FIS Modern Banking Platform
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Dondi Black | VP, Senior Director Market Engagement and Ideation, FIS
January 11, 2021
COVID-19 accelerated the pace of change in financial services. As we enter 2021, the evolution to a more digitally connected society will continue. Companies and innovators who want to remain relevant and in demand will have to keep up with the demands of a digital world, including digital currencies and how they will impact future markets.
Once the darling of the dark web, Bitcoin has gone mainstream and today is the world’s largest cryptocurrency. In fact, due to the uncertainty created by the ongoing pandemic, it is on track to close out a banner year. Bloomberg reported the digital asset surged above $28,000 in the last days of 2020 to hit a record high. In December alone, Bitcoin value has increased by more than 40%, putting it on the path to its biggest monthly gain since 2019. The number of Bitcoin transactions averaged about 328,000 per day globally in 2019 and today, there are more than 350,000 Bitcoin transactions recorded daily worldwide. But Bitcoin is not alone. In all, there are some 5,100 cryptocurrencies in market today. Other popular cryptos include Ethereum, Tether, XRP, Litecoin and Polkadot.
With more crypto buyers emerging, merchants and companies are increasingly offering digital currency payment options across all channels. There is greater adoption of Bitcoin infrastructure, for example, when there is a concentration of financially savvy adults with high risk tolerance, a large degree of banking sector competition, growing distrust in banks and financial systems, more money-laundering activities taking place and a stronger rule of law.
There has also been impressive growth in merchants accepting cryptocurrencies as consumer demand for digital currency payment options rises. Microsoft accepts cryptocurrency on their website and at the Xbox store. AT&T now accepts Bitcoin, as does Overstock. New crypto payments companies like Bitpay accept cryptos for payments with a 1% fee. Crypto offers payment solutions to merchants and loyalty rewards to users: payments can be made with digital wallets or crypto cards by Visa.
Visa also recently filed a cryptocurrency system patent that is meant to replace physical currency. Visa says its focus will be on blockchain digital currencies, noting that they want to continue their mission to revolutionize payment transactions. Mastercard has been working on collecting a trove of cryptocurrency patents, which they believe will give them an edge once central bank digital currencies debut. PayPal and Venmo will accept cryptocurrency for all online payments. PayPal account holders will be able to store, buy and sell popular virtual currencies. This move will make PayPal both a digital wallet and a cryptocurrency exchange. Square’s Cash App launched a Bitcoin Auto Payments Tool which allows users to make automatic purchases of Bitcoin. Cash App was initially launched in 2019 to facilitate app-to-app payments in fiat currencies.
With cryptocurrencies performing as a store of value amid the COVID-19 crisis, 2020 also witnessed accelerated growth in the number of ATMs supporting digital coins. During the first half of the year, their number increased by 2,196 and hit almost 8,000 in June. The number of Bitcoin ATMs exploded in the fourth quarter, with over 3,800 new BTMs operating worldwide between September and December, a 40% jump in three months. The number of BTMs in the United States soared by 175% YOY.
Despite their growth in popularity and acceptance, cryptocurrencies are not for everyone. Through its decentralized network and limited number of coins, proponents say that by getting central banks and governments out of the currency game, the currency will maintain its value better over time. However, values oscillate mainly because they aren´t backed by governments. They reduce the need for intermediaries as P2P, B2C and B2B transactions can be made directly without banks, both domestically and internationally.
Central Bank Digital Currency (CBDC) is the digital form of the fiat money of a country and utilizes blockchain and distributed ledger technology, yet, is different from virtual currency and cryptocurrency because the latter is decentralized and lacks the legal tender status declared by the government. CBDC brings together the convenience and security of cryptocurrencies and the regulated, reserve-backed money circulation of the traditional banking system.
CBDC will likely be a game changer, bringing about a rapid shift to the banking ecosystem as more consumers and businesses adapt to a safe and low-cost way of accruing, storing and exchanging value. CBDCs will potentially reduce traditional currency on deposit with commercial banks, increase competition lead by higher deposits rates, encourage innovation in saving and borrowing and create greater risk for commercial banks.
Questions remain around how CBDC will be regulated. For the foreseeable future, as the pandemic persists and uncertainty surrounds us, expect continuing growth in digital currencies by consumers, business, financial services and payment services.
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