The world has come a long way from bartering to exchanging banknotes, with fiat currency being the main and only possible means of exchange in the modern economies – or it just seems like that’s the case. When cryptocurrencies came into existence, the whole financial paradigm changed. Consumers finally got their chance to move beyond traditional banking with delayed payments and high transaction fees. However, the bright future is just a bit behind schedule. Try to remember the last time you saw someone paying for coffee with cryptocurrency – certainly this has never happened… yet.
The crucial issue that is going to define the future of cryptocurrencies is whether or not it will be widely used as a payment method for everyday operations or remain a phenomenon for enthusiasts. Are cryptocurrencies going to replace fiat money? Moreover, does the current infrastructure allow for crypto payments to become a reality?
Crypto use cases – payments still fall behind
A 2017 Global Cryptocurrency Benchmarking Study by the University of Cambridge estimates that there are between 5.8 million and 11.5 million crypto wallets currently active. However, evidence exist that the main use case for cryptocurrency is in fact speculation – for instance, over half of Coinbase users use Bitcoin strictly as an investment, and a rising number of transactions is made off-chain via internal accounting systems that are operated by centralized exchanges, wallets, and payment companies (like Coinbase). This basically means that the transactions never actually appear on a public ledger, and users don’t even withdraw cryptocurrencies from the platforms.
A recent study by CreditCoin.com also showed that 75% of respondents would welcome the opportunity to pay with cryptocurrency in-store, although 80% of them thought of their crypto as an investment and were unaware of the opportunity to pay with their digital currencies. Even though there is a growing number of merchants willing to accept cryptocurrency (80,000 more are coming in Europe!), the usage of crypto as a means of payment is still very limited.
Goals and obstacles – What are we waiting for?
Unfortunately, mass adoption of cryptocurrency is not that easy. In order to replace fiat money (or at least become more widespread as a payment method) cryptocurrencies have to serve as a medium of exchange, a store of value, and a unit of account, just like fiat money. For this purpose, there are a number of requirements from both consumers and merchants that need to be met in order to be able to use cryptocurrencies on a daily basis, and these are not that easy to meet.
Both consumers and merchants are looking for a stable currency to use so that the prices are predictable. For fiat currencies, central banks are responsible for stability and they adjust the supply of the currency according to the demand. In the case of cryptocurrencies, the supply is determined by the protocol, which makes it inelastic. This explains the high volatility of Bitcoin as prices react to every change in demand respectively (12% fall in price during August 5th-12th, 2018 by the way), which makes it a good investment asset and a target for speculators. There were several attempts to create cryptocurrencies pegged to US dollars (BitUSD, NuBits, CoinUSD, Tether, and others), however, none of them were truly successful. Tether, created in 2015, is one of the good examples – as of August 12th, 2018 it is in the 9th place by market capitalization in the list of cryptocurrencies according to CoinMarketCap. However, even Tether sometimes fails to maintain its stability – e.g. it temporarily went below $0.92 per coin in April 2017. The issue is still open.
Would anyone be willing to wait for an hour for their transaction to be approved? I highly doubt it. The distributed ledger system basically means that all users have to download the whole history of transactions with all the data included, which turns into gigabytes of data to store and process. Here is an illustrative example: while processing the number of retail transactions currently handled by several national retail payment systems, the size of the ledger would exceed the storage capacity of a typical smartphone in a matter of days, a typical personal computer in a matter of weeks, and servers in a matter of months. In order to keep the size of the ledger manageable, cryptocurrencies have to put limits on their throughputs (such as the limited size of the block for Bitcoin). While Visa is capable of processing over 3,000 transactions per second, it’s just 3.30 transactions per second for BTC, 3.18 for Ether, and 0.26 for Litecoin (based on 2017 data).
Consumers prefer technologies that are easy for them to understand and use. A good example of this is mobile phone adoption (two decades from introduction to saturation) and smartphone adoption (almost 70% of market penetration in the US in a decade). Credit cards, however, had a long way to go since 1950, but they have finally become a common standard on the market. For instance, in the US there are 160 million credit card holders, which represents about 50% of population. Unfortunately, that is not how it works with cryptocurrencies. According to the article by John Buck, “Having to create accounts and wallets on two to three exchanges in order to purchase a single cryptocurrency massively limits mainstream usage. Plus, the inability to make cross-chain trades is greatly hampering investment.”
