Cryptocurrencies Used for Payment?
Neither this post nor any other post on cryptofal.com should be taken as financial advice. It is not.
This is an excerpt from our March Newsletter.
Cryptocurrencies such as Bitcoin and Ethereum have had a massive impact on global financial markets. From cryptocurrency-oriented institutional solutions to cryptocurrencies being used as investment tools by retail traders, crypto has definitely disrupted the financial world.
One of the largest disruptions for this is cryptocurrencies being made legal tender in some countries. This has resulted in certain cryptocurrencies such as BTC having to be legally accepted as a means of payment. This is a controversial move that has incurred praise from the cryptocurrency community, but widespread condemnation from traditional financial institutions and governments.
One of the main reasons financial institutions and governments have condemned the idea of using cryptocurrencies as legal tender is volatility. From the US Government to the International Monetary Fund, they’ve all voiced opinions stating as to how this could result in widespread economic instability within those countries if/when they make certain cryptocurrencies legal tender.
Proponents of cryptocurrencies being used as legal tender believe it could provide developing nations with an opportunity to become part of a global economy that the traditional financial world left them out of. These proponents also hope that as cryptocurrencies become more widespread, the users in these developing nations will have access to a rapidly appreciating asset class.
From an objective standpoint, there are both legitimate concerns with making crypto legal tender. but there are also some potential benefits. The safest, and most effective answer likely falls somewhere in between the two.
Volatility is something that is not new to the cryptocurrency space and will likely continue as the asset class continues to mature. This is something that even the staunchest supporters of cryptocurrency can readily admit. With this being said, it’s understood that a stable currency is often a quality of a good currency, as it helps establish norms in pricing for goods and the cost of living. It also helps establish norms for trading between other currencies, economies, and assets.
Cryptocurrencies like Bitcoin, Ethereum, and Cardano have fluctuating values that can be influenced by a wide variety of factors. This creates an issue for countries trying to use cryptocurrency as a means of legal tender or treasury. Without some sort of non-fluctuating tender, it will be difficult to develop fair prices for goods, wages, and more. Fortunately, there are potential solutions to this volatility.
For means of legal tender, there could be a variety of ways that could use cryptocurrency or blockchain solutions while still providing a more stable economy. Since the cryptocurrency market often moves together it can be difficult for those holding it for transaction purposes even when more than one currency is accepted. Stable coins pegged to the price of a stable fiat currency could be an option for those needing to keep a steady value of their assets.
These tokens being able to be legal tender could give citizens the choice and option to gain exposure to assets that actively gain (or lose) value, while also having a certain portion that maintains a specific value. After all, this is just diversification. While the best solutions would likely be more complex in order to onboard more traditional financial systems and institutional systems as well, this could be a solution to the volatility for retail users.
Institutions, governments, and corporate treasuries will likely take a less risky approach. Instead of putting most of their capital in fluctuating assets, they could limit their exposure by placing some of their capital into stable tokens as well, and then continue to profit off that through decentralized (or centralized) lending protocols. This keeps their capital at a stable value while also making a profit off of lending that stable asset.
This is a very simplistic solution that would likely require even more complex nuances to achieve properly, but there are clear benefits to holding assets that grow in value and assets that maintain stability. A fine balance of both can help ensure there are stable funds there when needed, but exposure to growth-based assets could also help them outpace inflation.
In times of volatility, having a variety of assets that can be used as legal tender would be beneficial. When the more volatile assets are having more extreme days in price action, the more stable solutions could be a better option. And on days where those assets are less volatile, payment may be able to be made in a non-stablecoin cryptocurrency without having to directly transfer it into a stablecoin solution.
Of course, there are some legitimate concerns with instituting a nationwide onboarding and educational process for this to work. First of all, there would need to be some type of payment platform that could easily facilitate all of these types of payments. On top of this, there would need to be some type of educational program teaching residents how to operate this platform and how to use it responsibly (off-ramping risk via stablecoins, etc.).
Without it being on a single platform coupled with a vast educational system as to how to use this new tech, it would likely struggle to take off initially and could leave people feeling left out of the economic system. This also could be an issue for any. competing fiat currency which would likely struggle significantly as the population learns the benefits of blockchain-oriented solutions. This is why the US government will always accept tax payments in USD, because it forces assets into USD, which forces it further into circulation.
With more rural countries, or countries with less technological infrastructure, this model of crypto-based-payments-only could pose a legitimate challenge. If they don’t have access to the internet, this would (in theory) disconnect them from their economy as well.
There’s also the more hybrid option which is likely more realistic. Where cryptocurrencies exist as tender alongside fiat currencies. This ensures that those who want exposure to this new asset class can get it, and use it to spend, while also including those who wish to use the more traditional financial system. This also helps countries who do not have access to the internet wherever they go. This ensures that countries without
While this could be a legitimate solution in larger economies, it may be hard for smaller economies to have crypto competing with their fiat currencies.
Not only would they likely struggle with a succinct onboarding process for the cryptocurrency aspect, but the competition could cause volatility in their currency’s value (even though it’s meant to be stable). If they were able to create an onboarding process that could allow for multiple types of payments on one platform, it’s very likely that their educational outreach would struggle, especially so, in countries with isolated populations.
As we can see, there are some legitimate logistical issues that may arise during a full transition into cryptocurrency. While it’s not impossible, to truly make it accessible to all, there are some legitimate societal issues that would need to be addressed. Without access to the internet, it could be a struggle for some to gain access to this new financial system. And if there isn’t wide educational outreach, it could leave out many who lack the knowledge needed to navigate these challenges.
However, there are also undeniable benefits to moving to a blockchain-oriented economic system. As leaders in the space, we just need to ensure that this potential transition is as positive for as many people as possible.
