The global presence of cryptocurrency has been steadily growing in the last decade. 19% of the world’s population has purchased cryptocurrencies since the invention of Bitcoin (BTC) in 2008. There has been 2x growth in year-over-year statistics, and daily trades in digital assets have previously eclipsed $10 billion. The cumulative market cap of cryptocurrencies in the market grew from less than $18 billion in 2016 to $237.1 billion in 2019. More and more countries around the world have been issuing regulations for cryptocurrency trading and transactions. The number of blockchain wallet users across the globe has also been steadily increasing in light of relaxed or supportive governmental cryptocurrency regulations. As of Q2 2020, there are 47.14 million blockchain wallet users in the world.
Several major payments companies also consider cryptocurrency as a valuable proposition. For instance, Square, the market leader in offline store payments recently won the patent to debut a crypto-to-fiat payment network that allows its merchants to accept payments in cryptocurrency, among other customer assets. Global card payments giant Visa recently acquired Plaid, a fintech that serves Coinbase and Abra.
But even with changing regulations and investment by fintech companies, cryptocurrency adoption is not as widespread as it has the potential to be. As experts in payments consulting with a particular focus on cryptocurrency payments, we decided to take a closer look at some of the major obstacles in widespread cryptocurrency adoption across the globe:
Regulations (or lack thereof)
While several countries around the globe have recently released laws and frameworks to provide a comprehensive set of regulations for the trading and use of cryptocurrency, most countries have provided no clear guidelines on the use of cryptocurrencies by the general public. For instance, India’s Supreme Court recently struck down a previous mandate that gave the RBI (Reserve Bank of India) the power to regulate virtual currencies. While cryptocurrencies are currently legal for trading purposes, India has still not taken steps to regulate crypto assets or classified them as legal tender. Even so, crypto trading in India is booming; some crypto exchanges have seen more than 10x trades during the Covid-19 pandemic.
India is far from only the country with murky guidelines on the trade and use of cryptocurrencies. Countries like Turkey, Brazil, Russia, and others do not classify cryptocurrencies as illegal but have not legalized them either. Crypto exchanges and crypto trading continue to take place as large numbers of the population engage with these activities but a better framework of laws regulating crypto assets can certainly boost adoption.
It’s important to take a page out of South Korea, Japan, and Germany’s books — these countries have not only regulated crypto assets but also provided clear and useful frameworks that regulate the trading and taxes on crypto assets.
Simply declassifying cryptocurrency as ‘illegal’ is not enough to promote widespread adoption. Countries like the UK have regulated cryptocurrency but continue to advocate against crypto trading, making sure to note that it is both risky and volatile. In addition to this, the UK taxes crypto assets as capital gains, making it less than appealing for the common people to trade with cryptocurrency.
Barriers for User Entry
Trading in cryptocurrency has been restricted to tech-savvy individuals or to those who have the time and patience to understand how the blockchain system works. It is extremely difficult to use cryptocurrency for day-to-day needs as very few merchants accept crypto payments for their products. Paying for goods and services with fiat currency is simple — cash, card, mobile wallets, there are several ways for quick and easy payment options.
The need for multiple wallets (offline and online) to protect crypto assets is a much needed security feature but the user experience is far from friendly. If users are forced to remember multiple digits to log into their wallets every time they want to transact with their crypto assets, the tedious user experience makes it less likely for the general public to choose crypto payments. Facebook’s ambitious Libra project is attempting to develop a single, mobile-downloadable wallet that will allow users to transact with cryptocurrency like they do with fiat currency.
For increased cryptocurrency adoption, the process to buy, sell, and store crypto assets needs to be reworked to make it much more user friendly. Until then, only a select few people will be able to access and trade with cryptocurrencies.
The Scalability Trilemma
Ethereum’s Vitalik Buterin noted that when it comes to blockchain and crypto assets, it was only possible to choose two out of three: security, scalability, and decentralisation. Since any project that compromises on security can never be trusted and decentralisation is a core aspect of cryptocurrencies, most of them forego scalability to provide their users with a secure, decentralised trading platform which then alienates ordinary users. The loss of scalability leads to high entry barriers as noted above, which in turn makes using cryptocurrency highly difficult to use.
