ETA Expert Insights: The Future of Digital Currency – A Conversation with Circle

ETA TECHNOLOGY COMMITTEE

Contributing authors: Jared Poulson, Chief Integrations Officer, Payroc; Chair of the ETA Technology Committee. Joao Reginatto, Director of European Product and Operations, Circle

Cryptocurrencies offer a promising alternative for peer-to-peer payments (P2P), particularly across borders. But when trying to make a transition to traditional merchant payments, the first waves of cryptocurrency offerings on the market have been burdened by slow confirmation times (depending on blockchain traffic), high costs, price volatility and their incompatibility with many existing financial infrastructures. Below, ETA Technology Chair Jared Poulson talks to Joao Reginatto of Circle about the evolution of cryptocurrencies and Circle’s next steps in building a global, permissionless network for the exchange of value. For a basic overview of cryptocurrencies and cryptoassets, read Circle’s “Intro to Crypto.”

This Q&A is part of a series of conversations on crypto- and digital currency curated by the ETA Technology Committee. You can read our conversation with Coinbase here.

What are the limitations of the P2P payments space today?

The P2P payments space today carries many limitations – high cost / fees, slow settlement times, poor coverage in many regions of the world, and poor customer experience. In many cases, sending a payment today (whether domestically or overseas) can cost between 2-3 percent, take days and have serious limitations in terms of how much money can be sent and whether the recipient can easily access it. Despite advances made with blockchain technology, most payment services still rely on rails that have been built many years ago and lack the incentives to continuously improve the level of service.

How does digital currency address those limitations?

The invention of cryptographic assets and blockchain-based transfer of value have ushered in the next major era of the open internet, allowing for payments to be reimagined as global, seamless, instant and at a fraction of the cost. But a price-stable medium of exchange and store of value is still missing, and badly needed in order for global financial interoperability to function reliably and consistently. Transacting in cryptocurrencies that fluctuate in value is impractical for most mainstream payments use cases.

A price-stable crypto asset, such as a token pegged to the US Dollar, is critical for enabling broader adoption of blockchain technology for payments as well as for supporting maturation in financial contracts built on smart contract platforms, such as tokenized securities, loans, and property.

Circle recently announced the development of USD//Coin (USDC). USDC is a fully-collateralized fiat stablecoin, built on top of an open source framework being developed by CENTRE, which in time will also provide independent governance around the service. Circle is the first commercial issuer of USDC, of which there could be many. Every unit of USDC is always backed by one corresponding US Dollar held on reserve bank accounts, which anchors the value of the token.

Stablecoins can represent stable value (such as the US Dollar) as crypto assets, therefore leveraging the benefits of blockchain technology in various financial use cases while maintaining price stability.

Payments on the Blockchain are associated with long wait times and high fees. How does Circle get around these obstacles?

The scaling issue with blockchain technology is still open but it is important to note that with every innovation the previous criteria for measuring technology performance tends to be insufficient and new performance metrics are created. Blockchain technology allows for value exchange to take place in a truly global and permissionless way, akin to how the Internet works. Centralized, closed systems tend to be much simpler to scale.

Considering those new performance attributes, transaction processing times and fees have already improved with innovation built on more recent blockchains other than Bitcoin. USDC is an ERC-20 token and transactions are processed by the Ethereum blockchain, which has had recent challenges in terms of transaction processing times and fees. At the same time, the developer community around the Ethereum blockchain is actively engaged in experimenting with various ways to address scaling and some of those solutions might be tested in the next number of months. CENTRE, as part of its fiat stablecoin framework, intends on researching state channels and other alternatives to achieve transaction processing at Internet scale.

What are some alternatives to Bitcoin that are more conducive to everyday transactions?

There is plenty of experimentation in this space recently, from forks of Bitcoin with increased transaction throughput capacity, to sidechains, to sharding and state channel approaches. For the foreseeable future, it makes sense for USDC to be an ERC-20 token transacted on the Ethereum blockchain.

Are you planning to stay focused on P2P payments? If not, what area would you focus on next (business to business, consumer to business, etc.)? How would you think about that transition?

Circle’s vision is to enable everyone, anywhere to be able to create and share value. Payments are one element of sharing value, and the Circle Pay product enables customers to do that in pounds (£), euros (€), or dollars ($) without fees or borders.

Circle’s other products include:

• Circle Invest, enabling individuals to invest in crypto assets in a simple and easy to understand way;
• Poloniex, one of the world’s largest crypto exchanges that makes it possible for customers to transact in different digital assets around the world;
• Circle Trade, one of the largest market makers of digital assets in the world, offering over-the-counter (OTC) trading services and liquidity to institutional investors.

How do you see the payments space evolving with blockchain-based cryptocurrencies? Where will we be 5-10 years from now?

When digital photography emerged, while consumers started quickly adopting digital cameras to take photos, most of the consumption of those photos still took place in the analog world, and consumers would invariably use photo labs services to print physical versions of their digital photos. Fast forward a couple of decades and given the vast number of use cases and services compatible with digital photos (from social networking, to messaging, media, communications, etc.), the space for their analog versions became a lot more niche.

Crypto currencies and assets today are quickly evolving but the breadth of use cases and services compatible with them is still minimal, particularly on the payments space. Its use invariably involves moving from fiat currency on a bank account, to digital currency, and eventually back to a bank account – as in the early days of digital photography, the analog counterparty is required. As areas such as stablecoins and financial contracts implemented through smart contracts evolve, it becomes more practical for financial services to be built on top of that infrastructure, which increases utility for digital currencies, making its analog equivalent less and less used proportionally. It is possible to envision a world in 5-10 years’ time where consumers hold digital currencies more often without even knowing it, simply because services are implemented on top of that technology and they are ubiquitous.

