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Are crypto-based payments the currency of the future?

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The latest instalment of Delta Capita’s FinTech Series saw Conor Lane, Head of Thought Leadership for Data and Technology, host a panel of industry experts to discuss the future of cryptocurrencies in both Financial Services and wider society. The panel consisted of David Acton, Delta Capita’s Distributed Ledger Technology Lead, Mark Croxon, Head of Market Infrastructure, and Mark Pearce, Solutions Architect.
Below details the key takeaways from the exclusive event.

Large scale adoption

Crypto now represents the fourth-most popular type of investment among investors, behind only stocks, mutual funds, and bonds and the data tells us that there is a tremendous amount of it in circulation; approximately $1 trillion according to CoinMarketCap.

When we look at the most popular cryptos; Bitcoin (BTC) and Ethereum (ETH), in the archetypal framework of ‘money’ i.e., a store of value, a unit of account, and a medium of exchange, we begin to question the extent to which they should be considered ‘currencies’ at all.

The extent to which cryptos can be trusted as a store of value is directly tied to their relative volatility. The prices of ‘coins’ such as BTC and ETH famously fluctuate far more than most of their fiat counterparts. Asset-backet ‘stablecoins’ such as Tether (USDT) aim to keep cryptocurrency valuations stable by maintaining equivalent reserves in USD.

However, in practice, many question the legitimacy of such fiat-pegged stablecoins and claim that they exist in-part to artificially inflate the price of other cryptos. Nevertheless, stablecoins as a concept appears to provide the strongest rebuttal so far to the volatility argument in crypto while also being widely accepted as the most useful unit of account in the market.

Making the leap of faith

With tech giants such as Google and Meta now accepting cryptocurrencies in exchange for their cloud-based services, one may infer that we are approaching a world where such means of payment are more widely accepted.

It is however important to note that many tech-based firms possibly have a vested interest in the success of crypto exchanges such as Coinbase, given the emergence of their joint ventures. We must still question the utility of cryptos in wider society. Yes, we can purchase an NFTs with BTC; but can we buy our weekly groceries with it? Would we want to?

Perhaps developing countries such as El Salvador provide the most facilitating environment for the adoption of cryptocurrencies due to their lack of trust in central banks and higher-than-average inflation rates during times of uncertainty. However, in larger economies with relatively well-functioning fiats, we can consider most cryptos as investments more akin to derivatives, for the time being…

Security implications

Most of the advocating rhetoric around cryptocurrency and blockchain technologies quotes the idea that transactions are less prone to cyber-attacks due to the use of centralised distributed ledger technologies, outlined further in our related article. Whilst smart contracts provide promising evidence in the way of being less susceptible to hacking, they are certainly not immune to it.

Over the past five years, several cyberattacks on the blockchain network have been reported due to poor coding embedded within smart contracts, resulting in wallet freezes and drainage. Nevertheless, we should remember that these new DLTs are somewhat of a honey pot for cyber attackers, with trading volumes in excess of $80 billion per day at risk of attack.

We expect public DLT networks to become more robust as companies such as Firmo (recently purchased by eToro) dedicate themselves to increased security on the blockchain but should question the extent to which the public will embed complete trust in crypto-based payments.

If somebody is defrauded by a criminal gaining access their typical retail bank account details and that person spends large sums of money, the individual can be confident that they will receive that money back. Without the existence of a bank or a governing body that offers an insurance policy for such losses, holders of cryptocurrency are left helpless in the event of a cyberattack, or perhaps worse, in the event of losing a password.

Unlocking the potential of DLTs

Despite cryptocurrencies being the most well-known application of DLTs in practice, Delta Capita believe that there could be other ways in which blockchain, and distributed ledger technologies could solve real-world problems in the more immediate future, with buy-in from the Financial Services industry. One way in which these technologies could revolutionise the way banks and their respective clients interact and perform KYC is through Soulbound Tokens.

Using a type of e-passport, hosted on a private-permissioned blockchain network, individuals could have the ability to create an online profile and provision access to certain pieces of information to whomever they wish. This would reduce friction in the onboarding and perpetual KYC process, two key focus areas for our clients right now.

Looking to the payments space; in 2019, JPMorgan & Chase Co. announced plans to introduce JPM Coin (now part of Onyx) to institutional investors on a private network in order to help instantly transfer funds between some of its clients. The idea behind this technology was birthed in response to the delay and opacity that many banks and investors face when making cross-border payments or multi-currency settlements.

Such examples of blockchain-based solutions to real-life business problems are already on our clients’ agenda and Delta Capita have the experience and technology to help make them a success.

Whether cryptocurrencies will become more widely accepted and used as a means of payment, particularly in financial services, in the near future remains uncertain. However, we can be sure that the technologies upon which they are built are growing ever-more sophisticated and should not be ignored.

How Delta Capita can help

Delta Capita’s experienced global data & technology team has wide-ranging expertise in blockchain and digital asset management. We have a deep understanding of industry best practice – from strategic advisory and payments regulation to blockchain lifecycle and management – and can provide you with valuable insight and delivery support.

To learn more about Blockchain & Tokenomics, contact us here.