What's Stopping Cryptocurrency From Reaching the Retail Economy?
By Josh Tate, CEO of ForumPay
One-third of traditional financial institutions have invested in digital assets or derivatives, according to a Fidelity survey. Yet cryptocurrency still hasn’t achieved mainstream adoption. Volatility is often blamed as the primary culprit and is certainly a barrier, but the solution to that barrier might be easier than people think. In order for cryptocurrency to become stable and scale, it must first become an acceptable payment method across the board. Universality is one of cryptocurrency’s greatest attributes, but acceptability, ironically, is absent.
How can anything be considered a currency or some sort of exchange of value if it’s not universally accepted by vendors? At the heart of acceptability lie two problems: Fungibility and getting institutions and merchants to not just consider crypto payment adoption, but actually pull the trigger.
When referring to a budding currency powered by a novel technology outside the bounds of traditional, centralized principles of global finance, fungibility can be quite complex. In order to effectively be considered money, a currency must meet six defined characteristics. It must be durable, portable, recognizable, stable, have limited supply, and be fungible. To be fungible, a currency’s units must be indistinguishable and interchangeable from one another. The U.S. dollar is a prime example of a currency that is universally accepted and meets all six requirements, including fungibility. For example, one U.S. dollar, even if a celebrity like NBA legend Michael Jordan autographs it, is still worth one dollar as a means of currency. Cryptocurrency, however, often suffers from the absence of this type of quality.
Adoption of the world’s first cryptocurrency, Bitcoin, was initially centered around its characteristics of privacy and decentralization. But its reputation for privacy has recently been compromised with the advent of sophisticated analysis tools and chain firms that can identify Bitcoin users based on their transaction history. This means users can see who has owned the specific units of crypto crypto, ultimately changing the potential value of the coins. In other circumstances, the value of specific bitcoin units rose above market value because they didn't have transactional histories. Minted without transactional histories, these “virgin bitcoins” appeal to criminal organizations and investors seeking to evade taxes.
The solution to both problems must incorporate uniform price per unit for any cryptocurrency seeking to be accepted by merchants. The proposed model could be multi-tiered, wherein official local exchanges feed information into official online exchanges, enabling real-time price discovery. Legitimate demand as unscrupulous businesses will be voted out in the interests of the community as a whole. There would also need to be a system preventing the ability of creating premium coins worth a higher value.
In order to overcome the problem of coin traceability, which, as mentioned, can raise or lower the value of individual units, a process known as coin "mixing," or "tumbling"－typically applied to Bitcoin－can resolve this issue. The process involves using software that mixes multiple coins from different wallets and redistributes them back to the originator wallet. Essentially, tumblers combine different sets of coins and proceed to return this combination with differing transaction histories, thus negating the traceability issue. Tumbling doesn’t totally anonymize the transaction, but it does make it tougher to trace. Considering existing alternatives, Bitcoin tumbling has proven to be the most fool-proof way of maintaining transaction privacy.
In addition to the issues of fungibility, there is another question: Who takes the first step? The problem remains not just a matter of fungible units of exchange, but also a matter of who will adopt this medium of payment first. Will merchants adopt first or will users? Without shops offering crypto payment options, non-crypto enthusiasts, who are a majority of the consuming population, won't use it. On the other side of the coin, if not enough consumers own and use crypto on a regular basis, then merchants won't be incentivized to offer crypto payment options.
We can harken back to the credit card story of the 1940s to better understand how cryptocurrency can enter the wallets of the people, and not remain sidelined. As legend holds, in 1946, a Brooklyn banker named John Biggins created the first modern credit card consumers could spend in local shops, and his bank acted as the transactional intermediary. Shortly after, Diner's Club followed suit, and a new age was born of cashless payments.
The value of the credit card was convenience, and it became apparent when the founder of Diner's Club Frank McNamara, as the story goes, forgot his wallet while attending a business dinner. He allegedly returned months later with his business partner to pitch the idea to the restaurant of a charge card. Likewise for crypto, the "Eureka!" moment has yet to pass.
Economic recession was not enough in 2008 to motivate consumers to adopt crypto in the same way they did credit cards. Despite the clear business opportunity, like a market size of 50 million users spending €3.4 trillion annually; blockchain wallet adoption rising 425 percent between Q3 of 2016 and Q1 of 2020; cheaper transaction feeds for merchants; and drastically reduced user data attack potential, merchants still don't quite understand it. A Dutch study on virtual currency adoption found that "unfamiliarity with cryptos is the most cited reason for non-acceptance," at 58 percent. The same study also concluded that not enough consumer demand for crypto is the reason merchants are unwilling to offer crypto payment options.
Just as McNamara accomplished in 1950 and paved the way for the credit card era, cryptocurrency companies must be able to replicate the same value propositions. In essence, stronger awareness campaigns are required to foster the demand among, not just consumers, but retailers, too. Most importantly, cryptocurrency campaigns must focus not on supplanting fiat currency and credit cards, but coexistence. Fiat currency will likely never disappear, but cryptocurrency has a unique place in our world as an alternative payment method with its own applications and benefits.
Widespread acceptability among merchants is one of the final few hurdles before crypto achieves price stability and, as a result, mainstream adoption as a relevant form of currency, rather than remains a fad that will eventually fizzle out. A wider awareness campaign alongside intra-crypto regulatory changes provides for a roadmap that will ensure the further advancement in the acceptability of crypto, thereby removing the hurdles in its long-term adoption alongside credit card and fiat currency as viable payment options.
Josh Tate is a seasoned executive officer with more than 20 years of experience as an entrepreneur, practitioner and legal professional. Prior to founding ForumPay, he founded and launched multiple companies in diversified industries such as fintech, media, real estate, and energy. Josh concurrently holds positions as Director, CEO and General Counsel of several companies and provides a wealth of experience in both fintech and traditional finance. He holds a Bachelor of Science from Kansas State University and a Juris Doctor from the University of Kansas.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.