- Major Studies
Traditional banking and payment systems are proving to be too slow to accommodate increasing levels of e-commerce and cross-border transactions. And demands for faster payment processing will only increase as commerce enters the omniverse. This Research Byte outlines the factors driving the need for speed in financial transactions along with possible solutions, including various types of digital currencies and next-generation payment gateways. We take a close look at the benefits as well as the drawbacks of one kind of digital currency—cryptocurrencies—and what the future of money could look like with a combination of digital payment instruments existing alongside traditional currencies. We conclude with recommendations for enterprises to understand and prepare for the future of money.
As electronic commerce increases, traditional monetary systems are showing themselves to be too slow and inefficient, especially when it comes to cross-border transactions. Trillions of dollars are being moved around the world annually. However, it can take two to five business days to settle international payments, and much liquidity is floating in the system. For large enterprises, this presents a significant drag on cash flow. A single misdirected payment can have a significant impact on a business. Transaction costs are high, often involving a large amount of manual processing. As international trade increases, the volume of cross-border transactions will also increase. Solutions are needed to support the future world of global and virtual commerce.
For this and other reasons, digital currencies—and cryptocurrencies, one type of digital currency—are becoming more popular, as shown in Figure 1.
Figure 1. Total cryptocurrency market cap (US trillions)
And, as commerce increases in the virtual world (the metaverse, or, as we prefer, the omniverse), there will be an even greater volume of cross-border transactions. Digital currencies are a better fit for virtual worlds with no borders.
Cryptocurrencies or “cryptos” would seem to be an excellent way to provide speed in trading systems at a low cost. Although cryptos have their advantages, they also have serious drawbacks, as outlined in this section.
The benefits of cryptocurrencies over traditional payment instruments can be grouped into three key areas:
There are, however, several drawbacks to cryptos. These include:
Can cryptos overcome these challenges and come into widespread adoption as an alternative to fiat currencies? Thousands of cryptos exist today, and new ones are being created yearly. It will take some time for the market to stabilize and for a clear picture to emerge. But other forms of digital money could satisfy the need for speed and low cost in financial transactions without the drawbacks of cryptos.
The most likely outcome is a combination of digital payment instruments arising alongside fiat currencies. Here are some possibilities:
With digital currencies almost certainly part of the future global financial system, how should business leaders prepare? Here are three ways to get started:
The staying power of digital money in some form appears likely when you take the Lindey Effect into account, meaning that the longer something has survived (usually more than 10 years), the higher the probability of its existence in the future. Bitcoin, in particular, has survived for almost 13 years, suggesting that digital money, in some form, is here to stay. To stay ahead of the game, enterprises need to figure out their overall strategy for the future of money in a world of increasing virtual commerce and cross-border transactions.