Bitcoin is the elephant in the payments business today. With the launch of bitcoin futures, the cryptocurrency has entered the investment mainstream as the asset class of the moment.
But as a payments currency? Therein sleeps the elephant for the payments industry. Cryptocurrencies are the future of payments, and banks should be prepared.
To date, bitcoin is a trader's dream. The spectacular climb of the asset's price accelerates when both exchanges made their announcement, and it has continued to increase, as have warnings about the bitcoin bubble.
Yet bitcoin failed to gain traction for its initial design as a means of exchange, a currency, a payment vehicle. The title of Satoshi's initial paper is "Bitcoin: A Peer-to-Peer Electronic Cash System," and it presents a system of payments being exchanged from one party to another "without going through a financial institution."
Yes, it works. Major retailers accept bitcoin, and BitPay reports that it will process more than $1 billion in payments this year (compared to more than $250 billion worldwide last year by the card networks). In Japan, bitcoin is gaining acceptance as a currency and the country's regulators have recognized bitcoin exchanges. Even McDonald's is reportedly considering accepting bitcoin payments.
Bitcoin has interesting international use cases, with two Chicago firms, DigitalMint and Athena Bitcoin, using it to make international remittance payments more affordable to people sending money back home.
But we're talking minuscule transaction volumes in relation to other payments instruments. And who would want to make a payment with an instrument whose price is rising so quickly?
This quote from a Reddit discussion, "Bitcoin is actually quite adopted by merchants in Japan," sums up the present state of bitcoin as a payments vehicle pretty nicely:
“An extremely small percentage of bitcoiners, let alone persons, want to spend bitcoin on legal goods and services when there are a ton of better payment options available that don't require them to spend their deflationary store of value.”
I’m not saying bitcoin will not become a major payments vehicle in the future—I don't really want to be that guy right now—but the merchants that accept it most likely do it for the PR value and not because it reduces costs or gains much in the way of new customers.
So why should banks prepare? Because the arc of technology and investment finance demands it. The cross-border case for point-to-point payments is compelling now. Consumer applications will follow, probably in underbanked areas and within communities of consumers.
And today’s hottest cryptocurrency market, initial coin offerings are morphing into regulated token offerings, under the supervision of the Securities and Exchange Commission and the Commodity Futures Trading Commission, or both.
As legally traded securities, cryptocurrency-based investments will require the same kind of exchange function as international currencies, to convert fiat money into crypto-based tokens. Banks will either find ways to guide and offer those exchange services or their customers will go elsewhere.
We don't know when cryptocurrencies will become widely accepted for consumer payments, nor do we know what coins will develop nor how a transition from current payment forms will move. And we know that given current volumes of cryptocurrency payment volumes that it’s likely a long future. But we also know it’s a future that’s coming and will transform both cross-border and crosstown payments.