Bitcoin has an unsolvable problem when it comes to merchants and consumers. Fortunately, blockchain is the answer. More on this in a moment.
First, everyone needs to realize that their money is already electronic. Banks don’t store all of their cash in vaults, it’s electronic entries at the Federal Reserve. People don’t store all of their cash at home, it’s in electronic entries at their bank, brokerage firm or trust company. E-trade doesn’t store their customers shares of Apple or other companies in a big vault, it’s in electronic entries at DTC and transfer agents.
And commerce is conducted electronically. When you buy a book or some clothes, you pay with a credit card. Your paycheck is auto-deposited to your bank. You pay your rent and insurance via BillPay. You split costs of a night out with friends via Venmo or Zelle. We are at the point where, for the majority of us, it feels kind of weird to pull actual cash out of our wallet to pay for something.
Let’s compare using Bitcoin to a credit card.
A credit card is a form of a loan. It’s fairly high risk, so the issuing banks charge interest rates accordingly. There are defaults. There are slow pays. There are negotiated settlements. There is fraud. There are chargebacks.
But the person selling you the books, or renting you your apartment, or insuring your car doesn’t care about that. Their business is selling books, renting apartments or providing insurance…not making loans to people. The credit card company solves this problem by taking the risk and assuring the merchant that they will, within the next business day, deposit funds into their bank account. So, you bought a book for $12.95? Great, the merchant has confidence that your credit card company will give them $12.95 (less 3% or whatever) by tomorrow, so they let you walk away with the book today.
Bitcoin is a commodity, not a currency. It has wild, dramatic and unpredictable price fluctuations. The bookstore mentioned above may be open to accepting digital currency, but their business is selling books, not speculating in commodities. The fact that they might let you walk away with a $12.95 book right now, and then when the blockchain settles the Bitcoin transaction in an hour, or certainly by the time the bookseller could liquidate the Bitcoin to USD on an exchange, they might only receive $8.43. That is not something they can risk. That isn’t their business.
Yes, some intermediaries have tried to solve this problem by guaranteeing “spot” pricing for small transactions. And the losses caused all of them to cease doing this. This isn’t “USD vs Euro” hedging, with relatively mild price fluctuations and with national federal reserves and international banks working collaboratively in their mutual self-interest. This is pure speculation. Which may be fine for investment purposes as part of a high-risk portfolio but is absolutely unacceptable in commerce.
Blockchain solves this with a “stablecoin”.
What’s a stablecoin? It’s cryptocurrency, like Bitcoin, that can easily be transferred from one person to another. However, unlike Bitcoin, the value/price doesn’t fluctuate. These digital coins (aka “tokens”) are 100% backed by stable assets held by a regulated, audited third-party trustee (often Prime Trust). When that asset is, for example, US Dollars, then each token is worth $1 when it’s issued, $1 tomorrow, $1 a week from now, $1 forever. This gives merchants (and everyone else) who accept stablecoins as a payment option confidence in knowing that they can, if needed, go to the trustee anytime and exchange the tokens for dollars. The same is true if it’s Euros, US Treasuries, Yen, Rubles, gold, etc.
I am seeing an explosion of stablecoins being created by entrepreneurs and established businesses alike to be used in a variety of ways as a new mechanism of domestic and international commerce. Using stablecoins;
- A bookseller knows they will have $12.95 of value for the book they sold you.
- Payrolls made in stablecoins (which make multi-state and multi-country employment relationships much easier) will result in the employee getting exactly their salary (and not 20% less, as happened last week to folks who get paid in Bitcoin or Ether).
- Escrows of private transactions between individuals or between international buyers and sellers, can be handled easily and with reduced friction (say goodbye to the old letter-of-credit industry).
- In-app purchases & micropayments in video games and other electronic entertainment will become frictionless (even the unbanked and people without credit cards will be able to participate).
Stablecoins are the future of commerce, just as the tokenization of assets is the future of our capital markets (but that’s a topic for another blog).