While there is no doubt the blockchain will transform many areas of industry, that doesn’t necessarily mean blockchain-based solutions will erase legacy players from the landscape.
One such area in which the incumbents are likely to remain is payments, where blockchain-based technologies will need to factor in the banks and other key players if they are to fulfill their potential, Hyperwallet’s SVP of digital markets Michael Ting believes.
“Banks have historically had a strong foothold in that space, especially with their corresponding relationships,” Mr. Ting began.
For decades when companies wanted to send payments overseas they would deal with their respective bank, who would then deal with the receiver’s bank and all the other banks related to all of the other transactions they processed that day. Taken together it essentially was an IOU system, Mr. Ting said. Far from perfect, but a known commodity.
Such a system long worked for larger amounts, but as lower amounts began to be sent as remittances or commercial payments in smaller economies the model became unviable, as it could cost the recipient a significant chunk of the original payment.
“With lower sized payments you need a different paradigm for money crossing borders,” Mr. Ting said.
Most people do not understand how fragmented banking relationships are, he added. There is no complete global payments rail guaranteed to easily send money from every Point A to every Point B. In its place a patchwork of provider relationships could see your money travel more than you do before reaching its intended destination (and amassing fees at every stop).
The blockchain can help address that in theory, he said. With an agreed upon single leader, data cannot be altered or disputed, giving a new system needed credibility. Payments can be made much quicker.
But a widely-adopted, blockchain-based solution is a ways off as constituents are used to moving money in certain ways, even with the accompanying warts. Cryptocurrencies confuse many, and with blockchain’s link to Bitcoin people may get confused and think they are becoming involved with cryptocurrencies, Mr. Ting said.
Better education will help move things forward, he believes, and it begins with understanding the current system and its flaws. Only then can people see how the blockchain can be the foundation for a better system as new players explain how they reduce known frictions.
“Without a strong appreciation for the old system and its problems it’s hard to understand the merits of a new one,” Mr. Ting said.
When you are talking about moving money, there has to be a policy framework to protect participants. But who establishes that? Is it self-regulated? We’re already seeing problems with ICO scams and the same fears will be felt in payments. Perhaps a consortium? Maybe. Government involvement? As we’re talking about money that is the likely outcome, though Mr. Ting said the early approach to ICOs suggests regulators will also have to adjust as their current systems never envisioned cryptocurrencies.
“There has to be some sort of rule book people are following,” Mr. Ting said.
Knowing who the other transacting parties are is important because it gives participants security. Say what you want about banks but they are known, regulated commodities with participant protections in place and that has value. Look no further to the role poorly supervised mortgage lending played in the recession for a timely example of why regulators need to be closely watching any new system.
The smart play is for companies to look at the blockchain, embrace it, and develop reliable ways to move money in and out of fiat currencies, Mr. Ting suggested. That is a must.
The success of blockchain-based methods is highly dependent on exchanges and market makers providing liquidity, Mr. Ting said. The more volatility we see the more it will deter people from getting involved, a trend which will limit the number and scope of use cases. More ways to facilitate merchant involvement will spread acceptance by allowing people to get acclimatized to cryptocurrencies.
There’s a few “ifs” there already, and we haven’t addressed events like large hacks that can scare off participants.
Hacks, merchant uncertainty, volatility, and liquidity are all problems that a sound central framework can address, Mr. Ting said. But any widely-accepted, blockchain-based payments system isn’t coming tomorrow.
“It’s important for people to understand blockchain isn’t a panacea,” Mr. Ting said, citing Hyperwallet’s own experience with the challenges of developing a new payments solution.
“Hyperwallet looked at this 15 years ago, saw the needs and brought together the global banking system on our own virtual rail system to transfer value cross-border between banks without those banks having accounts with each other.
“But it takes time.”