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The Role of Crypto in A Cashless Society

22 October 2020
THE ROLE OF CRYPTO IN A CASHLESS SOCIETY

I have always supported the view that crypto’s resilience stems from the push for more digital inclined means of communicating and transacting. Much of crypto’s chances of surviving legacy systems hinges on the drive of countries to upgrade their financial infrastructures to enable cashless economies. In essence, the more people opt for cashless modes of payment, the more attractive crypto is to the average consumer. However, note that this sentiment comes into play if we all agree that payments and other financial applications emerging in the DeFI landscape are crypto’s best bet of achieving mainstream adoption. In this article, I will explore the factors that strengthen and weaken the case for crypto as a functioning financial instrument in the not too distant future.

The Long Road to A Cashless World

The Long Road to A Cashless World

According to experts, the business and financial landscapes will do well if they support technology designed to shrink the time it takes to process transactions, introduce advanced accessibility functionalities, and provide flexibility to evade recurring challenges. While this is the foundation on which the cashless society movement relies on, it might take a while before it finally becomes a reality. As highlighted by Andrew Singer, although a cashless future promises to redefine economies and push favorable paradigms, it remains a controversial topic.

For one, cashless strongly relies on the proliferation of internet-based technologies. Hence, those living in regions or communities with poor internet infrastructures are at a disadvantage if cash eventually loses its relevance in the global financial terrain. In other words, a cashless society could further promote the economic inequality restricting the poor from actively engaging in the broader finance landscape.

Similarly, consumer behavior and the perceived authenticity that cash-enabled transactions command have slowed the transition to a cashless society in developed regions. This hurdle persists, regardless of the recent campaign for cashless transactions fueled by fears that contaminated bills could pose serious health risks. Vlad Totia, a payments analyst at GlobalData, explained that some people are more comfortable with making cash payments, and they will continue to do so even after the coronavirus pandemic is no more:

“However, the biggest bump in users have been people who were either too reluctant, comfortable, old or too used to paying by cash. These new have been basically forced to use a more convenient and easy method of paying […] and most will likely keep using these services after COVID-19 has passed.”

Another factor is the growing surveillance of cashless infrastructures. Some do not support the idea of having all their transaction history and activities tracked by the government or payment service providers. It is worth noting that the traceability of fintech solutions is not just detrimental to criminals, but also undesirable for individuals with good reasons to keep their activities private. While reiterating this argument, Vinay Prabhakar, vice president of product marketing at Volante Technologies, stressed that privacy is one of the core advantages of cash. Therefore, it may take a while before people adjust to more open and censored means of payment:

“By paying for certain types of medication — birth control [pills], say — with cash, the payer can be confident that while their pharmacy or doctor knows of the purchase, their credit card company or mobile phone provider does not. A centrally controlled digital currency would mean the government having access to every transaction made by everyone in the country, a situation ripe for dystopian exploitation.”

As you can see, there are a handful of valid reasons why cashless infrastructures are yet to become the order of the day. Thus, it is vital to explore the implications of this resistance to the crypto narrative bearing in mind that digital assets are one of the many forms of cashless systems.

What Is Crypto’s Role In the Emerging Financial Order?

What Is Crypto’s Role In the Emerging Financial Order

Although I had argued at the beginning of this article that crypto’s fate depends on the success or failure of the cashless campaign, it is worth mentioning that distributed ledger technology and blockchain provide new paradigms that find a balance between the positives of holding cash and adopting cashless systems. Top among the factors that give crypto an edge over other cashless systems is its decentralized nature. Unlike a majority of conventional fintech solutions, crypto allows users to have total control over their finances. Compared to the level of autonomy afforded to cash holders, crypto technology offers more freedom as it operates a storage system where owners can choose to have the sole custody of their digital assets. However, in this case, there is no limit as to the number of digital assets an individual can store privately.

Also, the validation process of crypto transactions very much resembles the chargebacks-restrictive model of cash-power transactions. In contrast to other digital payment services, it is impossible to reverse transactions on blockchains. Back in 2008, Satoshi Nakamoto clarified this when he replied to a complaint regarding the non-instantaneous nature of bitcoin transactions:

“Instantant non-repudiability is not a feature, but it’s still much faster than existing systems. Paper cheques can bounce up to a week or two later. Credit card transactions can be contested up to 60 to 180 days later. Bitcoin transactions can be sufficiently irreversible in an hour or two.”

The argument for crypto’s irreversible model has become even more potent, thanks to the influx of crypto solutions that can easily match the capacity of established payment networks like PayPal and Visa. Therefore, crypto as a payment method remains a powerful option for merchants, which are almost always at the receiving end of chargeback policies notoriously exploited by scammers.

Apart from the irreversibility of cryptocurrencies, the technology also provides some level of privacy synonymous with cash transactions. There are a handful of privacy-focused crypto projects providing surveillance-resistant infrastructures to users. With this, it is possible to join the cashless society bandwagon without relinquishing the privacy that cash offers. Hence, crypto makes the transition to cashless infrastructures less scary to privacy-conscious individuals. As such, it is safe to say that crypto is one of the most vital components of the fintech industry poised to quicken the transition to a cashless world.

What Are the Factors That Continue to Limit Crypto Adoption?

