to only 10% of those ages 44-65 and 1% of those ages 65+. And the market is only growing. The current market capitalization of cryptocurrency is nearly $3T, up from a few hundred billion dollars just 12-18 months ago. Understanding who finds crypto appealing will be crucial for financial institutions, companies, and merchants looking to enter the crypto space.
Much has changed in the crypto space over the past few years. According to Manji, there are three broad drivers of crypto growth:
- Continued technological innovation – Whereas crypto was primarily a speculative investment even just a few years ago, use cases of blockchain-based technology are broadening to include examples such as P2P transactions and non-fungible tokens (NFTs).
- Increased legitimacy through regulation – People are becoming more comfortable using crypto for payment or exchanges due to regulations that didn’t exist a few years ago, particularly in Europe, with some additional cases in the U.S. and Asia-Pacific region.
- Governments exploring CBDCs – Central Bank Digital Currencies and other alternative payments and rails have recently been a significant investment target for governments from the UK, France, Nigeria, Singapore, China, and the UAE, affecting the business and consumer market.
Merchants and cryptocurrencies
As of November 2021, there are 79 million blockchain wallets in use globally. Merchants are accordingly beginning to accept more crypto at point-of-sale. Just as with the larger ecosystem, Manji noted three factors contributing to merchant interest:
- Enormous market capitalization – Merchants want to tap into the value of crypto and to sell their goods and services, particularly high-ticket items like air travel and luxury goods, which consumers might be willing to explore new payment methods to access.
- Payment agnosticism – Merchants already support all kinds of payment methods, and as a general rule, do not want payment method to be the reason a customer can’t complete a purchase.
- Expensive credit card fees – Moving business strategy away from the hands of card suppliers will be cheaper for merchants and potentially free them from the hassles of disputes and chargebacks, plus prepare businesses for wider supply chain finance options.
Conversely, merchants may feel some trepidation about integrating cryptocurrency into their business. There are still many unanswered questions. “If I have crypto on my balance sheet, how do I account for that?” Manji asked by way of example. “What are the tax implications of holding and transacting cryptocurrency? Are there any regulatory considerations that I need to be aware of?”
Adding another layer, the adoption of CBDCs are a “when, not if” question, and when governments introduce central digital bank currency, it will be legal tender by definition and its acceptance will be mandated. Merchants risk falling behind if they are unprepared to make these changes in advance. As the details are clarified at both a governmental and industry level, Manji emphasized that both merchants and payments companies like FIS must lean in and bolster their understanding of the challenges and opportunities involved with crypto.
Crypto growing pains
The world is going through growing pains when it comes to embracing crypto. In many ways, the landscape is quite fragmented at the moment. Besides the fact that even blockchains with the same basic function can look different, blockchain-based crypto can also be directed either towards the account/payment infrastructure or towards investment-side NFTs, which are very different animals from one another. “Regulators are broken up into these very narrow silos,” said Sloane. “I think they’re really having trouble getting their heads around this broad spectrum of capabilities.”
At least in the U.S., there seems to be an aimlessness when it comes to classifying crypto; “It’s neither fish nor fowl,” Sloane quipped. To understand the problem, you might invoke the old cliché of not “thinking outside the box” or “trying to teach an old dog new tricks.” Manji explained: “The feeling is that we’re trying to take a set of regulatory institutions and laws that were designed in a different time and with a different set of aims and goals applied to different technologies.” Trying to apply those protocols to new use cases of this sort doesn’t make sense. “It’ll be interesting to see how different governments seek to harmonize existing frameworks and laws,” Manji continued, “or whether they will start from a clean sheet of paper and do something completely new. I think that’ll drive a lot of what the innovation, use cases, and products and services will look like.”
Regulation for crypto and blockchain
At the moment, blockchain as a technology is largely unregulated, much like the internet. “It’s more about what applications are being built,” Manji clarified. “Which of those should we regulate, and why or why not?” The key is to manage decentralized blockchain-based applications without stifling innovation. Some of the core blockchain-based cryptocurrency services that used to be unregulated, such as crypto exchanges, wallets, and qualified custodians, are all now regulated in most jurisdictions. The expectations around regulation and security for these services – including consumer requirements, anti-money laundering, sanctions screening, and suspicious activity reporting – may soon look the same as they do for similar pre-existing financial offerings.
Regulatory requirements may help ease skepticism and represent a significant next step in the development of a legitimate crypto ecosystem. According to Manji, the narrative around crypto was quite different even just two years ago, with many viewing crypto merely as a convenient vehicle for criminal activity. However, jurisdictional entities like the Financial Action Task Force (FATF) and Interpol have leaned into the technology and realized that with the correct regulation, it can greatly benefit institutions and governments in actually preventing those same kinds of crimes. “Chainalysis, Elliptic, CipherTrace, and others have helped governments bust longstanding crime and trafficking rings, and that wouldn’t have been possible in the traditional kind of fiat and financial services ecosystem,” explained Manji.
The future of cryptocurrency
Given the rapid clip at which crypto and blockchain have exploded over the last five years, who knows what the next five years will bring? Three prominent trends are expected from an FIS perspective:
- Continued blockchain expansion – NFTs, decentralized finance, CBDCs, stablecoins, and more applications will likely continue to grow, and within 3-5 years will see widespread consumer and business adoption.
- Interoperability – Significant value in blockchain will drive innovation on both the application and protocol layer front, allowing different parties to move between different chains and assets, particularly for G20 economies to enable cross-border CBDC transactions.
- Continued digitization of life – Concepts like the metaverse and digital identity, accelerated by COVID, are inspiring the world to transcend using existing technologies and financial services, and instead asking whether blockchain can create new industries in and of themselves.
Although the world of payments – and the world in general – seems to always be advancing, one critical and under-asked question is about progress for progress’ sake: Some might maintain that traditional currency works perfectly fine, and while blockchain technology is cool, it is a solution in search of a problem. Both Manji and Sloane disagree with that contention.
Sloane pointed out a couple of practical use cases. “Crypto is a great opportunity to apply digital identity,” he said. “My hope is that we see a major shift in how we execute all of those standard regulations around KYC to embrace the new role of identity on the internet.” Sloane continued to discuss the benefits to efficient account validation: “Payments today have been bolted onto accounts. You can’t make a payment without knowing the balance of the account… blockchain and crypto eliminates that because the account and the crypto are one and the same.”
Additionally, U.S. payment rails are not as efficient as they might be, according to Manji. Conversion rates and consumer satisfaction with their banking providers are both lower than expected. Legacy infrastructure, antiquated or clunky regulations, and slow manual processes can all interrupt efficient, timely, cost-effective payments. There is clearly room for improvement. “Is blockchain going to solve all those problems?” concluded Manji. “Absolutely not. But is there an opportunity for blockchain to come in and be a new set of infrastructure or technology layer to improve some of those things and benefit everybody in the ecosystem? Absolutely.”
