Crypto, digital cash and the future of payments

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  • Crypto innovations and stablecoins have led central banks to accelerate their plans for their own digital currencies (CBDCs).
  • Banks and payment companies have to adapt, but economies of scale remain critical

Thirteen years have passed since the pseudonym Satoshi Nakomoto published his (or her) famous white paper: Bitcoin: a peer-to-peer e-cash system, a nine-page document describing a new technology that enables digital payments without going through a financial institution. Fast forward to 2021 and Bitcoin’s market cap briefly exceeded $ 1 trillion, making it the fastest asset to hit that milestone. alphabet (US: Googl) took 21 years and Amazon (USA: AMZN), 24 years.

While Bitcoin has attracted an army of loyal supporters and speculators, very few people are now buying it for what it should make it easier: payments. Verifying transactions is slow, expensive, and energy intensive, which makes it inefficient – before you even think about how volatile the asset was and what security concerns there are.

But despite its volatility, Bitcoin supporters now view it as a store of value: a decentralized, immutable supply of money that governments cannot devalue. It seems more than a coincidence that the value and interest in cryptocurrencies has skyrocketed as governments launched huge stimulus packages and inflation fears have risen.

This observation has long been made by gold bugs. Jason Cozens, CEO of Glint Pay – an app that facilitates gold-deposited payments – notes that the purchasing power of both the US dollar and the pound sterling has fallen by over 85 percent since 1970. In the next decade, it will be the crypto believers who are ready to lead the renewed indictment against fiat currency.

While Bitcoin is the largest cryptocurrency, there are now thousands more. For example, Ether uses a mechanism that uses much less energy per transaction, and Litecoin is designed to work four times faster than Bitcoin. Importantly, the technology that underpins cryptocurrencies often has other uses, such as Ethereum, which powers decentralized applications, and Filecoin’s role in data storage.

Stablecoins are also growing, terrifying regulators. This is a type of digital currency that offers price stability by being backed by a reserve asset, most commonly fiat, while also providing instant processing and privacy via blockchain technology with smart contracts.

However, regardless of how good the technology gets with cryptos, it’s hard to imagine how those not tied to fiat could evolve as a mainstream medium of exchange. Governments and central banks around the world will not be ready to give up monetary control. Despite the recent approval of Bitcoin as legal tender by El Salvador, China has banned payment companies from enabling crypto transactions, and central banks and regulators often warn that investors could lose all of their money in these assets.

Governments likely won’t be able to completely eradicate them, but they could turn crypto into a niche counterculture that most avoid by banning exchanges and links with fiat money. This is a problem as digital currencies require scaling to be successful.

A legitimate new wave of payments?

To contain the threats posed by alternative currencies and harness their efficiency, authorities around the world are accelerating their plans for central bank digital currencies (CBDCs). The scope of the CBDCs is still being worked out, but they are generally viewed as a digital version of cash held with a central bank. According to the Boston Consulting Group, CBDCs could be issued and maintained based in part on blockchain technology, which could help automate monetary policy, curb criminal activity, tax evasion, and gain access to non-banks. In October 2020, the Bahamas launched the world’s first CBDC to “fully prove” their financial system.

Most other central banks also look at CBDCs. Leading the way among the major economies, China is testing its e-yuan by giving free online wallets to lottery winners. Officials hope foreign visitors can use their digital yuan at the Beijing 2022 Winter Olympics. China has also set up a joint venture with Swift – the global financial messaging and cross-border payments system – which appears to complement any ambition to make the e-yuan a future global reserve currency. In March, Mu Changchun, head of China’s central bank for digital currencies, said the main motivation for a central digital currency was to protect China’s “monetary sovereignty”.

Elsewhere, the President of the European Central Bank, Christine Lagarde, has said that a digital euro will be introduced in the middle of this decade. The Federal Reserve will publish a research paper on the subject this summer. The UK is looking into ‘Britcoin’ despite a discussion paper last week that while payments could get faster and easier, borrowing could get more expensive. The fact that it can be “programmed” for specific purposes also begs the question of whether it could give the government too much control.

The Bank of England has suggested that a CBDC could be used alongside stablecoins operated by the private sector. While the long-term implications are unknown, Aanand Venkatraman, head of ETF strategy at LGIM who recently oversaw the launch of L & G’s digital payments ETF (see below), doesn’t believe CBDCs like traditional payment companies like. will threaten Visa (US: V) or MasterCard (US: MA) as they adapt and remain part of the transaction process. Valued at $ 58 billion in 2020, L&G expects the global digital payments market to grow 19.4 percent annually between 2021 and 2028. And considering that it took Libor more than a decade to phase it out, an overhaul wouldn’t happen overnight.

Both the card giants and the providers of digital first payments PayPal (USA: PYPL) and square (US: SQ) dipped their toes in the crypto room. Visa offers coin transactions and a crypto wallet, while PayPal and Square customers can use Bitcoin on their platforms and both have bought crypto assets themselves. Mastercard’s entry into the industry was slower – in April it launched a crypto-based reward card together with partner Gemini.

Gaining a foothold in this industry is a sensible move from the titans of the industry, especially as they seek to dominate the infrastructure that is being built around all bridges between digital and fiat currencies and transactions. But economies of scale, the unstoppable growth of e-commerce and the self-interests of the global financial and monetary system will remain decisive rifts around the business models of these companies. MM

Payments important stocks

Surname

market

Mkt Cap ($ million)

Price change% (YTD)

Price change% (5 years)

Sales CAGR% (5 years)

EPS CAGR% (5 years)

Av Op margin% (3 years)

Average ROCE% (3 years)

Average R&D% sales (3 years)

MasterCard

US

$ 362 billion

2.33

272.75

9.62

13.73

55.47

52.10

N / A

PayPal

US

$ 309 billion

12.36

600.80

18.78

28.77

15.61

11.89

10.94

square

US

$ 97.5 billion

-1.62

2142.09

49.61

N / A

2.25

3.60

02/12

Visa

US

$ 495 billion

6.09

184.20

9.50

12.90

65.80

23.56

N / A

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