The blockchain can be the underpinning for the financial services ecosystem to give rise to assets that have real tangible value — including stablecoins and other cryptocurrencies.
In a panel moderated by Paul Purcell, co-founder and partner at Continental Advisors, Visa Head of Crypto Cuy Sheffield, CoreChain CEO Chris Aguas, Bakkt CEO Gavin Michael and The Clearing House (TCH) Executive Vice President of Product and Strategy Russ Waterhouse said those assets will drive change for B2B payments and the financial services ecosystem at large.
As Aguas noted, firms that are embracing blockchain “are looking at a new realm of technology that lets us do new and different things, technically, than using traditional technologies or paper-based processes.”
The emergence of the crypto ecosystem, he said, is similar to the development of the internet decades ago.
Blockchain, he said, “is about distributed ledger technology. It’s about network-based architectures. There’s a lot you can read into these terms … Helping the broader industry understand what dimensions of crypto are relevant for them and how they can play are keys to driving wider adoption over time.”
But beneath those technologies, said Aguas, some important fundamentals remain. The notion of a fungible, stored value financial instrument stretches back across decades. He pointed to paper American Express travelers checks as evidence that proxies for traditional currencies have been around for a while.
And drilling down into the ever-evolving cryptocurrency landscape, said Visa’s Sheffield, there are thousands of options from which to choose.
While pricing volatility of bitcoin and its brethren might be headwinds to those digital offerings being adopted as a medium of exchange, “We’re seeing a ton of activity and interest in crypto as an asset class that consumers and institutions are looking to invest in,” said Sheffield. “And then on the other side, we’re seeing the emergence of new fiat-backed digital currencies or stablecoins.”
In the latter case, he added, Visa views stablecoins as a class of payment technologies where fiat currencies such as the dollar can be represented on the blockchain network, particularly in B2B transactions.
But as TCH’s Waterhouse said, moving “bits across the networks can be really easy. The challenges lie with cross-border, foreign exchange and compliance.” He cautioned that stablecoins are stable only if assets are in place to back those digital coins — and “if you get outside the regulatory system, there’s a gap.”
That gap, he said, exists between the digital offerings being issued and the regulatory oversight that is needed to make sure those issuers come to market having satisfied anti-money laundering (AML), know your customer (KYC) and other compliance mandates.
CoreChain’s Aguas noted that the gap can be addressed by examining the “service portfolios that treasury banks typically provide today — and then thinking about ways to strip those services into various layers.” He likened that process to what’s taken place in cable and transportation sectors, where services have been unbundled in recent years. Specific aspects of KYC, know your business (KYB) and other activities might be fulfilled by third parties other than financial institutions (FIs).
Bakkt’s Michael said regulators must ask fundamental questions about what they’re trying to replace, what they’re complementing and what needs to be introduced to get there. In order for payments, and specifically B2B payments, to be transformed, new standards must be developed and enforced.
“You cannot bring old rules to a new game,” he said. “If [regulators] are focused on improving the speed of money, then there needs to be regulated on-ramps and off-ramps that fit into the environment where, as market caps grow, the currency itself will be marked by less volatility than we are seeing today.”
The On- and Off-Ramps
Sheffield maintained that as those on- and off-ramps are established, Visa can act as a bridge, partnering with crypto companies that are, themselves, looking to expand. These firms “are really starting to look like a new generation of neobanks,” said Sheffield. “They have millions of customers, with billions of dollars of assets on their platforms. They are ambitious, and they are looking to get into payments.”
Making it easier for individuals to purchase crypto and load funds into digital wallets using Visa cards can help enable that commerce, he said. With the advent of open-loop networks, different wallets and apps can connect to one another.
Complexity reigns behind the scenes, he said, where firms must grapple with how to convert a hypothetical $10,000 fiat dollars into $10,000 USDC. There may be off-ramp conversion fees, or a user may seek simply to hold the USDC in their digital wallets.
But no matter the mechanics of the transactions, the blockchain, Michael said, represents a public, neutral payments infrastructure that no entity owns or controls and is available to settle transactions 24/7, upon which developers can build and create new products. Those developers wind up abstracting away from the underlying infrastructure. Public-private partnerships will continue to be important in developing infrastructure but also making sure that transactions are compliant.
Hybrid models, said Sheffield, connecting legacy and new infrastructures are “going to promote more innovation about how we use a move liquidity.”
The learning curve is steep, he said, as crypto companies navigate the mechanics of issuing cards and mitigating risk. But the impetus for traditional players to embrace stablecoins is there, said TCH’s Waterhouse, as cross-border transactions can be among the biggest profit drivers for card networks and banks.
As cryptocurrencies (including stablecoins) and blockchains continue to develop, said Bakkt’s Michael, there lies the potential to bring a wide range of digital assets together — spanning rewards points, credit card points and loyalty points — and use them as stores of value tied to different asset classes. And along the way, firms like Bakkt can provide the regulatory bridge between countries and regions, where compliance and other regulations may differ, depending on where you look.
Looking ahead, the panelists said that within the next few years, a variety of use cases will emerge for cryptos and for blockchain. Waterhouse said that “stablecoins are here, and they are here to stay. More sophisticated players are looking toward regulation because regulations will give them legitimacy.”
CoreChain’s Aguas said that B2B will be transformed by the smart contracts, which combine data and transactions tied to automation.
As Aguas told the panel, “The fundamental notion of what we’ve done by encapsulating value in a different kind of vehicle is something that we’ve been doing for 100-plus years. We can just do it at the speed of light now.”