Why Crypto Is the Future

The case against it is mostly fallacious. The one for it is unavoidable.

By the late 1980s, MasterCard was removing humans from the authorization cycle, replacing them with modems. By the 1990s, the Internet was connecting the last mile to merchants, replacing modems with instant authorization. Will the 2020s be the decade when the payment ecosystems remove issuing banks from the process?

Many have long questioned the viability of cryptocurrency as a transaction medium and dismissed it as a volatile investment. For the moment, let’s cast aside discussion of crypto as an investment. This article is about buying things with crypto instead of with cards.

There is no disputing that blockchain technologies have a long way to go before they can compete with sub-second authorizations, the foundation of international networks like Visa and MasterCard. But it would be a mistake to ignore market segments that do not require real-time authorization.

Commerce models using cryptocurrency have the potential to slash transaction costs and liabilities for merchants that can logistically accommodate near real-time authorizations.

Ironically, the same public Internet that reduced authorization times from a few seconds to what is effectively instantaneous also created vast new markets that don’t require real-time authorization.

Consider e-commerce. So many of the things you used to buy in person you now just order from Amazon. Unless you are purchasing digital goods, Jeff Bezos is fine getting an approval long after you’ve logged off, just as long as it’s before the next shipping cycle. Indeed, the hard-goods e-commerce market has very few use cases that require instant authorization.

Yes, when you’re at the register at Kroger, the store needs to authorize your card right now. But when you order the same food on Amazon Fresh, the situation is different. Amazon can wait the minutes—or hours—it takes the blockchain to authenticate, reducing interchange and eliminating chargebacks.

As the consumer, you might get your confirmation email later than you would if you had used a credit card. But you would not care, if you even noticed. Your food will still be delivered the next morning.

Likely Markets

Indeed, plenty of market-segment behaviors don’t require real-time authorization. Certainly, recurring transactions fit the bill, since the scheduled nature of the transaction inherently provides plenty of time to pre-validate the payment.

Medical-cannabis dispensaries already heavily leverage pre-order staging. Accepting cryptocurrencies would not impact those flows, and would provide a realistic alternative to cash, arguably to a user base especially likely to be comfortable with spending crypto.

Foreign exchange, too, is shaping up as an intriguing use case. Unlike fiat currencies, cryptocurrencies have always been borderless, so, in and of themselves, they have no cost to exchange. The root cost of forex using cryptocurrency lies in converting it (back) to the fiat currency of choice, which is typically far cheaper than trading one fiat currency directly for another.

International merchants benefit from this decentralized finance model, as they don’t have to worry about bank, network, or processor exchange fees between native currencies of the merchant and the buyer.

Now consider business-to-business commerce. Small average tickets, retail pricing, and exchanges mimicking interchange models are hindering crypto adoption in the small-merchant space so far, but B2B transactions offer a far more compelling play.

Enterprise stakeholders transact massive-dollar transactions and enjoy wholesale pricing, often as per-transaction only, no interchange applied. Modern standards like ISO 20022 are further simplifying B2B payments, finally merging payment-industry and electronic data interchange standards. Along the way, this trend accommodates cryptocurrency.

International business drivers are incorporating currencies like Cardano (ADA), Ripple (XRP), and Stellar Lumens (XLM) to better manage their forex processes. When Ford buys a million tires from Michelin, paying 5 basis points instead of 50 moves the needle all the way across the dial.

Crypto Myths

The volatility of cryptocurrencies is certainly a concern, but merchants have options to mitigate this risk. Stablecoins like Tether (USDT), Reserve (RSD), and USD Coin (USDC) anchor their value to a durable, unfluctuating asset like the U.S. dollar or gold, providing safe repositories for their settlement accounts.

Forward-thinking merchant strategies are blending stablecoins and accounts payable/accounts receivable procedures that reduce the need to convert to fiat currencies at all. National governments will also become significant drivers in this arena. Scotcoin (SCOT) represents itself as a nation-based currency meant to support social and moral good, leveraging the benefits of crypto to maximize contributions. Recently, El Salvador announced it will adopt Bitcoin as legal tender.

Some myths about cryptocurrency remain a major hurdle to commercial standardization. Detractors speak to the anonymity of cryptocurrency, its association with criminal operations like Silk Road, and its use in ransomware attacks. These facts have exacerbated the perception of cryptocurrency as being designed for nefarious purposes.

It’s a fair point. Crypto can make things easy for the bad guys. The good news is that the blockchain and strict know-your-customer procedures render most of these arguments moot. As a public register that can be queried in real time for transaction detail, the blockchain makes it technically simple to set policies and controls. If the cryptocurrency presented for a transaction doesn’t have a pristine past and a verifiable person attached, it would be declined.

Imagine the ability to query Visa’s authorization logs in real time. For the life of a card. For free.

Decentralized finance models and commerce-tuned blockchains will help to accelerate acceptance as cryptocurrencies gain credibility as purchasing methods. But even now, there is no shortage of use cases that legitimize cryptocurrency commerce models, if not make them preferable.

—Cliff Gray is a senior associate at The Strawhecker Group, Omaha, Neb.