Cryptos. The future of payments.
But might there be digital offerings in the wings that will supplant the promise (and peril) of bitcoin and its digital currency brethren?
It’s a case that, Laurence Cooke, CEO of nanopay, made on Friday’s Topic TBD, telling PYMNTS’ Karen Webster that cryptos simply won’t cut it when it comes to speed and scale, two things that are the hallmarks of any viable payments system, digital or otherwise.
But digital fiat currencies, he believes, will.
Even in an age where piles of cash are supplanted by rows of ones and zeros.
Cooke argued that bitcoin and blockchain have their place and use cases in the world. Solving the world’s payments problems, particularly when it comes to reaching unbanked populations around the globe, ain’t among them.
The central problem of bitcoin and the whole concept of cryptos?
“By definition, when you make a payment, you need to know who the other party is. Otherwise it is an illegal payment. That’s part of KYC and AML,” Cooke proffered. “And so we’ve got a brilliant technology [bitcoin] with a use case that just does not exist.”
In searching for a payments system that leverages digital conduits, boosting speed and boosting scale, said Cooke, keep in mind that there are very few people on the planet who do not trust any central banks at all.
Though the banking systems of politically less stable nations – say, in Africa and Central America – may give institutions and individuals pause, there’s a bit of backstop in the form of greenbacks.
“Indeed, a lot of those countries use a well-known currency – it's called the U.S. dollar,” said Cooke.
“And in fact, a lot of central banks around the world hold a lot of U.S. dollars. So I don't see that the natural response to that [being] ‘you do not trust your central bank and therefore you need something that goes around the central bank.’”
Continued Cooke, “The reason we need banks is because banks do incredible things to our currency, and they multiply it. They have this banking license that allows them to make money out of thin air. You put one dollar into the bank and miraculously it becomes 10.” That license, so to speak, does not exist with blockchain technology.
Absent the traditional banking role of money creation, he said, individual consumers would not be able to obtain mortgages or finance car loans because there would not be enough money to go around.
The digital cryptocurrencies can’t function with the same flexibility and economic impact as fiat, then, and blockchain doesn’t scale. Cooke noted that bitcoin, Ethereum and other digital currencies see transactions only on the order of a dozen or so per second. The implication? That’s hardly enough to keep up with demand.
The better solution? “Digitize our fiat currencies,” said Cooke.
Pressed by Webster as to why we’d need to digitize fiat when currency is digital anyway – and faster money movement is possible today without it – Cooke cautioned there is a difference between electronic money that is sitting in a bank (the ways we pay now) and a digital fiat currency. He told Webster that paper notes represent a risk-free claim against the central bank.
Digital fiat currencies would be a move to make a digital, risk-free claim against the central bank.
The way the process exists today, the individual “has an IOU to my bank and my bank pays your bank, and your bank pays you. In that process, we set up lots of relationships.” There, friction in the paper-based process and even the digital one, with attendant fraud, costs money.
“The advantage of a digital, risk-free claim against the central bank is you remove the friction from the [payments] system,” Cooke said.
Among the problems solved by digital fiat: Looking at speed, said Cooke, cross-border transactions can take a while.
The problem exists on all fronts. “It’s true if you’re a consumer and you are receiving benefits. It’s true if you are a business and want to pay late to manage cash flow.” To do a risk-free payment in real time, he said, is more appealing than might be seen with any other platform.
That makes sense in a cross-border payments environment, where Cooke contends there are mountains of money sitting in front of institutions through the corresponding banking network, which is cumbersome and prone to fraud. “No one really knows where the money is … or what the money is for,” he asserted.
Not an insignificant problem when cross-border transactions cost banks $170 billion annually in friction-related costs.
Information is key, and as Cooke stated, a data-rich payment – made possible through global messaging standards – can eliminate the guesswork that comes with knowing who’s who and why payments are being made.
Said Cooke, ruminating on the state of digital payments, even large-scale digital initiatives have bumped up against hurdles, on the biggest and most visible projects.
In India, a series of initiatives, such as Aadhaar, have sought to digitize payments – yet several hundred million people remain stubbornly out of reach for those initiatives, and banks cannot afford to serve them, he said. Better options (such as his own firm’s) have two modes: online and offline, the former being where most people conduct their transactions. The offline mode takes care of issues where one might not be able to afford a mobile phone or may be in an area where there is a lack of coverage.
To move to a real-time payments system is also a ponderous (and again, costly) task.
Cooke stated that the software and infrastructure underpinning those initiatives was designed to complete transactions once a day, and now groan under the implantation and demands of faster payments. Against that backdrop, another advantage of digital fiat ties into integration. He noted nanopay’s recent partnership with Interac, where almost all Canadians have access to Interac’s platform. He said, “it's not a new interface. You don't have to log into a new app.”
Asked Webster: How will all this be decided and how will it all shake out? In 10 years’ time, will we see rails that are powered by crypto, digital fiat currency, existing paper-based methods gone wholly digital?
It would be possible to create an alternate central bank based on digital cash.
“I'm not a big fan of that,” said Cooke. “I like privacy.” And among the best way to get that privacy, he said, is to issue digital fiat, where anonymity can be a hallmark of transactions between consumers and merchants. “And if at any time you involve the crime and law enforcement investigating you or something that gives regulators cause for concern,” he said, that privacy can be unmasked.
But one thing is likely, noted Cooke: “I don't think there's a long-term opportunity for cryptos, because if you need a currency that translates from one country to another, I don't understand why you wouldn't just use the U.S. dollar.”