For a cryptocurrency to be used widely, it needs to be scalable and adapt to different needs. Some cryptocurrencies (like the EOS) are partially foregoing decentralisation in an attempt to be more scalable. On the other hand, other projects like The Lightning Network choose to create specialized transaction channels outside the main blockchain. The Lightning Network claims it is capable of hosting millions to billions of transactions per second across the network. Additionally, by going off the blockchain, it encourages emerging use cases such as instant micropayments.
Several new cryptocurrencies are attempting to solve the scalability trilemma by using a sharding mechanism. Sharding involves splitting the network into subgroups and only requiring a single subgroup to process particular transactions.
Until cryptocurrencies solve the scalability trilemma and can provide security, decentralisation, and scalability, the adoption of crypto payments may be limited. Widespread adoption is only possible when crypto payments are scalable and match the current scalability of fiat currency, making it easier for the general public to switch to cryptocurrency,
As noted above, several countries advocate against trading in cryptocurrencies given the high risk and volatile nature of crypto assets. Since cryptocurrencies are not governed by any central or regulatory authority or a controlled emission mechanism, they can be highly volatile. The lack of an intrinsic value and institutional capital coupled with prevailing short-term investments also contribute to the volatile nature of cryptocurrencies.
Cryptocurrencies like Bitcoin are similar in properties to gold. This is governed by a design decision by the developers of the core technology to limit its production to a fixed quantity of 21 million BTC. But in comparison to gold, the volatility of Bitcoin (and other cryptocurrencies) is much higher. For instance, from October of 2017 to January of 2018, the volatility of the price of bitcoin reached nearly 8%.
The highly volatile nature of cryptocurrencies can be alluring for some high-profile investors but unlike with gold, the general population is unwilling to invest in cryptocurrencies. The highly volatile nature coupled with the high user entry barriers has stumped widespread adoption of cryptocurrencies.
Given that cryptocurrencies are highly volatile, it comes as no surprise that security is a critical element to increase the adoption of crypto payments. Market fluctuations lead to vast increases or decreases in the amounts held by crypto traders. In April 2014, the OpenSSL vulnerabilities attacked by the Heartbleed bug and reported by Google security’s, Neel Mehta, drove Bitcoin prices down by 10% in a month. Since cryptocurrencies are decentralised, these assets are not protected by governmental laws and regulations which means that investing in crypto assets is considered a risky endeavour.
Vulnerabilities in the security of the blockchain network can lead to volatility in the value of these cryptocurrencies. In addition, such liabilities result in heavy losses for crypto traders and users. For instance, South Korean exchange Yapian Youbit was driven to bankruptcy after a hack resulted in a 17% loss of its cryptocurrency. Similarly, Trinity Wallet offered by the IOTA foundation faced $2 million in losses after hackers exploited the vulnerabilities in its payments processor Moonpay’s system.
While the intermittent collapses in the security of cryptocurrencies are not dissimilar to hackers attacking banking and financial institutions, the loss of assets is not protected by governmental regulations. As such, this does not encourage the general public to invest in crypto assets.
The Penser Perspective
The widespread adoption of cryptocurrencies and crypto payments is dependent two important factors: countries have to regulate and advocate and encourage the use of cryptocurrency and cryptocurrencies have to adapt to build scalable use cases that can serve thousands of transactions per second to match the current fiat currency transaction rates.
As people around the world are switching to digital payments, it is not farfetched to expect the population to switch to crypto payments in the future. If the blockchain network can handle the same level of transactions as fiat currency and offer a sense of security and trust, there is no reason we wouldn’t see widespread adoption of crypto payments.
Facebook’s Libra and others are working to provide an easier way to transact with cryptocurrency. While stablecoins exist to minimize the volatile nature of cryptocurrency, all cryptocurrencies must decrease their volatility to encourage more and more people to switch to crypto payments.
As payment consulting experts, we have seen several new trends such as mobile wallets, real-time payments, phone payments, and more in recent years as the payments industry is affected by fintech disruption. We think it’s highly likely that cryptocurrencies will some day be present on the high street. The challenges currently stopping widespread adoption are not unsolvable and in time, people will be able to remit funds internationally and pay for local goods and services using cryptocurrencies.
Penser is a specialist fintech and payments consulting firm with experience working for clients in the digital payments, card payments, and mobile payments sectors. We offer digital transformation, due diligence, and strategic planning services. Contact us to find out how we can help boost your business.
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