Cross-border payments are frequently highlighted as a prime case for the utility of digital currencies. Alas, in reality, several factors including technological issues, competition, and regulatory constraints pose substantial challenges to the full adoption of this technology–a fact emphasized even more by the Federal Reserve’s recent launch of FedNow.
Chief Blockchain Officer for EY, Paul Brody, argues that whilst blockchain has specific benefits, basic fiat payments do not fall within this category. Simple, frequent transactions are faster and cheaper through centralized systems due to the simplicity of infrastructure. Blockchain payments, on the other hand, must be copied across numerous nodes which can impact both speed and cost, particularly at times of network congestion.
As an example, transaction charges for FedNow are anticipated to be under $0.05, while Bitcoin fees average closer to a dollar. Though accelerator networks exist for both Bitcoin and Ethereum that can reduce this cost, their efficiency with large volumes remains untested.
Furthermore, it is difficult for novel technologies to supersede established infrastructure such as debit card linked payment systems, unless they provide an exceptional advantage. Currently, blockchain has yet to demonstrate value that distinguishes it significantly from existing systems.
Crypto-enthusiasts often argue for its potential in cross-border remittances, pointing out that traditional systems have high fees and often exclude people without bank accounts. However, these challenges aren’t derived from technology and thus, cannot be fixed merely by deploying blockchain. The origin of increased costs often rests with regulatory roadblocks, physical infrastructure demands, and lack of competition.
Countries such as Brazil, India, Kenya, and Tanzania give us examples of how quickly financial services can prosper once regulatory obstacles are eased. The soaring costs of cross-border transactions are often attributed to the physical aspects of the infrastructure like supply chains for cash movements.
Despite uncertainties surrounding blockchain’s takeover of credit or debit card systems, there is still hope for this technology. Two aspects show particular promise.
Firstly, tokenization, allows anything of value to be moved around much like money, effectively preventing double spends outside of regular fiat money. Secondly, it enables payments and product delivery in the same ecosystem, simplifying transactions from multiple complex processes into a streamlined system.
While it may not be practical for blockchain businesses to compete in traditional payment arenas, they can harness their inherent flexibility and programmability. This would be particularly valuable for transactions that extend beyond simple transfers, entailing complexities from reconciliation to intricate business logic. The future of blockchain in payments might not lie in outpacing the existing systems, but in transforming the rules of the game.