If we put aside discussions on Bitcoin’s value (and volatility) to consider its payment network properties we can see that a radically different approach to payments is technically possible, and could lead to a major disruption of the traditional payments infrastructure in the longer term. However, the barriers to widespread adoptions are high, and we explore a few in this article.
What are the key properties of blockchain payments (taking Bitcoin as an example)?
- Single payment “event” instead of traditional multi-steps payments. With a Bitcoin payment, several steps that are typically distinct are performed in one transaction. One message initiates the payment, checks available funds, checks authorization credentials and transfers the funds to settle the transaction.
- Possible integration with delivery of the good or asset purchased. In the case of digital goods or real assets with a tokenized ownership model (not common today). This eliminates the risk of paying for something only to not be delivered. This enables trustless transactions where the buyer does not need to trust the seller, as the funds and the products are exchanged simultaneously in one single transaction.
- Push payments. The payments are initiated by the payers (e.g. consumer making a purchase) which is different from the most widely used payments methods today (credit and debit card transactions are “pull payments” where the merchant initiates the transactions). Push payments are inherently much less risky, reducing the cost of fraud for the system. The most problematic and spectacular data breaches of the past few years involve the card owners credentials being stolen from the merchants (Target, Arby’s, British Airways, Etc,), creating the risk that this data can be used for fraudulent payments. This risk does not exist in a push system, as the consumer does not have to give sensitive data to a myriad of merchants they interact with (that will secure it more or less effectively)
- Security: in most traditional networks, a limited number of players assume the risk and guarantee the integrity of transactions (e.g. Visa, Mastercard). This means there is a clear entity to attack (whether to steal funds or to halt or slow down the network) and risk of accidents at critical points in the system. A blockchain system can be operated by a very large number of nodes that can be substituted to one another, eliminating single points of failure. Current blockchain payment systems come with other potential vulnerabilities but in theory should prove more resilient to malfeasance or disasters. In fact, Bitcoin has never been “down” while Visa and other networks all have had incidents.
- Continuous operation: blockchain systems operate 24/7/365 by design. There is no need for pauses to process settlements or perform system upgrades. There is virtually no chance that a natural disaster in one location brings down or even slows down the network.
- Reduced cost, as a result of some of the properties above (lower risk, elimination of centralized intermediaries)
What is preventing blockchain adoption for payments?
- Volatility / currency risk: for current cryptocurrencies, the cost of volatility far outweighs the cost savings of processing payments on the blockchain. For example a business that would want to pay suppliers or receive payments in Bitcoin faces the cost and complexity of hedging and accounting (what were mere transactions now have elements of capital gains and losses embedded). It is likely that wide adoption of blockchain payments will require the creation of either stable and scalable cryptocurrencies (“stable coins”) or more likely the progressive introduction of government-issued cryptocurrencies (i.e. crypto dollars or crypto euros). In B2B in particular, the cost of operating in a multi-currency environment for businesses is high. The Euro was introduced across Europe precisely to eliminate the friction for small and medium sized businesses that had to operate with multiple currencies (or simply chose not to operate in other countries to avoid this complexity).
- Cost of entry is high for consumers and businesses, in an industry that is characterized by very ingrained behaviors. Many typical features and parameters of traditional payments are drastically redefined in blockchain models like Bitcoin (absence of charge backs, probability based finality of payments, storage of currency outside of a trusted bank, etc.). While the benefits are large, the transition is certainly not straightforward.
- While eliminating a lot of risk (and cost) within the network, blockchain payments as of today also create new risks at the end-point, that will need effective solutions. It is not clear that many companies or consumers are ready to be their own bank. Over many decades, governments, companies and consumers developed a practice of outsourcing the security of funds to trusted and heavily regulated institutions (banks). Blockchain solutions are quite flexible, and will ultimately offer very high and customizable levels of security but adoption will take time.
- Powerful network effects at all levels: businesses, merchants and consumers. Taking consumer transactions for example: the value of carrying around a credit card is that in developed markets, the vast majority of merchants accept it. Conversely, the value for a merchant to accept credit and debit cards is that a vast majority of consumers carry one around. The same is true for B2B payments: for a blockchain solution to be worth implementing, it needs to have a lot of suppliers and clients on the platform. What this mean in practice is that for adoption to take on, any winning solution is likely to bootstrap adopting through existing platforms (e.g. crypto payment enabled in ApplePay or PayPal?).