Sorting through the fact or fiction behind cryptocurrencies and its blockchain distributed ledger technology can be like running into a corn maze with no exit. Actual new crypto payment method working applications “are nascent, at best,” Bernstein’s Lisa Ellis writes, while engineering and regulatory challenges leave question marks, some of which could take years to resolve. But having a roadmap to recognize where change is likely to occur — and what organizations are at risk of disruption — is the baseline to which both investors and corporate executives might best monitor. It is in understanding the long-term vision that the players at risk and those who might benefit most come into focus.
There is a “dream” for cryptocurrencies — and more to the point the blockchain / distributed ledger technology — that underlies the how the future could shake out. Ellis outlines the vision for a “trustless” monetary transfer system in a September 22 Global Financials Blast titled “Bitcoin, Blockchain, and Ethereum – A Fraud or the Future?”, a question which is on the mind of Uber drivers to the biggest hedge fund managers (in the world).
The “trustless” aspect of the system is that “middlemen” are no longer needed in a financial transaction. The technology confirms that the buyer has the appropriate assets in their account and creates secure methods to execute contracts and exchange value while “eliminating the associated risk, inefficiency and cost.” This is, in practice, more a currency system that has intelligent add-ons that “dumb” currencies can’t currently match. Ellis, for instance, points to supply chain traceability, the automating of contracts, particularly in derivatives, and eliminating inaccuracy in asset transfers as key components of a new asset transfer methodology.
She isn’t alone in this assessment.
Vincent Schmeltz, a regulatory lawyer at Barnes & Thornburg, notes that cryptocurrencies could become “smart” and reside at the center of commerce. “If you want to rent a car, the distributed ledger could allow you to locate a car near you and unlock it based on your verification,” he wrote, pointing to an identification system for those who use the system. “With the ability to immediately verify both customer and provider, car share programs that are only nascent now could replace the large-scale rental car companies—at least outside of airports.”
This view comports with that of Ellis, who has a vision for a public system to develop that transforms into “a set of global, public payment rails analogous to the public Internet.” To meet its potential, Ellis says the current fragmented blockchains need to standardize, eliminating siloed ledgers and working in a more open, collaborative environment.
Blockchain technology is likely to disrupt numerous financial services business models, Ellis notes, but there is also salivation for those who understand and embrace it.
Calling the financial services industry “the most exposed” to the technological revolution, she thinks core banking service providers are likely to be impacted most over the long-term. Those intermediary firms involved in the bank-to-bank transactions, for instance, are likely to be impacted along with settlement providers and certain custodian banks.
But the disruptive trend doesn’t necessarily extend to popular consumer payment method servicers such a Visa, Mastercard and PayPal. Working under the mantra, “If it’s not broken don’t fix it,” the primary retail payment method “works extremely well,” Ellis pointed out, claiming there isn’t a problem in this niche to which blockchain might fix.
With consumer payments, there is “a chicken-and-egg challenge.” In order to be successful, a payment method must gain a critical mass of merchant and consumer acceptance. But which comes first? Consumer demand is required to motivate retailers to accept a new payment method, yet retailers might be required to accept a new payment system first in order to generate consumer demand. Cryptocurrency-based systems would need to create enough incentive for consumers change behavior away from a trusted payment method that is generally ubiquitous, Ellis points out. This is a significant challenge in this arena.
Where the technology might find opportunity is in international payment method, as evidenced by Veeam, “one of the more successful Bitcoin-related start-ups.” But such smaller start-ups are likely to run into larger competition, as evidenced by Chain, which has partnered with Visa to build a global business-to-business payment network.
A key issue that will be monitored is real-time transactions and processing, Ellis points out. Bitcoin transactions now take on average 10 minutes for processing — blocks in the chain need to “solidify” before finalizing settlement. In reality, this creates a transaction confirmation that takes from 30 to 60 minutes to settle, which in retail isn’t a viable response time.
It is very early in the nascent industry’s development to pick winners and losers. What Bernstein does is outline the playing field and keys to the game as this is the start, not the middle or end, or a transformative moment.