September 27, 2016 | DEVON WATSON
We’re seeing more and more evidence that – while slower than some of us fintech fanatics would hope – alternative payments (mostly mobile payments) are gaining traction and complementing the continued dominate use of cash, giving consumers convenience and choice in how they access their money. The thing that’s so fascinating, and so frustrating, about the alternative payments landscape is how complex it can seem; so today I want to attempt to demystify a few buzzwords that have been cropping up quite a bit: cryptocurrencies (i.e., bitcoin) and Blockchain.
You might be thinking, why does Diebold Nixdorf care about digital currencies and blockchain? In our role as a solutions provider for retailers, financial institutions and payments processors around the globe, we’re connecting the physical and digital worlds of currency and payments, in whatever form they take. While bitcoin itself may or may not have staying power, the continued evolution of money AND the associated technology behind it are important long-term trends.
So what exactly do these terms mean?
You can think of a cryptocurrency as a digital version of a typical fiat currency, one that a government has declared to be legal tender, but is not backed by a physical commodity. However, where fiat currency was once linked to precious mineral values, a cryptocurrency creates scarcity through the complexity of digitally mining or solving equations to create new tokens.
Cryptocoins News defines cryptocurrency as “a medium of exchange like normal currencies such as USD, but designed for the purpose of exchanging digital information through a process made possible by certain principles of cryptography. Cryptography is used to secure the transactions and to control the creation of new coins.” Put another way, cryptocurrency is electricity converted by solving equations in order to create digital units of value that can then be exchanged as a form of payment. In the simplest of forms, cryptocurrency is digital currency that is mined, rather than printed.
Bitcoin is a specific type of cryptocurrency. It has its own community, rule system and market dynamics. While there are many different cryptocurrencies, bitcoin happens to be the most recognized name with the largest network and market float. Keep in mind though, that “large” is relative – compared to global money flows, this is hardly a blip.
Regionally, however, there is some evidence of heavy localized usage. For example, some Latin American economies are turning to bitcoin as a solution due to political and economic instabilities. While examples like this are certainly a consumer benefit, I don’t see today’s cryptocurrency going more mainstream because it lacks the wrapper of consumer services and protection that financial institutions provide. Sure, cryptocurrency is an open road, but when it comes to being the driver behind your money and finances, wouldn’t you at least want some guardrails?
So while cryptocurrencies have a long way to go before — or if — reaching mainstream, there is good reason to pay attention to its evolution, and the evolution of the design pattern behind all of it: blockchain.
The Wall Street Journal pointed out that over 40 top financial institutions and a growing number of companies across varying industries are currently exploring use cases of blockchain as a “secure and transparent way to digitally track the ownership of assets.”
While it is often referred to as a technology, blockchain is actually perhaps better described as a design pattern. A blockchain is essentially a construct wherein a cryptographically authentic record of events is distributed amongst participants in a network and permanently updated once a majority consensus of nodes ratifies the entry. This design pattern could be tweaked and applied to solving many different challenges, but has its real-world origins powering cryptocurrencies. Said simply, it is the design pattern that bitcoin, and other cryptocurrencies, run on.
A Use Case for Blockchain?
Will blockchain upend payments and the world of banking as we know it? Not in the near term.
I believe blockchain is years out from being retrofitted into our trusted, high-volume, global financial structure. As currently implemented and tested at any scale, it’s an outlier that solves a specific trust problem for a specific group of users. This specificity yields issues in settlement timing, scale, computing overhead, etc. Turning blockchain into a viable, globally accepted standard that integrates with existing payments infrastructure is a long way off.
Because blockchain is in essence a cryptographically authentic design pattern for the transferring of value or assets, I can envision a few opportunities in the financial services industry where we could put it to good use. Thinking bigger picture, I think the most promising frontier for blockchain is automating highly complex or manual financial products, such as securing document-intensive processes. I can imagine everything from capturing a timestamp to securing viewership of credentials, providing notary services and automating your mortgage papers.
While I find it fascinating to watch the twists and turns of the evolving payments ecosystem, the bottom line is this: As alternative payments gain traction and cash continues to dominate, we have to recognize that payment options aren’t simply being replaced; instead, they’re coexisting — and it’s up to all of us to help consumers navigate this increasingly complex ecosystem as seamlessly, painlessly and intuitively as possible.
I’m passionate about alternative payments technology. Let’s talk payments, debate the future of currencies and share our big ideas.