Contributor: Dr. Sakib Khan*  (Sakib is a partner within the Corniche Crypto/Blockchain Practice)

Stripe recently announced that they would no longer be supporting Bitcoin as a payment method for their e-commerce merchants (and this is remarkable given that they were the first payment platform to adopt bitcoin). In this article we dig into the issues facing cryptocurrencies as an actual currency and as a form of payment for physical goods and services.

Introduction

The year 2017 was when cryptocurrencies finally entered into the mainstream. It seemed like you couldn’t sit in an airline lounge or a coffee shop without overhearing someone talking about Bitcoin. The media was having a field day with sensationalist reporting on the new Bitcoin millionaires to predicting the impending doom of the financial system as we know it. Financial regulatory bodies globally were trying to make sense of this “new” phenomenon and the tax authorities were panicking because they wanted their share but didn’t know how to get it.

As someone who has been involved in this nascent industry for a number of years, 2017 was an opportunity for me to start to demystify cryptocurrencies not only for friends and family but also for corporates who suddenly had to understand what the rise of cryptocurrencies meant for their businesses. Inevitably this meant the decoupling of the “token” (read: Bitcoin, Etherium, Ripple etc.) from the underlying blockchain technology, and it is this blockchain technology where all the magic happens and where the opportunity to disrupt so many industries lies.

What is a blockchain?

A blockchain is an incorruptible, distributed, digital ledger in which transactions made in bitcoin (or another  cryptocurrency) are recorded chronologically and publicly. In essence, the blockchain can record anything of value (any physical asset that can be digitised) in a manner that cannot be altered. Think of it as a distributed database, with identical copies sitting on thousands of computers globally. With the blockchain being stored across thousands of computers it is difficult for any one entity to control the blockchain or have one single point of failure (like a hack, or getting accidentally deleted).

Transactions on the ledger are verified and recorded on the blockchain by “miners” who solve complex computational problems in order to verify and record the transactions. In exchange for their time and computing resources, they are rewarded with a number of tokens and a transaction fees.

A compelling property of blockchains is that they enable two people to transfer value, for example, a Bitcoin, to one another without knowing who they are and without a central authority such as a bank. This is revolutionary and so disruptive.

Is “it” a currency, a commodity or a store of value?

This question cannot be answered in this short blog post. The reason is that there are literally hundreds of blockchains and associated tokens and everyday new blockchain technology is added to the mix to solve a particular problem (for example, faster transfer of value between two people) or provide a solution to a problem (for example, provide a simpler and cheaper way for banks to transfer payments between themselves).

Firstly, what are differences between currencies, commodities and stores of value:

* Simply put a currency is an accepted form of money (coins and notes) and is used as a medium of exchange. Typically these are backed by a government and issued by a central banking authority. These currencies are traded via the foreign exchange market and have rates of exchange relative to other currencies. Rates of exchange can be fixed (linked to another currency or to the value of gold) or floating.

* A commodity is a basic good used in commerce and is often used as an input into other processes. The quality of the commodity is typical uniform within specified minimum standards (“basis grade”) regardless of the producer. Examples of commodities include precious metals, wheat, pork bellies and bandwidth.

* A store of value is simply a commodity that is not perishable or subject to depreciation over time, and its value can increase over time.

Taking Bitcoin as an example (and this is analogous to a number of other crypto-currencies, but not all), it has firmly entrenched itself as a digital commodity. It can be traded on exchanges and its “quality” is uniform. We are now in the phase of its evolution where we are seeing Bitcoin as a store of value where people speculate on its value. Bitcoin’s protocol carefully controls the number of Bitcoins that will be produced over time (21 million). People and organisations are buying Bitcoin and holding on to them with the hope of further appreciation. However, will the final phase in Bitcoins evolution turn it into a currency?

Today Bitcoin is not suitable as a currency for a number of reasons, but the two main reasons are:

1. It is too volatile. Can you imagine the value of the Euro in your hand against the British Pound wildly changing by the minute! Well Bitcoins value does, it has its extreme highs and spectacular crashes sometimes within a very short time span.
2. Transaction processing is too slow and high transaction fees. The speed of processing is determined by a number of factors including the number of transactions the network as a whole has to process and the transactions fees. There are only a finite number of miners to process the transactions, and the transactions offering high transactions fees are prioritised.

Each transaction takes about 10 minutes to process yet 6 confirmations are needed meaning transaction verification time can be 60 minutes on an uncongested network. Factor in all the interest in Bitcoin of late and associated network congestion increases, some transactions can take >15 hours to process.

Some of these factors have resulted in payment processing company Stripe announcing that they will stop taking Bitcoin as a payment method later this year. Stripe cited the reason being that in order for transactions to be processed quickly per transactions fees had spiked to >$30 in December otherwise transaction could take days to be verified and completed if the transaction fee was less. At the time of writing, transaction fees are sitting at $2.60 for a ten-minute transaction on the Bitcoin blockchain, but these fees are volatile and spike when more people want to make transactions. Also, the number of people using Bitcoin on the Stripe platform was declining.

There has been a lot of discussion within the Bitcoin blockchain community on how to speed up the transaction times and lower transactions fees such non-bandwidth scaling mechanisms that would make Bitcoin payments faster and reduce some of the volatility around transaction fees. There are numerous other blockchains that are tackling some of these problems from the ground up including some developed by established players in the payments space.

However, the prospect of online payments using cryptocurrencies is not dead. Coinbase, the popular exchange that allows users to convert fiat into Bitcoin, Etherium, Bitcoin Cash and Litecoin launched its new service, Coinbase Commerce, that lets merchants add crypto payments directly to their payment flows. The service is supported worldwide, and its anchor integration is with e-commerce giant Shopify which claims over 500,000 merchants worldwide.

Once transactions can be processed faster and at a lower cost, which will happen, we will see other payment gateways starting to accept cryptocurrencies making online services accessible to more consumers, especially those without easy access to credit cards and bank accounts. 2018 is going to be an exciting year for payments.

* Dr Sakib Khan is a Partner within the Corniche Crypto/Blockchain Practice, and founder of Enerleq, a consultancy based in Sandton, South Africa, focussing on assisting global disruptive technology developers “go to market” in Africa.