Although the idea that cryptocurrencies will overthrow incumbent payment systems might seem far-fetched to most, according to one payments expert, it is a scenario that crypto-skeptics shouldn’t dismiss.
In a research note titled, “V, MA, PYPL: Not Imminent, but Worth Watching — the Risk of Disruption from Cryptocurrencies and Blockchain,” Lisa Ellis, an analyst at MoffettNathanson tracking the rapidly evolving payments sector, said nascent digital coins aren’t a fad.
“We believe the ‘existential’ threat of cryptocurrency systems is unlikely to occur soon, as bitcoin (and other cryptocurrency systems) still face several shortcomings compared to the current private payment systems,” she wrote. “However, we believe this ‘existential’ threat — as ludicrous as it may sound (why would I ever buy a coffee with bitcoin?) — bears watching, as progress is steadily being made to address these shortcomings.”
For meaningful progress to be made by cryptoassets, however, the technology that supports the digital currencies requires a tuneup, she said, referring to so-called blockchain, the backbone of digital currencies.
Already, payments with currencies like bitcoin BTCUSD, +1.48% can be executed on traditional platforms. Starbucks Corp. SBUX, +0.19% recently joined Microsoft MSFT, -0.11% and Intercontinental Exchange ICE, +1.22% the parent of the New York Stock Exchange, to launch Bakkt—a regulated ecosystem for digital assets.
Still, the dominant platforms for payments remains Visa, V, +0.64% Mastercard MA, +0.10% and PayPal, PYPL, +0.22% to name a few.
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A blockchain is a decentralized record-keeping system that immutable logs transactions. However, popular blockchains like bitcoin and ethereum are inefficient, because processing can take a much longer time, than, say, using a credit card. For example, Bitcoin can process around five transactions a second, ethereum around 10 in that time, while major credit card companies can do so at a comparatively breakneck speed, processing upward of 5,000 transactions a second.
However, this so-called scalability issue, the ability to process at a faster clip, is a problem the crypto community is eminently addressable, the expert says. For one, a number of add-on features are promising to increase network efficiencies and speed, including the Lightning Network, which is a second-layer system that sits atop of the bitcoin blockchain.
MoffettNathanson’s Ellis specifically cites the Lightning Network, along with stablecoins—those usually pegged to a fiat currency like the dollar or euro—as possible solutions to the current shortcomings of digital assets and blockchain.
Read: A team at Northwestern think they have solved one of bitcoin’s biggest problems
Moreover, she sees less-conventional cryptocurrencies like XRP, XRPUSD, +2.43% which runs on the Ripple protocol, as a further threat to payments, especially in the cross-border transactions. Ripple has linked up with a number of banks to use their native coin, XRP, as a settlement tool that enables rapid-fire payment transmission, settlement and confirmation.
However, while bitcoin and crypto aficionados are set on the idea that their technology can dethrone current monetary systems, Ellis said it isn’t a ‘one or the other’ scenario when it comes to the future of payments. “That said, cryptocurrencies and blockchain present opportunities to Visa, Mastercard and PayPal in addition to these risks,” she said.
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