Most customers don’t buy a technology for its own sake, no matter how novel it is. They are interested in what value it brings to their lives. Digital currencies and crypto payments are no different. Their adoption is slow, as this is a novel technology that needs to be recognized to become usable. Let’s review what sort of advantages and disadvantages could digital cash bring to the end users in the payments market.
To become adopted within a product development process, a new technology – like digital cash – has to bring significant improvements to existing technologies, either in terms of cost saving, function, efficiency or design. Alternatively, many consider it a disruptive innovation — poised to completely replace some existing technologies, processes or products.
In their inception phase, crypto payments were only a technical idea with a proof-of-concept showing that the reasoning behind them is sound. However, without an ease of use factor, large-scale adoption remains limited. This is about to change.
Crypto payments advantage #1 – Cost effectiveness
A major differentiating factor is the applicability of this technology to both domestic payment market needs and transactions for small value amounts as well as to high-value, across-the-globe payments between governments and corporations. As there are no 3rd parties that need to secure, process and proxy the transactions, costs are pushed down significantly.
The cost-effectiveness factor of the product also means that we’d be able to use this technology to create products for “unbanked” people. For example, in regions where suppliers can’t offer traditional payment products as they’re not financially viable.
Crypto payments advantage #2: Variety of use cases for digital cash
The second most important advantage of digital currencies is their applicability in vastly varying business scenarios. They support diverse use cases. Digital cash can be tailored to support person-to-person payment scenarios, like borrowing money from your colleague for lunch or handing a small amount of pocket money to your kids. However, we could also use them for regular purchases, such as online or in-person shopping with brick-and-mortar merchants.
On top of that, the model can also cover much more complex scenarios for the corporate world. Example: a hierarchically organized group of people controls fund spending. CEOs can make decisions themselves up to some specified monthly limit — or with other board members above that limit. We can apply digital cash to scenarios where the paying party is either online or offline.
Crypto payments advantage #3 – Speed of transaction
The amount of time that user has to wait from the purchase decision to payment confirmation can be significantly lowered, even to microseconds. It would only be necessary to check the transaction’s validity using digital currencies and their cryptographic capabilities. You wouldn’t need to wait long seconds for the card transaction to filter through the chain of complex integration networks between intermediaries. Acquiring banks, issuing banks, card schemes, payment gateways – you can remove the requirement for trust in any of these intermediary parties.
Crypto payments advantage #4 – Anonymity
For some types of transactions, like donations to a political party, we wouldn’t like to reveal our personal data. Cash offers that feature, but only for in-person payment and only for products of smaller value. Digital currencies, when used properly, reintroduce anonymity. Parties can make transactions for purchases of any value and without any physical or geographical boundaries.
On the other hand, each and every transaction is permanently and irreversibly recorded in the public ledger. So, if a regulatory body only knows one party to the transaction someone could extract valuable information about the payment parties themselves and their past activities from the ledger. This makes digital currencies product compliant with various local and national regulations (KYC, AML or ATF).
Problem #1 – …anonymity!
We should also note some features that can cause problems to crypto payments users. The first one would be… again, anonymity. It can be an advantage, but under some conditions, we can see it as a disadvantage. Shadowy partners in a transaction can cause regulatory interest and even police investigations.
What’s more, making sure that a transaction is truly anonymous isn’t easy. You have to take certain technical factors into account. External services on top of a digital currency can assure that, but then you have to trust them to some extent.
Problem #2 – Fraud
As with any new means of payment, hackers and fraudsters can target its users in sophisticated and clever ways. The education process for a new product (like crypto payments) always takes time. During that time, users are more vulnerable to various forms of attack. A lot of unique features of digital currencies (anonymity, cost-effectiveness, lack of intermediaries) stem from the decentralized nature of the technology. But as an end-user, you don’t usually see the decentralization complexities. You rely on the regular communication interfaces available (mobile phone application, web browser sites) which increases your vulnerability. Transactions, by design, are irreversible, no matter if fraudulent or legitimate. This may discourage some users.
Problem #3 – Valuation swings
Classical digital currency value isn’t pegged to any national fiat currencies, which can cause big swings in currency valuation. These swings might make the currency unusable for some use cases. In time, when adoption grows, the swings will be smaller and spectrum of use cases will increase. However, right now this is a disadvantage. On the same note, if the number of merchants and other parties willing to accept digital cash is small, adoption will remain limited.
What are the properties of the perfect digital currency?
With all that knowledge, we can try to design a list of properties the ideal digital currency should have to reach the widest possible adoption:
- Ease of use, preferably in an already familiar way. For instance, it can interface with some existing means of payments like mobile payments or card initiated payments, QR-codes and NFS.
- A regular mobile phone should be enough to make transactions.
- Very small cost of usage. This would allow micropayments.
- Value-added products and services (loans, investment, savings, corporate products) should be possible to be built on top of the digital currency (expandable, programmable money).
- Government sanctioned: it adds legitimacy and greatly widens adoption.
- Global reach, acceptable around the world for both online and in-person purchases.
- Value pegged to basket of fiat currencies (so that it’s not that volatile and can appeal to various geographical regions).
With these features, the number of uses cases for crypto payments and digital payments is vast and various. Adoption of digital cash can start with micropayment scenarios, where there is little competition. Gradually, we can move to other more competitive areas. Read more about more blockchain business ideas and challenges on our blog – and sign up to our newsletter for more!