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Payments – Why Visa’s foray into crypto matters

Visa announced on the 29th March 2021, that they had completed their first settlement transaction in USDC (a stable coin linked to the US dollar) on the Ethereum blockchain.

Visa’s Chief Product Officer Jack Forestell said “The announcement today marks a major milestone in our ability to address the needs of fintechs managing their businesses in a stablecoin or cryptocurrency… it’s really an extension of what we do every day, securely facilitating payments in different currencies all across the world.”

This may not sound like the most exciting announcement, but for the financial services industry it is big news and foreshadows a change in the established opinion of crypto-currencies and their potential global monetary impact.

So let’s look at why this news is important.

Why are Visa settling in digital currencies?

Visa requires settlements to occur in fiat currency (USD, GBP, JPY etc.) at the moment, which means that any crypto currency transaction needs a traditional ‘off-ramp’ into the kind of everyday currencies that we all know, to settle with Visa.

Converting digital currencies and assets across into fiat currencies can add additional friction (complexity, cost and time). There are a huge number of businesses now, who not only pay their employees in digital currencies and who store their capital in digital assets. For these companies, they may not even have traditional business banking accounts, and don’t necessarily want to have them just for the purposes of settling via Visa.

So Visa clearly feels that there is enough of a shift occurring in the market, that they have to move with demand and create this flexibility in their offering, but what else does it signal to the financial services sector?

Digital currencies are a good thing.

There is a lot of hyperbole around crypto currencies and their impact, efficacy and use.

But, if we think more broadly about money, capital and assets. We see that it is just part of an innovation curve.

Assets pre-1970 were all analogue… a physical stock certificate, a physical ownership deed to a home, paper money etc. When we wanted to leverage technology to increase transactions, increase access and create flexibility, we took those physical assets and made electronic assets in centralised databases that represented the asset that was sitting somewhere in custody.

The financial services sector knew that pace and scale of transactions and ease of trade could mean greater revenue opportunity and better business models.

Digital currencies and digital assets are just the next step in that evolution, and as part of that evolution we may have decentralised, open source stores of value (like Bitcoin), but we can also have central bank issued sovereign state digital currencies (digital pound or DGBP) and centralised private company currencies (like Facebook’s DIEM). Ultimately, what digital currencies are optimising towards is flexibility, pace and cost reduction of transacting.

And as much as some financial institutions may protest against the nature of the crypto experiment, nearly all of them would like to realise the feature benefits.

The near future of the financial services industry will almost certainly be digital currency native.

Are Visa future-proofing their operations?

As the daily news cycle contains ever more information about Bitcoin, NFTs, Bitclout and other blockchain based, decentralised, digital assets classes. It is only a matter of time before the high water mark is reached and these technologies become truly mainstream.

The significance of this move by Visa cannot be overstated.

Visa is the largest card network payments provider globally, and a move from a company of this stature to settle transactions with a stablecoin is significant for the industry.

Their move will, in Autumn 2021, effectively eliminate the need to involve fiat currency in a crypto to crypto transaction, which could in-turn lay the initial groundwork for a wider adoption of crypto assets. Ultimately, what Visa is doing is normalising the use of digital assets for payments, which won’t go unnoticed across their partnerships in traditional finance.

Are Visa paving the way for other providers?

There have been many notable companies who have dabbled with crypto currency, blockchain and distributed ledger technology over the last 5 years, but what Visa is doing will perk up more ears than most.

Notably, we had Elon Musk, announcing last week that you can buy a Tesla using Bitcoin and It is expected that PayPal will announce in early April that it will allow U.S users to pay with millions of merchants globally in Bitcoin, Ether and Litecoin.

What this signifies is a shift in the payments space that has digital currencies and crypto at the heart of it’s innovation.

Where DEFI & Fintech meet financial services

There has been a huge amount of innovation that has occurred within fintech over the last five years and in crypto many of the transformational use cases from the last 3 years have come out of DEFI (decentralised finance) space.

So as these innovative, nascent industries prove use cases, garner interest and build devoted consumer bases, we will see DEFI and fintech come closer and closer together and mature into partnerships with traditional financial services organisations.

As the over-quoted Darwin quote goes “It isn’t the fittest of the species that prevails… it is the most adaptable to change”.

Change is occurring right now in the payments space. Are you going to be adaptable?

 

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