Can Digital Assets Really Disrupt Payments?

As digital assets continue to become more and more mainstream, what role they’ll play as they move beyond a token for professional traders to something more widespread and ubiquitous remains a primary question. To some extent, there are no clear answers – yet. A lot depends on the moves that government organizations and banks make moving forward, and the answers they come up with could have ramifications that completely change the nature of banking going forward.

While the regulatory answers are still murky – though that may not be the case for long, as the Biden administration continues to focus in on some use cases – the potential role for banks in this new future is somewhat more tangible.

“If banks have a role in the future – and they have to – it’s ‘safe deposit box 2.0’,” said Adam Aspes, Portfolio Strategist with Atlanta-based investment firm Jacobs Asset Management, during a talk at the recently held Boston FinTech Week 2021. “You used to go to the bank to store your valuables in a safe deposit box. The future is a digital vault.”

To develop that competency, banks need to determine whether their strategy is to do it directly or offer it on an “as a service” basis. “Then they need to be able to lend against those assets because to me, there’s no better lending than lending against something that’s in your own custody,” Aspes said.

That thought process can stretch far beyond bitcoin and the traditional cryptocurrencies, as well – digital assets could theoretically contain any tangible asset referenced on the blockchain, including fiat currencies. Moving an asset with the backing of the U.S. dollar into that kind of space could start to fundamentally change the nature of money.

Organizations like the USDF Consortium are already exploring mechanisms for just that, in fact, with a look to addressing the concerns with existing stablecoins and facilitating real-time, bilateral transaction settlement.

“Think about USDF as an alternative to interchange, and think about $1.2 trillion of market cap between Visa, MasterCard, and PayPal,” said Mike Cagney, co-founder and CEO of DeFi blockchain company Figure Technologies. “And so what you’re talking about is probably one of the most substantive disruptions of market cap that we’ve ever seen, because you’re looking at trillions and trillions of dollars that’s baked into the whole function of intermediation through the interchange system.”

And this could reach a tipping point quickly – more so than most firms are fully prepared to admit. Take for example New York Community Bank, which has not historically been known as a tech-focused institution. This past September, the bank coined its own blockchain-induced digital marker, essentially paving the way for realtime trading in digital stock shares.

That transformation is real in ways that will matter to consumers. One solution presented by Jacobs Asset Management called Pay offers a mobile service for challenger banks that cuts out one fundamental pain point many consumers – particularly lower-income ones – have come to loathe.

“We say no overdraft fees, but the reality is you can’t overdraft the account anyway,” Aspes said. “This has a Visa Debit Card associated with it so you can transact all the normal rails, but often the debit is real time against the Blockchain balance. And so if you think about this versus prepaid debit or certainly payday lending, the max rate that we charge on Pay is 30%. And that’s for a customer that has absolutely no credit history at all. And we can do it profitably.”

Pay is attempting to provide a foundation for disenfranchised communities that haven’t had access to financial services. “This solution levels the playing field for them, with the added benefit that their communities where the merchants are using Pay can circumvent interchange expense and transact in a way that benefits the local merchants and local community.”

— Jessica Purdy