Cryptocurrencies such as bitcoin are slowly making a transition from speculative investment instruments to payments. Special attention to payment habits and the financial life cycle as the COVID-19 pandemic leads to more calls for dematerialization of payments.

Overview

Impacts

• Geographic location matters significantly when measuring awareness of cryptocurrencies and interest in making cryptocurrency payments for goods and services.
• For customers, any transition from currency speculators to retail shoppers is not straightforward.
• And most consumers are not currency speculators.
• The acceptance cost for businesses will be significant, especially compared to alternative existing payment options.
• Companies accepting cryptocurrencies as payment for goods and services may benefit from short-term public relations gains and be perceived as innovators, but the impact on payment acceptance is very likely to be short-lived.

Recommendations

Banks and investment CIOs driving financial services digital business strategy and innovation should:

• Communicate to business executives the challenges and risks of engaging with customers wanting to use cryptocurrency for payments by demonstrating an understanding of the demand factors and how they impact prioritization of related business strategies and IT investments.
• Avoid unnecessary technology investments by weighing the scenario that there is no viable demand for cryptocurrency payments in your market, and other payment options are good enough or superior.
• Help your executive leader peers to understand the nature of ongoing market hype by analyzing the source of announcements in terms of locations and profiles of messengers and their companies.
• Prioritize IT investments by creating an action plan for business executives.
• Position customer engagement services as a collaboration between all functional representatives from transaction operations, not just as a pure payment play.

Analysis

One of the most hyped aspects of any CIO’s agenda is that of the role of cryptocurrency in the payments value chain. For all the promise of bitcoin and other cryptocurrencies, none of the largest online or traditional retailers accept them at scale.

While bitcoin is used as a store of value, it has not become a medium of exchange for day-to-day commercial exchanges.CIOs, therefore, need to be very careful toward claims that bitcoins and other cryptocurrencies could succeed as a medium of exchange.

This is especially true in the current context where there is an acceleration of such calls due to the current challenges to cash being perceived as a potential vector for COVID-19.1,2 However as shown by Coinmarketcap, bitcoin value is quite volatile, making it difficult to use for day-to-day payments. But beyond short-term perceptions, consumers’ payment habits and other demand factors greatly matter.

As a result, understanding the reality of what is new and what is changing in this space will be key to those CIOs successfully navigating cryptocurrency hype during and post-COVID-19.With this in mind, we explore the biases and misconceptions that can affect the role of cryptocurrencies in the payments industry.

To do so, we will use 2019 Financial Services Consumer Trust Survey3 data to examine the relative levels of demand to use bitcoin and cryptocurrencies. To aid clarity, we will use data from a single country as a measure of that demand.

The U.S. has been identified as the most logical country dataset to utilize, given the public’s relatively advanced level of cryptocurrency understanding. It displays a strong level of experimentation with cryptocurrencies as both a speculative investment instrument and as a payment mechanism.

This offers reasonable base levels to explore bias and misconceptions, a hypothesis based in part on Coinmap’s landscape of cryptocurrency merchants and ATMs. This data indicates that the U.S. has a relatively higher density of merchants supporting cryptocurrency transactions.

However, we do have to recognize that the state of existing payment infrastructures, as well as local regulations, will also strongly influence adoption and usage. On the one hand, comparatively backward payment systems may benefit the most from a new approach, but would demand higher costs of integration.

On the other hand, advanced payment systems would facilitate integration, but may not need a new approach in the first place. Our focus in this analysis is to assist our clients in paying attention to and detecting potential bias and misconceptions, not to generalize from the U.S. situation.

CryptoTrends sees potential for blockchain-enabled tokens to create, represent, exchange and manage new types of digital assets. We, nevertheless, recognize the lack of maturity of the underlying blockchain constructs that will follow an evolution. 

The opportunity to use cryptocurrency to replace existing payment systems is limited. However, in order to support our clients’ understanding of consumer demand factors, and their interest in benefiting from customers’ use of cryptocurrency investments for payment purposes, we provide additional guidance on what mistakes CIOs and executive leaders can avoid. We also suggest where to focus resources.

The main objective is to equip CIOs with an understanding of the consumer demand and market dynamics, to dissipate any hype, and to give advice on working with business executives in prioritizing innovations across the investment and payment domains (see Figure 1).

To navigate hype, avoid overselling by vendors keen to demonstrate the urgency of adopting cryptocurrency payments. Focus on ensuring that CIOs prioritize the right investments, especially with current COVID-19-related financing restrictions.

We will now explore the demand indicators that matter to gauge the potential for cryptocurrency payment.

The key demand and supply factors accounting for the challenges in making customers evolve from speculators to shoppers.

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