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A Closer Look: Cryptocurrencies as a mode of payment?

Cryptocurrencies are originally built for payments, and to state the very obvious, the word ‘currency’ is embedded in the term ‘cryptocurrency’.

But taking a closer look, we all know that the use of cryptocurrencies as a mode of payment is not widespread. There are a few factors at play here, the most significant of which is that it is not easy to pay with cryptocurrencies.

Firstly, there are few merchants accepting virtual currencies to begin with. Bitcoin, Ethereum and other mainstream cryptocurrencies are volatile, making it hard for merchants to account for their true revenue.

If the price of the cryptocurrencies falls after they receive payment, they make a loss. If the price of cryptocurrencies rises after they receive payment, they make a profit; but only very few consumers would pay using cryptocurrencies if they have already expected their holdings to rise in value.

Next, for a consumer to adopt cryptocurrencies as their primary mode of payment (and not merely out of interest), payments are not as frictionless as they seem. Yes, cryptocurrencies can be transferred from wallet to wallet in matters of milliseconds without middlemen, but the process prior to that is far from simple for the layperson.

To start using cryptocurrencies, of course you would have to purchase them on coin exchanges (or mine them, which is a far more time-consuming and a technically challenging effort).

Before any purchase you would need to create an account and wallet on these exchanges, and verification of any account on a reputable website takes time and effort. Then, a bank account has to be linked on your account for you to deposit traditional currencies – normally USD – which again takes at least one day for banks and financial institutions to complete your deposit request.

After which, cryptocurrencies can finally be purchased using your deposited USD, and in this purchase process, you would have to bear a slight miners’ fee for the decentralized system to process your new virtual currency purchases.

Not that frictionless as it seems!

No surprise then, most cryptocurrency holders would agree that they have their assets primarily for investments. Many individuals believe that the value of bitcoin and Ethereum, or other altcoins will rise, so they buy them cheap and sell them when value rises – a process called “sharting”. Some will also seek quick profits by supporting initial-coin-offerings (ICOs), hoping to sell off the cryptocoins when they eventually rise in value.

It is my view that the primary purpose of cryptocurrencies as a mode of payment is lost. Only a minority use their virtual currencies to pay or conduct practical and useful money transfers.

Furthermore, many start-ups with their ICOs join the bandwagon of seeking quick profits by convincing investors to invest on their seemingly valuable applications, only to abandon the project after raising funds.

This “I-want-quick-profit” phenomenon has recently raised the irk of Ethereum co-founder Vitalik Buterin, who in his Twitter account in December 2017 expressed his fury towards many cryptocurrency applications that have no true practical applications in the real world.

He also added that the profit mentality has tarnished the reputation of cryptocurrencies, and the direction of the industry may prove lost, should we not start to closely examine the true value of cryptocurrencies once again.

But back to cryptocurrencies as a mode of payment. What real value does cryptocurrencies offer as a disruptive way to pay?

The most important value lies in helping the unbanked go digital, and in fact, offers them a really fast way to pay without having to go through banks or financial networks.

Anyone can transfer cryptocurrencies and use them to pay once they hold some. But again, it is back to our problem of having to link a bank account to our digital wallets to first purchase our cryptocurrencies.

But why need a bank?

A counter can be set up in unbanked areas to allow consumers to use cash to buy cryptocurrencies for their wallets on their smartphones.

Merchants can also print out their individual wallet QR codes to receive payments via cryptocurrencies, and subsequently exchange it for cash at counter exchanges. Or better still, merchants can use the cryptocurrencies to pay other merchants, establishing a healthy system of acceptance and adoption across the whole community.

Pushing this idea further, there are a lot of opportunities to establish new form factors for payments with cryptocurrencies. We do not need to solely rely on QR codes based on digital wallets – perhaps we can transfer cryptocurrencies from peer-to-peer with Near-Field communication (NFC) technology. This will see a consumer simply tapping their smartphones near another smartphone to conduct immediate money transfers, similar to Apple Pay or Samsung Pay.

Simply put, opportunities are endless, if and only if adoption of cryptocurrencies become mainstream. For a start, the community needs to encourage the use of cryptocurrencies according to their true and original purpose.

Or perhaps, let’s go about this with a long-term perspective. If no one uses cryptocurrencies for payments, what value do you think cryptocurrencies will have? The market value for cryptocurrencies will fall and crash, making the whole idea of cryptocurrency obsolete and a laughable venture a few generations from now.

So let’s do our part and use cryptocurrencies to pay. Assess the value of ICOs with the criteria of practical real-world applications in mind.

Of course, there are still many obstacles ahead when government regulations come into the picture, and these obstacles can be discussed comprehensively in another article. But for now, proving that a healthy payments ecosystem in the real-world based on cryptocurrencies can work is the first step towards future success.

JP Morgan’s CEO Jamie Dimon infamously said that the whole idea of bitcoin is stupid, and that it is a bubble. To prove him wrong, we need to start working together, and start working it right.   

By Leong Jiexiang

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