You can’t open the news without reading a story on cryptocurrencies, but how will it affect the future of payments? While the environment is changing daily, I hope this article will give you an overview of the different types of digital currencies and how they may develop from a payments acceptance perspective.
Let’s start with cryptocurrency. One of the most common forms of this currency is Bitcoin, but it is just one of many cryptocurrencies in the market. Cryptocurrency is created by solving a complex algorithm using high powered computers. When the equation is solved, a token is granted and entered into a distributed ledger. The ledger validates the owner of the coin throughout its life.
Most government agencies view cryptocurrency as an asset and treat it as such from a regulation or taxation perspective. The value of Bitcoin is determined by the price someone is willing to pay for the token at any given moment. This causes the value to fluctuate and makes it difficult to exchange at a given value.
Even with this fluctuation, innovators have developed several programs to enable its use to make a payment. Today, most merchants are accepting cryptocurrency as an underlying payments instrument and, in many cases, may not even be aware of it. The common way this takes place is through programs which convert the cryptocurrency to fiat at the time of purchase. To the merchant, this transaction is settled in dollars; but at the account level, a wallet containing the crypto is debited as the original source of funds. Both Visa and Mastercard have licensed issuers on their platform to perform this type of transaction. PayPal and Square also facilitate this type of transaction in their wallets.
Few merchants have the ability to accept Bitcoin in its native form. Programming the direct acceptance of Bitcoin would require significant work by a merchant, including the ability to convert your product pricing to Bitcoin and ensuring the price of items can be converted in a dynamic manner to reflect the fluctuation, as well as how to recognize any fluctuation between the time the cryptocurrency is moved to the merchant wallet and when it is converted to dollars. I will leave it to the tax accountants to explain the complexity around how this change in value will be taxed.
The next version of digital currency is known as stable coin. Stable coin value is pegged to a specific currency or a basket of currencies. Facebook focused attention onto stable coin when they announced their plans to create such a currency, Diem. There are many open questions on stable coin which have yet to be answered. One of the questions is how regulators plan on treating stable coins and will it be treated as a currency or an asset.
Although the development of stable coin is still in the early stages, businesses should focus on creating efficiencies in the movement of money. Customers have the ability to store value in a variety of containers while merchants accept a direct transfer of the value. Businesses could also follow a more traditional model by using a third-party network to facilitate the transfer of the value.
Today, the number one use of stable coin is in the trading of cryptocurrency and international money movement. Both rely on the dynamics of the coin having a consistent price as it is transferred between different forms of currency.
We have yet to fully understand how the stable coin market will develop but it is important for merchants to monitor the developments and be involved in the discussion. There is an effort through the American CryptoFed to develop a merchant based stable coin ecosystem. The basis of this effort is to create a stable coin ecosystem driven by a collaboration of merchants, resulting in lower cost of acceptance. It is one way in which the development of digital currency could result in a more competitive payment acceptance landscape.
Central Bank Digital Currency
The last type of digital currency I will cover is Central Bank Digital Currency or CBDC, which is a central bank created digital asset which can be used in substitution of a physical fiat. Many counties’ central banks are in various stages of developing CBDC. For example, China has a digital yuan market and is testing acceptance with various merchants. In the U.S., the Federal Reserve has a joint venture with MIT to evaluate the different requirements needed to launch a CBDC. Recently Federal Reserve Chair Powell stated the Federal Reserve will release a position paper on CBDC and will solicit comments from the general public.
There are many outstanding questions regarding CBDC, but it can offer a more direct transfer of funds between multiple parties. The Fed could deliver CBDC directly to customer wallets, which they could use to make purchases directly with merchants. Another critical question is what the rules will be regarding where the currency will be stored. CBDC could lead to a more distributed environment in which consumers no longer rely on financial institutions to store their funds. One can see a whole new ecosystem developing where customers are in control of their funds and accept bids to store in wallets which offer the highest returns.
The MAG has engaged in conversations with all the different providers of digital currencies to represent the merchants’ point of view, and we will continue the collaborative discussions, through both our Innovation and Advocacy committees. If this is of interest to you, join one of the committees. Later this year the MAG will release some basic principles we believe should be incorporated into any digital currency. The ability to create a more competitive landscape and freedom of choice is paramount to the success of the adoption of digital currencies.
The MAG believes, if implemented correctly, the addition of digital currencies can lead to a more competitive payments system which will serve all parties. It is important to understand the developing markets and participate in the conversation. We look forward to working with everyone moving the digital currency market forward in a collaborative manner.