Mickey Sattler from Abra states the case for the role of cryptocurrencies in the emerging defi environment
It seems that you can’t read the news or scan your social channels without reading about digital currencies like Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), or Dogecoin (DOGE).
The reason: There’s a lot of talk about the value of these assets, which governments have adopted or banned them, and if digital currencies can unlock financial freedom for investors.
The public’s increased fascination with cryptocurrencies has led to increased adoption. However, with the growing popularity, will cryptocurrency still be around in 5 to 10 years, or is this just a "flash in the pan." In this post, we’ll explore the future of digital currency.
How Digital Currency Looks Today
The vast majority of interactions with digital currencies today is investing: buying "coins" and holding them in anticipation of future higher values (and, secondarily, earning passive interest income).
Digital currencies are also used to send funds earned back home to families, also known as a remittance.
It’s also possible to pay for goods and services with digital currencies, but at the moment, this is not widely adopted by most retailers or businesses.
What Does Tomorrow Hold?
The COVID-19 pandemic accelerated the move to a (mostly) cashless world. In fact, the proliferation of Near Field Communication (NFC) will make it easier for you to make purchases just using your mobile phone, instead of pulling out your debit or credit card. On-device wallets will have with a combination of existing cash-based bank accounts, central bank digital currencies (CBDCs), stablecoins, and cryptocurrencies.
Cash-Based Bank Accounts Become Endangered
Those on-device wallets already let us pay via NFC at merchants’ point-of-sale terminals and online retailers’ checkout pages. Over time more purchase options will be added, including stablecoins and cryptocurrencies. Specialized apps, such as baakt, already provide the ability to pay for goods and services with non-traditional currencies. As mainstream banks allow for these currencies we’ll be able to choose where to store our income; accounts which provide a higher interest rate will become commonplace.
The deployment of NFC and the U.S. move to the chip-and-PIN standard for cards will make physical cards, signed paper receipts, checkbooks, and wallets full of banknotes a rarity. Apps will integrate those digital receipts for easier money management.
We’ll move away from physical cash, checks, and debit and credit cards to on-phone wallets via NFC at merchants’ point-of-sale terminals and online retailers’ checkout pages.
The lay of the land looks familiar, and our digital wallets will be full of new ways to spend money.
Central Bank Digital Currencies Add Governmental Protection
Central Bank Digital Currencies (CBDCs) are a purely digital form of central bank-issued digital currency, backed by the "full faith and credit" of the issuing government. The accounting ledger for CBDCs is also maintained by the issuer, something like a private blockchain.
CBDCs are best illustrated by examining the time it takes to deposit a check into a bank or transfer money to a friend. The existing three-day lag for these transactions is due to a banking infrastructure system that’s based upon moving paper money and signed checks physically between locations.
CBDCs would transfer near-instantly, at the speed of a text message (for example). Bounced checks would become a distant memory.
One concern with CBDCs is a lack of privacy; they don’t have the anonymity of paying with cash. Central banks will attempt to limit CBDCs to legitimate purposes through auditing and tracing the movement of money to prevent money laundering, etc.
The first CBDC already exists: the Bahamian Sand Dollar.
Services are Key to Future Adoption
Just as physical currencies underwent a period of adoption from being a mere curiosity to the preferred way of settling debts, digital currencies will become ubiquitous in our lives through ever-increasing use through convenient services.
In the late 20th century, it was unthinkable that we could live a life mostly devoid of cash, banking remotely, paying for goods and services via cards or through our phones. The personal financial landscape will radically change again over the next few decades.
A Greater Choice in Investment Options
Investing to save for retirement and create a stream of passive income started in 1611, with the creation of the Amsterdam stock exchange. Today, most of us invest in specific companies through stocks and market segments with mutual funds, much of it through tax-deferred retirement accounts.
The ability to invest through digital currency is now well-established, although being used by a smaller percentage of the population than are stocks. Currently, Abra supports 117 cryptocurrencies, with more becoming available.
Cryptocurrency-holding retirement accounts have become available recently, as have exchange-traded funds (ETFs) tied to various cryptocurrencies and banks chartered with digital currency provisions.
Hedging against inflation is another major attraction of cryptocurrencies, especially Bitcoin. Since September 2019 more than $9 trillion has been put into circulation, more than 22% of the total number of dollars. The resulting inflation erodes the value of retirement savings, driving investors to seek other ways of preserving buying power.
Availability is another driving force: the primary U.S. stock market is available for trading only 6.5 hours each weekday (minus holidays) whereas cryptocurrency exchanges run 24/7/365.
As both cryptocurrencies and CBDCs gain adoption we see them used more for investments, deriving value from the financial economy. Bank savings meager returns will drive money to more lucrative options.
Faster, Cheaper Remittance Helps Families
Abra stands for "A Better Remittance App"; our origin story includes enabling a better life for workers sending earnings back to their families in their origin countries.
Traditional remittance services can take up to 12%; through a digital currency remitter, the cost is a mere fraction, leaving more money to the receiving party.
Replacing traditional remittance methods for reasons of transaction speed, lower costs, and availability as when Western Union ceased operations following the U.S. withdrawal from Afghanistan digital currency remittance will become more mainstream. Adding to the allure of cryptocurrency remittance is the stark fact that in times of conflict local currencies become not only difficult to access but unreliable as a store of value due to inflation.
The world’s most vulnerable peoples will continue to adopt digital currency remittance as governmental policies, financial instability, and armed conflict persist.
So Many Ways To Pay
The ability to conveniently pay for goods and services is a cornerstone of a cash-based economic system, extending through the use of debit and credit cards into digital payment apps.
The cost of accepting credit cards currently ranges from 1.5% to 3.5%, depending upon the card issuer and transaction type. Digital payment apps cost around 1.5% per transaction, with some fee caps in place.
These costs, paid by merchants on purchases and consumers when using out-of-network ATMs, add up and are fertile ground for disruption. Factor in the cost of conversion between currencies through the banking system and digital payment methods become even more attractive.
Systems like the Lightning Network will enjoy greater adoption as these advantages become known to the general public.
No More Paper: Legal Documents & Smart Contracts
Digital currency creation and transfer are cryptographically preserved on the blockchain. This facility is perfectly suited for the recording and enforcement of legal documents as smart contracts.
Smart contracts are computer programs that are stored on a blockchain that run when predetermined conditions are met. This allows automation of legal agreements so that all contract participants are immediately certain of the outcome, without any time lag or an intermediary’s involvement.
Automating a workflow, triggering the next action when conditions are met, and indelibly recording state on the blockchain will drive the adoption of legal documents and smart contracts, especially as the lower cost of doing business crowds out paper-based contracts.
The Great Unknown of the Undiscovered Country
"It is difficult to make predictions, especially about the future." – unattributed, the Danish parliament, 1937-1938
The most exciting developments are those which we haven’t yet imagined. Cell phones, streaming content, and social media were unknown in 1970. What will be commonplace in 2060 will no doubt astound us.
The future of digital currency (and other services which use its digital infrastructure) looks rich. Investing, remittance, payment, decentralized finance, digital legal documents, smart contracts, and developments now-unimagined will transform our relationship with money, whether it’s saving for the future, spending, sending and receiving, and making agreements around financial commitments (like renting).