If time is money, then why do our payments move so slow? In the 21st century, speed is the name of the game – instant communication via email, text and phone calls are critical to our day-to-day lives, social media has changed way we learn about the latest news and keep up with friends, and transportation continues to bring us to our destination quicker, cheaper, and safer. Yet, our payments system continues to create a drag on businesses, individuals, and the economy. The current system is a mesh of many different providers, limiting interoperability, using antiquated systems that are slow and expensive. Built on technology that predated the internet, with some minor updates, current payment systems are slow and prone to errors.
How do we go about creating the next generation of payment systems to address these issues?
The U.S. faces many roadblocks in improving the current state of payment systems. The US ecosystem includes a myriad of stakeholders, including government institutions, financial institutions, payment systems, merchants, consumers and service providers. The fragmented nature of US payments prevents the quick adoption of technological advances that could fix many issues we are facing today. Convincing existing players to invest in new systems is an uphill battle – industry incumbents don’t have much outside competition pressuring innovation. No matter how our payment systems change, we know one thing for sure – it will take time.
At the time of this writing, there are two main types of solutions being proposed as part of the US Faster Payment Task Force (FPTF) to improve US payments – Transactional and Distributed. For an in-depth look at the US FPTF check out our whitepaper Managing Risk in Faster Payments Systems.
Transactional proposals are those aiming to improve the existing payment infrastructure by offering increased speed, security and reduced costs.
Distributed solutions are those built utilizing distributed ledgers systems, also referred to as blockchains. Distributed solutions are touted by their advocates as the future for making payments for a variety of reasons. Blockchains are immutable, meaning a transaction can never be altered once it has occurred. This prevents bad actors from making changes. Transactions in distributed solutions are pseudo-anonymous because they use an address made of random chains of characters, rather than real-world identities, enhancing privacy while the ledger remains public. These transactions are fast and work globally – payments are completed in minutes or even seconds, and can be sent anywhere in the world with anyone allowed to participate. Lastly, transactions are secured through the use of public and private encryption keys
The case for XRP and blockchain
There are many cryptocurrencies, including Bitcoin Cash, Litecoin, DASH, and Stellar, that have gained traction due to attributes associated with Distributed solutions: speed, reliability, and scalability. However, few cryptocurrencies have actively started working with banks and financial institutions like Ripple, the company behind the cryptocurrency XRP. I believe these functional banking relationships will be key to creating long-term viability.
Proposing a blockchain solution to improve payments, Ripple offers a series of products on its RippleNet platform that aim to solve a variety of issues within the payment industry. Advantages of using XRP include transaction fees and speed. Transactions cost a fraction of a cent, regardless of transaction size, and are posted to the ledger within seconds. In comparison, a typical credit card transaction may take anywhere from 1-3 business days to post to your account.
For a solution to be widespread it must be scalable — XRP consistently handles 1,500 transactions per second, but Ripple claims it is scalable to the same throughput as Visa (over 50,000 transactions per second), meaning it could handle the strain of becoming a global currency. With a perfect record – all ledgers have closed without issues since its inception in 2012 – XRP boasts many advantages as the potential future for digital transactions.
Despite being technologically superior to our current payment infrastructure, XRP still hasn’t taken off. This may be due to a variety of factors— a lack of decentralization, price volatility, or lack of regulatory approval by governments. Cryptocurrency fanatics typically are at odds with XRP due to its pseudo-centralized nature and Ripple’s desire to work with banks rather than replace them. Financial institutions are hesitant to use XRP because it faces extreme price volatility. Price volatility, along with a lack of regulatory approval, makes XRP an asset that banks just don’t want to take a risk on. At this point, the majority of banks working with Ripple are only using the RippleNet platform, and not XRP itself.
The road ahead for blockchain and cryptocurrencies
While Ripple is an example of a solution that solves some of the issues facing the US payment ecosystem, it does not solve all of them. It is unlikely one solution will solve all of the problems in payments, but it is a step in the right direction. It is critical that moving forward new payment innovations are designed to be easily interoperable with both old and new systems.
The second biggest hurdle for blockchain solutions is preventing illegal activity while maintaining anonymity for users. It is imperative that transparent ledgers keep individuals’ data private, but the use of cryptocurrency for money laundering and other illegal activities will continue to throttle adoption.
The most significant hurdle is that of theory – many blockchain systems are built upon the idea of decentralization, which at its core would require a complete shakeup of how the U.S., or any country for that matter, operates compared to the current centralized institutions. Regulation is imminent and may be beneficial or catastrophic to the success of cryptocurrencies. Without a central authority utilizing monetary policy to control supply, volatility may always remain the biggest hurdle for cryptocurrencies. Unless the U.S. issues a USD backed cryptocurrency, adoption by merchants and financial institutions is likely to remain low for the coming years.
While no one may know what is in store for blockchain and decentralized currencies in the future, it sure is fun to speculate.
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