In addition, the technology itself is consuming, therefore consumers have problems with understanding the overall process – and the complicated interfaces are not helping. John Warmann, founder of Tip Blockchain, developer and blockchain enthusiast, also mentions random alphanumeric or hexadecimal addresses as a huge problem for cryptocurrencies: “Bitcoin addresses look like this: 1MufAiS5KxYstVHDmrEM8fyfRNohfiNrMT, while Ethereum addresses look like this: 0xb794f5ea0ba39494ce839613fffba74279579268. It is practically impossible to find someone to transact without going through the address exchange ritual crypto users have come to accept. This creates friction which is one hurdle in the way of non-techy crypto adopters.” This basically means that in order to send and receive cryptocurrency, you will need to put in the public address of the sender and recipient, that – looking at the addresses – can be pretty frustrating and may lead to fat-finger errors.
The lack of user-friendly solutions for merchants is also a barrier for adoption. As John says, “Merchants can’t easily manage cryptocurrency payments or easily integrate them with their existing payment systems.” The reporting features are also quite weak when compared to traditional banking. Last, but not least, in most cases there is no easy way to attach contextual information, such as the purpose of the payment to the transaction. This is another source of inconvenience for the merchant, as it complicates the process of differentiating customers in case there are several transactions happening at the same time. Some of the cryptocurrencies, such as NEM, are solving the problem by making it possible to attach messages to the transactions. However, this is still not the common user experience.
Cost is also an issue: cryptocurrency players have to keep transaction costs below the 3% fees associated with credit card payments in order to attract an audience. Crypto startups working on cross-border payments have already shown some valuable results in this direction. For example, sending a $200 remittance from the US to the Philippines with Bitcoin-based company Rebit.ph costs 3%, which is lower than the 3.5% fee charged by World Remit, an established money-transfer operator.
A solution is on the way
There tends to be a solution to most problems, and there are already companies trying to find out what those are for cryptocurrencies. FiiiGroup, for example, is developing a range of products dedicated to making the blockchain and cryptocurrencies more accessible to public, which includes a consumer payment platform and hardware devices that accept cryptocurrencies.
The hardware presented by FiiiGroup is called the FiiiPOS, a mobile payment point-of-sale terminal that accepts crypto payments for merchants. There are several features making the product valuable for market participants:
- The terminal supports over 1,500 cryptocurrencies and allows you to choose from three payment methods: a widely accepted QR Code, a faster and easier NFC (near field communication), and Bluetooth. The company utilizes Bluetooth Low Energy technology to support offline payments, which makes it particularly useful for anyone who don’t always have a stable Internet connection, like travelers.
- The device is able to mine coins: as long as it is idle and charging, it automatically starts mining FiiiCoin. This brings an additional passive income for merchants just by having the device on.
Based on Fiii team‘s research, we’ve compiled the following data to determine the viability of their new technology:
FiiiPOS was developed to make use of the variety of cryptocurrencies on the market – and that’s where the real value comes from. There are almost 7,000 cryptocurrencies currently circulating around the world, with 90% of them known as so-called “conceptual crypto” – these were built, released, and launched based on the business idea that needs some time to develop (ICO concept). The problem is that until the proposed project goes live, these cryptos have no utility for their owners. FiiiGroup created a strategic alliance program to make conceptual cryptocurrencies usable.
As an issuer of your own cryptocurrency, you can join the FiiiEcosystem, list your crypto, and receive a FiiiPOS terminal able to accept direct payments with your coin as well as all other coins supported by the system. At the same time, all FiiiPOS devices around the world that are already in use will start to accept your cryptocurrency for payments. This basically means that Fiii’s infrastructure allows currency holders to make their coins usable in real life, which is exactly what is needed for mass crypto adoption.
Cryptocurrencies, without a doubt, show a huge potential to change the whole payments ecosystem. However, there are a lot of limitations that prevent crypto from mass adoption, such as the lack of a simple, user-friendly experience, a high level of volatility, and the low speed of transaction verification.
This infrastructure change could become the solution to the most critical problems that the crypto world faces right now. This could lead to the mass adoption of cryptocurrencies as a payment method, and we can see it happening in small steps already. The important thing to remember is that apart from the technical and usability limitations, there are other factors connected with regulation and government policy that may slow down the expansion of cryptocurrency as a mainstream form of payment.