Crypto Regulation

Crypto Regulation

Certain factors make it a tad difficult for crypto technology to achieve mainstream adoption. The first is the regulatory stance of governments on cryptocurrency. A majority of countries and regions are yet to come up with regulatory frameworks designed to establish standards for the crypto industry. Besides, regulators that have developed or are on the verge of introducing guidelines and rules often do so to the detriment of the emerging crypto space. For instance, the newly adopted Digital Finance Package by the European Commission proposes stringent requirements for crypto issuers. The proposal reads:

“For previously unregulated crypto-assets, including ‘stablecoins’, the Commission proposes a bespoke regime. The proposed regulation sets strict requirements for issuers of crypto-assets in Europe and crypto-asset service providers wishing to apply for an authorisation to provide their services in the single market. Safeguards include capital requirements, custody of assets, a mandatory complaint holder procedure available to investors, and rights of the investor against the issuer. Issuers of significant asset-backed crypto-assets would be subject to more stringent capital requirements, liquidity management and interoperability requirements.”

Following the announcement and publication of this proposal, experts have stressed that this rule could pose a significant challenge for the burgeoning DeFI sector, whose developers always almost choose to remain anonymous. Xreg explained this in a recent report:

“MiCA will also present significant challenges for an industry in which many activities have, until now, been unregulated. As such, the role of ESMA and the EBA in supporting MiCA compliance through publication of technical standards and guidance will be key. However, it remains to be seen how the Regulation will co-exist with innovative decentralised projects which may prove difficult to subject to regulatory requirements. Significant resources will be needed to comply with MiCA, by both regulators and regulated. Issuers and CASPs operating in the EEA or with EEA clients should consider the strategic implications brought about by MiCA and begin planning accordingly. The clock is now ticking on the legislative process and so time is short in which to make representations. To do this, however, businesses first need to understand the implications of this new crypto-asset law on their activities.”

In another assessment, The International Association for Trusted Blockchain Applications (INATBA) warned that the regulation could marginalize the crypto scene and force DeFI protocols to evade European markets. The report reads:

“Certain analyses suggest that, under the proposed regulation, novel and early-stage developing markets such as Decentralised Finance (DeFi) would likely no longer be accessible to Europe and her citizens. Europe’s ability to attract talent, foster innovation, maintain a start-up ecosystem and develop competitive advantages for the enjoyment of EU Member States and citizens could profoundly suffer as a result. Likewise, other nascent technologies, innovations, applications and functionalities which could improve the lives of European citizens and contribute to the furtherance of democratic digital governance initiatives could be rendered inaccessible to European citizens and Member States. The INATBA members concerned about these possibilities would reiterate the need for a sound framework that provides technologists and entrepreneurs the manoeuvring room necessary to conduct experimental innovation and keep Europe on the leading edge.”

The Proliferation of Scam

The Proliferation of Scam

Another factor derailing the crypto adoption train is the prevailing notion that crypto has become the go-to financial infrastructure for criminals. In light of this, security experts and governments will stop at nothing to establish some level of control over the flow of money in the crypto market and discourage the use of cryptocurrencies for fraud and other illicit activities. As opined by Michael Cohen, vice president of global operations at MyChargeBack, the explosion of crypto fraud puts a dent on mass adoption:

“Unfortunately, it’s a very nice tool for a scammer to have as a means to collect funds. I think it serves in the disinterest of those who are looking to promote the general and universal usage of crypto. I think it is at this point. It is somewhat of a stumbling block because of all of the people who are getting scammed. I mean, they’re not going to be the ones who are going to be promoting the usage.”

The fact that certain digital assets provide privacy-focused features that allow users to transact under the radar makes this argument even more potent. And so, regulators and security experts have invested their time and resources not just to unravel these digital assets like Monero, but also to force crypto exchanges to delist them. Maddie Kennedy, senior communications director for Chainalysis, posited that while privacy-enabled coins, in theory, should attract bad actors, the convenience and liquidity of traceable digital asset networks makes bitcoin the top choice for illicit activities:

“Cryptocurrency users, including bad actors, often have to choose between using a cryptocurrency like Monero for its enhanced privacy and Bitcoin for its convenience, availability and liquidity. Bitcoin already usually wins, especially as exchanges increasingly delist privacy coins in light of regulations.”

The Crypto Trend Lives On

The Crypto Trend Lives On

Regardless of these setbacks, the notion that crypto is central to the cashless society campaign still stands. Even if decentralized crypto crumbles under the weight of strict rules, the centralized versions are slowly emerging as the universally accepted payment option. This is due to the growing demand for central bank-backed digital assets. Following China’s giant strides in the development of a functioning CBDC, more countries are working on implementing government-issued digital assets of their own. Recently, the European Central Bank revealed that it is seriously considering the possibilities of digital euro. The bank stated:

“The possible advantages of a digital euro and the rapid changes in the retail payment landscape imply that the Eurosystem needs to be equipped to issue it in the future. A digital euro could support the Eurosystem’s objectives by providing citizens with access to a safe form of money in the fast-changing digital world. This would support Europe’s drive towards continued innovation. It would also contribute to its strategic autonomy by providing an alternative to foreign payment providers for fast and efficient payments in Europe and beyond.”

This development shows that crypto is leading the cashless society narrative, despite its drawbacks.

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