If we are going to take cryptocurrency mainstream then it's time to start using stablecoins and payment processors. The biggest barrier to cryptocurrency adoption right now is the extreme price volatility because if you work hard for your money, and most of us do, then the idea of losing 20 percent of its value overnight just doesn’t inspire confidence.
However, the mobile payments industry is growing rapidly and the benefits that cryptocurrency can bring to this space are huge. According to Boston Consulting Group, mobile payments as a share of total ecommerce is expected to increase to 48.5 percent by 2020, growing from 23.6 percent in 2015.
Despite the benefits cryptocurrency can bring, merchants are unwilling to take revenue at an unpredictable future rate when they continue to pay liabilities at a fixed currency rate. Buyers are reluctant to spend in a currency that may see positive price movement in the near future, bitcoin as an example seeing 800 percent increase in price during 2017. For cryptocurrency to hit the mainstream, the industry needs to find stability. Enter stablecoins.
What is a stablecoin?
Whilst the industry is full of cryptic concepts, a stablecoin is a simple one to grasp. A stablecoin is a digital currency that maintains a peg to a globally recognizable unit of value. That unit of value is generally the USD but it can also be commodities (gold, silver, oil), traditional asset classes (cash, bonds, gilts), other global fiat currencies, as well as collateralized debt positions (CDPs) of cryptocurrencies. While each of these has achieved a mechanism for stability, the management of most of these systems – all excluding cryptocurrency CDPs – require a centralization of governance.
Centralization involves the acquisition, storage and management of the underlying asset; regulated under the jurisdiction of the local economy and therefore restricted by its capital controls.
This centralization is counter to the founding principle of cryptocurrency and undermines the censorship resistant nature that they promote. Fortunately for crypto evangelists (and the world at large) there are now a handful of stablecoins available on the market that derive their stability from the cryptocurrency market. The most successful to date is the MakerDAO, or Maker Decentralized Autonomous Organization, that has around $30m worth of volume in circulation. For a more detailed look, check out our post on The MakerDAO; Stabilising cryptocurrency through decentralized governance.
Accepting cryptocurrency without the price volatility risk
Although stablecoins are increasingly reliable in their function, they can be complicated to use. Transacting with stablecoins requires understanding how to buy cryptocurrency, navigate exchanges and secure your funds in digital wallets – it’s not the most accessible. Fortunately there is an alternative in the form of payment processors.
A payment processor is a company appointed, often by a merchant, to handle transactions from various channels. Their task is to screen, transfer and confirm payment details between the merchant’s bank and the customer’s bank. The payment processors typically handle the exchange of currencies at point-of-sale and now there are a number of processors handling cryptocurrencies.
Customer’s holding their funds in Bitcoin (BTC) can go to a store and use them to purchase an item that is priced in USD. The payment processor enables this by exchanging BTC for USD at point-of-sale, similar to any other FX transaction. Payment processors have been around for decades. Their job is to facilitate the transfer of value between merchant and customer, regardless of the currency, time and location.
Below is an overview of a standard Visa payment cycle;
Cryptocurrency payment processors provide an additional service between steps 1 and 2. They facilitate visibility on the current cryptocurrency exchange rate (eg. 1 BTC = $8,800) and execute the exchange on behalf of the customer. The process then continues through the steps above. The fiat amount is checked and confirmed by the traditional payment processor (Visa/Mastercard/AMEX) and the balance is settled at the end of each day between merchant and customer bank. Neither the merchant bank nor the customer bank see bitcoin or in fact are even aware that bitcoin was used during the transaction.
Bitpay is currently the most successful payment processor in the space handling over $2 billion in annualized payment volumes in 2017. Bitpay integrate at point-of-sale to enable the merchant to choose to settle in fiat or cryptocurrency, taking a small fee for the service. The Bitpay service enables merchants to encourage and accept cryptocurrency payments without being exposed to its price volatility.
Stablecoins and payment processors each play their part in the evolution of the cryptocurrency space. Payment processors enable crypto enthusiasts to pay in bitcoin without the merchant taking price volatility risks while stablecoins drive stability within the cryptocurrency ecosystem. With incredible teams creating stablecoins that use crypto as their underlying collateral there is still the ability for a fully decentralized, distributed, immutable and censorship resistant form of currency. It’s now up to users to decide what type of stability mechanism will underpin the future of cryptocurrencies.