By: Lou Grilli, Senior Innovation Strategist, PSCU
As financial institutions explore the future of payments and real-time accessibility for their customers, the question has arisen: should cryptocurrency be considered a serious part of the conversation?
The industry recognizes cryptocurrency as a relatively new form of digital currency, where monetary value is represented by a token held in an individual’s digital wallet, and where transactions of that token are registered in a distributed ledger, or block chain. A new form of cryptocurrency, Central Bank Digital Currency or CBDC, has emerged as a digital currency issued by a nation’s central bank, tied to the dollar (or the Euro, Yuan, or other fiat currency) to eliminate the volatility and the anonymity, and make conversion easier and more cost effective.
To date there has been no impact of cryptocurrency on other forms of payments, but as consumer acceptance, acceptance by merchants and proliferation and usability of digital currency wallets increases, there are expected to be some impacts to banking. A slight increase in card transactions is expected, as digital currency platforms such as Coinbase and Fold work with Visa to enable real-time digital currency conversion and use over existing card rails.
If there is going to be a noticeable impact to debit, it will occur when CBDC begins being issued – although its biggest impact will be to hasten the elimination of cash and checks, as the unbanked are given the option to store their money digitally without the need for a bank account. There is the possibility of a decrease in deposits as more funds are stored in digital wallets as opposed to bank accounts – this may result in a migration from debit card usage associated with a DDA to debit card usage associated with a wallet. However, any decrease due to this migration will be outweighed by the greater migration from cash to digital, resulting in a drive to more, not less, debit transactions.
The most widely known versions of cryptocurrency include Bitcoin, Etherium and XRP. This category of currency is publicly traded, meaning that the value of each coin is determined by supply and demand. Although initially envisioned as a secure and anonymous method of payment independent of any government oversight, there is currently little merchant acceptance of this form of currency, except for nefarious purposes, due to the volatility of its value and the difficulty and expense in converting decentralized crypto into dollars or other forms of payment.
The Role that Fintechs Play
There are a number of cryptocurrency wallets that are trying to overcome the complexity of buying, holding and selling cryptocurrencies. Two examples worthy of mention are PayPal and Square, both of which are attempting to make the process more consumer friendly. In June of 2018, Square enabled users of its popular Cash app to buy and sell Bitcoin. The purchased Bitcoin could not be used directly for purchase from Square merchants, but rather would need to be sold within the app, or transferred to another wallet.
PayPal recently enabled its users to buy, hold and sell several cryptocurrencies, including, Bitcoin, Bitcoin Cash, Ethereum and Litecoin. Funds held in the form of a cryptocurrency in the PayPal wallet are not considered part of the PayPal balance available for purchases, and in the initial rollout cannot be transferred to external wallets to be spent. It is solely for ease of investment.
SoFi and Robinhood, two online-only investment and financial services companies, enable trading in cryptocurrency alongside individual investments. Several other wallet providers also exist to reduce the burden of dealing directly with this relatively new form of currency. Given that these solutions do not facilitate using crypto for purchasing, there is no expected impact on debit transactions.
Stablecoins May Be the Answer
To solve the difficulty of spending cryptocurrency or converting funds held in cryptocurrencies for payments, a new form of cryptocurrency was developed, called stablecoins. Stablecoins are redeemable upon demand, making them more flexible when it comes to spending, and the only volatility is that of the underlying asset.
As opposed to Bitcoin, which has no owner, stablecoins are typically issued by a private or public organization. In addition, whereas Bitcoin is permissionless, meaning anyone can become part of the blockchain for mining new coins and redeeming, stablecoins are permissioned, meaning there is an entity that acknowledges and allows access to the blockchain for that currency.
One example is the JPM Coin issued by JP Morgan Chase, which recently went live. The goal for the JPM Coin is to reduce cost and friction in interbank transfer, especially cross-border, by moving monetary value on a secure blockchain, rather than through intermediary banks. It is redeemable by its institutional customers at a 1:1 ratio to the dollar, other fiat currencies are planned to be supported as well.
Another example of a stablecoin, one that has taken a convoluted path, is Libra, a previously planned stablecoin announced by Facebook. The original vision was for Libra to be a stablecoin backed by a reserve of cash and low-risk government securities denominated in a mixture of selected fiat currencies: U.S. dollars, euros, British pounds, Japanese yen and Singapore dollars. Libra received tremendous pushback from regulators in several countries. Subsequently, Facebook revamped its plan, renaming Libra to Diem, and changing to a single security-backed stablecoin, and turning governance over to a consortium called the Diem Association, of which Facebook remains one of several voting members.
Stablecoins, which are intended to be used for payments as currency as opposed to investments, could conceivably have a negative impact on debit transactions. However, the predominant use case for stable coins are for intra-bank transfers and cross-border remittances, both of which do not typically involve debit rails.
A Promising Look Ahead
In today’s climate, it goes without saying that financial institutions need to stay on top of industry trends and stay knowledgeable – the level of diligence behind these efforts can ultimately make or break the customer experience. When it comes to cryptocurrency, financial institutions should keep an eye on CBDC developments and be aware of what central banks are doing, as they may need to support CBDCs in the long term.
In addition, financial institutions should monitor their cardholders’ use of debit cards to purchase cryptocurrency as an indicator of preference over other traditional payment types. Monitor transfers into PayPal (or other wallets introducing crypto capabilities), as this will become the logical pathway to crypto purchase. Also watch for such transfers coinciding with declines in debit transaction volume in the same account, as it will be a sign of the customer shifting to PayPal as their primary transaction account.
Stay tuned for part II of this series, where we further explore cryptocurrency, including trends to look for and how financial institutions can prepare for potential impacts to debit.
Lou Grilli is a senior innovation strategist at PSCU, tasked with building and shaping a superior payment and member experience capability for PSCU and its Owner credit unions. Grilli’s long career in payments includes product management, product development and thought leadership in credit, debit, loyalty, mobile payments and digital wallets. He has spent the last six years in roles dedicated to the credit union industry.