What does the landscape look like for merchants to mass adopt acceptance of digital currencies for goods and services? (i.e. is it mostly major merchants, sophisticated, or are smaller merchants coming on board?)

The use of crypto currencies for everyday payments of goods and services has failed to reach significant traction due to a lot of challenges, a few of those being price volatility, scaling, cost and user experience. Fiat-backed stablecoins are a very promising building block in that space because not only they can address the price-stability challenge, but they also make it easier for broader experiences to be built – most consumers would be more comfortable holding US Dollars (or Euros, Pounds Sterling, etc.) in a wallet, but with stablecoins those US Dollars can actually be USD-backed crypto tokens that are moved between consumer and merchants without surfacing the implementation details. As payment processors and gateways adopt this type of technology, there’s a better chance merchants will be more open to it.

This infrastructure still needs to be improved in terms of scaling (and cost) and user experience, for more and more consumers to be able to leverage it and merchants to adopt it. As mentioned earlier, there are many alternatives being experimented with in terms of scaling of blockchain technology. Also on the user experience side, many exciting products in the wallet / Web 3 browser spaces are emerging and we expect to see significant improvements in crypto-native experiences for payments and purchases use cases, which should also help drive more adoption.

Fees to buy/sell crypto-currencies are hovering around $20/transaction, what alternatives does Circle see emerging in the market that would be more conducive to everyday transactions?

Blockchain transaction fees vary from network to network, depending on the type of infrastructure used to maintain transaction information and process updates. Ethereum transaction fees have peaked a few times in 2018 due to higher than average network congestion. As mentioned earlier, various flavours of improvements from sidechains, to sharding, state channels, etc. are being tested and we expect to see further advancement in the next while.

Circle, through its upcoming spin-off CENTRE, intends on researching scaling strategies such as state channels to allow for the next order of magnitude in terms of transaction throughput. State channels is an approach whereby initial and final transaction settlement states, such as account balances, of an interaction between two parties are written to the relevant underlying blockchain, but intervening transactions are not written to the underlying chain and thus executed at the speed of the Internet. This allows for much greater throughput and has the potential to spread processing fees across a much higher number of transactions.

In your opinion, what would spur quicker adoption of cryptocurrencies as a payment option either online or at the point of sale?

Many areas have to be further developed to allow for large-scale, more mainstream adoption of cryptocurrencies as a payment option. The scaling and cost issues have been debated in two previous points already. Beyond that, merchants would not more widely adopt cryptocurrencies unless it represents some significant benefit for them that applies to a large number of consumers. There is a promise that cryptocurrencies could represent cheaper payment processing fees for merchants given the less centralized aspect of it, but for this to materialize the utility of that option has to increase – for instance if there is an incentive to settle transactions in cryptocurrencies and maintain part of capital denominated in that asset, perhaps because suppliers can be paid that way, this would contribute to less conversions between crypto and fiat and therefore lower cost. Stablecoins are a key element of this step forward as merchants would only ever want to hold capital that is price stable.

Also, many more consumers around the world would need the ability to pay with cryptocurrencies for it to become more widely adopted. The reality is most consumers don’t want to hold or transact with a currency they don’t understand. So payment experiences have to evolve to push the technology complexity further down the stack and make it seamless for consumers to the point they might not even realize they are using cryptocurrencies. This is also an area where stablecoins can have a material impact since 100 US Dollars can be represented as 100 USD Coins without any loss of value, but with gains in capability.

What are some pros and cons merchants should consider before taking digital currency payments?

In terms of pros, the cost should be one to be kept in mind for sure. Payments use cases with cryptocurrencies should be designed in a fundamentally different way so as to involve a lot fewer intermediaries (payments using card networks today require 5, sometimes more parties from end to end) and therefore be more cost-effective. Eventually these blockchain networks will be adopted by hundreds of millions of consumers globally, and so tapping on them gives merchants access to a fundamentally global rails for value exchange. In terms of cons, the lack of consumer adoption, the lack of price-stability and issues around scaling are the larger roadblocks that are being addressed by the industry as stated above.

What does Circle have coming down the road to proliferate digital currency acceptance to smaller merchants?

Circle’s work on the development of USDC, will offer a simple alternative to volatile crypto assets that can be used for many peer to peer and small merchant use cases. Many crypto apps and services touching commerce in one way or the other will adopt support for USDC really soon which should also drive more awareness amongst consumers. As customers get more familiar with exchanging price-stable value using wallets and other services they have access to today, this will help form a foundation that can be built on top of by many entrepreneurs in the payments processing space.

What roles does Circle play in making it easier for consumers to understand and utilize cryptocurrencies?

The development of USDC certainly plays a role, as it will allow many crypto apps and services to bring to consumers a version of their services that is denominated in a price-stable crypto asset, something they understand and trust, and that they might be more comfortable holding.

Beyond USDC, the education role of Circle Invest – Circle’s offering that allows mainstream consumers to learn about and invest in innovative crypto assets – will become more and more prevalent. Crypto assets and the use of blockchain technology to implement a new breed of financial contracts on top of smart contract infrastructure will bring to market a number of innovative offerings that consumers can not only use but also participate in through some sort of equity or voting capacity by holding tokens. As these services and participation tokens become available, it is important that products such as Circle Invest exist to educate consumers on this new reality and how they can join in.

Cryptocurrencies may still be in their infancy, but innovators like Circle are working hard to make improvements to efficiencies, speed, and costs that will bring them closer to mainstream merchant adoption. We are still exploring and uncovering the many potential applications of cryptocurrencies and the networks that underpin them, but the future looks exciting and promising.