COVID-19: How long must we wait for a cashless society?
Despite much talk about making the transition to a cashless society, the truth is that the blockchain-enabled payment networks that may help to make it a reality, are still far from ready for mainstream application. Based on convenience and processing speed, they simply cannot compete with traditional banking and credit card networks, which have evolved over many decades. But could the experience of living in a pandemic accelerate innovation in this area?
The coronavirus has had a dramatic impact on many areas of life, and one of the most evident has been increased take up of digital technologies. When the crisis first hit the world’s financial markets for example, some investors turned to cryptocurrencies instead. Incentives designed to reward cashless transactions during the pandemic, such as the patented technology offered by the SocialGoodProject, have also been taken up more widely. These factors combined with increased reliance on contactless payment methods, have served to accentuate the push to a cashless society.
The main factor holding blockchain technology back is its lack of scalability. As a relatively early-stage technology, many blockchain-enabled payment networks are capable of handling 4-6 transactions per second, whereas Visa claims that around 1,700 transactions per second is possible on its own network. Trying to match this volume of transactions, whilst maintaining the high level of security inherent in its distributed ledger technology, has proved challenging. Innovators of the Lightning network have attempted to address this scalability issue. Specifically, they have added a second layer, which operates on top of the blockchain, to conduct transactions “off” the blockchain without delegation of trust or ownership. This in theory allows an order of magnitude increase in the number of transactions that can be processed per second.
In addition to shifting habits caused by Covid-19, there are many other reasons why blockchain innovation could be about to leap forward. While existing payment networks are already facilitating cashless payments in many Western societies, in less-developed areas of the world, access to traditional banking infrastructure is more limited. This is creating an opportunity for alternative systems, in many cases operating via mobile phones, to thrive. There is also growing interest in the use of centralised blockchain-enabled payment networks, which can be controlled by large financial institutions or governments.
Facing the prospect of a cashless society, governments have become increasingly concerned that a wholesale switch to platforms trading in cryptocurrencies, such as Bitcoin, could result in financial instability and a loss of control of national currency mechanisms. In a bid to address this problem, Visa has recently filed a patent application for technology capable of turning actual banknotes into a digital equivalent, denoting the same currency, before destroying the notes and removing them from circulation entirely. Payment networks that make use of this technology would be easier to control and potentially could be scaled for mainstream application, without consumers even realising they are underpinned by blockchain technology.
As well as addressing the problem of scalability, innovators are striving to ensure that emerging blockchain technologies are interoperable and resilient enough to protect users of both centralised and decentralised payment networks. If blockchain technology is going to be used more widely, new point-of-sale systems may be needed that accept cryptocurrencies and are suitable for a variety of transactions. There is a considerable amount of innovation taking place to repurpose existing hardware or find new solutions that are both secure and convenient.
Just last year, global payment technology providers, Ingenico and Verifone, announced partnerships with Singaporean blockchain firm, Pundi X, to develop technology to allow current customers of their payment terminals to download software enabling cryptocurrency payment capabilities. Amongst others, Pundi X is also developing its own payment systems, which are likely to be more of an attractive buy for new businesses wanting to accept cryptocurrency payments.
The patent space for this area of blockchain technology is still quite underdeveloped and there could still be room for some lucrative patents. Twitter CEO, Jack Dorsey’s, mobile payment company, Square Inc, made headlines earlier this year, having just recently obtained a US patent for a method of settling Crypto-to-Fiat transactions. Technology like this could be important for addressing problems of interoperability between centralised and decentralised payment networks.
It is hard to predict whether a wholly cashless society will ever be achieved. In the UK, the proportion of payments made in cash fell to just 28% in 2018, and is forecast to fall to just 9% by 2028, according to UK Finance. However, eliminating cash altogether may not be practical, and is only likely to happen when it is easier and more convenient for everyone in society, even the most vulnerable, to make electronic rather than cash payments. For blockchain technologies to support this, they must evolve to provide a discreet but integral element of next generation digital payment system; supporting everything from hassle-free peer-to-peer payments to large inter-bank transfers.
In fact, Visa’s patent pending technology for turning banknotes into digital currency could prove an important stepping stone on the way to a cashless society. As well as helping to reduce the use of counterfeit notes, peer-to-peer transactions could be made much more quickly, without the need for banks and clearing houses to process each transaction. There might also be benefits for governments, as the relevant authorities, such as the US Federal Reserve or the Bank of England, could oversee the conversion and therefore maintain a degree of control over the currency.
In the absence of any dominant blockchain technologies, there are still plenty of opportunities for innovators to secure their stake in this vision of a cashless society. By filing patent applications for their inventions at an early stage, and using broad terms of reference where possible, they could acquire exclusive rights to tomorrow’s ‘standard essential’ blockchain technology.
Phil Horler is a partner and patent attorney at European intellectual property firm, Withers & Rogers. He specialises in advising innovators of blockchain technologies.