The hype around blockchain technology has cooled off since the peak hysteria of 2021, and institutional interest is now returning as the market stages a comeback on the back of regulatory approval for US-domiciled Bitcoin ETFs.
Retail sentiment has largely remained muted following the collapse of a series of fraudulent schemes, topped by the high-profile conviction for fraud of Sam Bankman-Fried for his actions with crypto exchange FTX, and the hype about non-fungible tokens (NFTs) now seems like a distant memory.
Has the pendulum swung too far, however? As with so many technologies over the years, the best time to apply critical thinking to the opportunities enabled is when price appreciation headlines are scarce but tangible technological advancements are being made on the ground.
Breakthroughs in the scalability of trust minimised applications (those which are not controlled by third-party entities, for example Meta or Google) and the increased use of digital assets continues, despite comments from naysayers that the technology is yet to find a clear mainstream use case.
The cryptocurrency industry - originally pioneered by technologists who intended to use privacy as a route to social change following the 2008 banking crisis - has now moved from the fringes to a resting giant in the evolution of digital asset ownership. Institutional participants across multiple sectors, including asset management, banking, payments, and media, are adopting blockchain technology despite limited clarity from regulatory bodies.
How AI and blockchain work together
Under the tag Web 3.0, the underlying smart contract technology that has emerged from blockchains promises new opportunities for digital commercial activity and is opening the way to a new internet where control and ownership over digital assets moves away from centralised third-party entities to the users.
One clear use case that has shown mainstream appeal is fiat currency-backed cryptocurrencies (e.g. US dollar-backed stablecoins such as USDC or USDT) that are now dominant in the industry after their launch in 2014.
They are in widespread use in South America and parts of Europe where consumers and businesses have leapfrogged adoption of digital dollars as an alternative to local currencies.
The rising dominance of stablecoins as digital native currencies that can be used plug and play thanks to their permissionless design that has no borders and does not require implementation approval from a third-party, raises the question of what unique use cases will create exponential growth opportunities.
High-speed blockchains
When it comes to payments, the key performance factors for users can be distilled down to security, reliability, speed, and costs. While blockchains are built on foundations of cryptographic security and reliability, speed has historically been an inherent limitation, but this has recently been upended by the networks launched in the last few years.
These networks prove that blockchains can be scalable to a high number of users while delivering low-cost and secure transaction confirmations at the speeds that consumer applications demand. For example, the Solana blockchain processes transactions in under half a second and delivers an average sustained demand of 3,000 to 4,000 transactions per second, with demonstrations of enhanced software (under development) capable of processing over a hundred times more transactions per second.
Commanding low determinable fees at a quarter of a cent, these cost and capacity levels are considered to be in excess of the demand required to service global payment processing and large-scale consumer applications.
While the future of technological innovation in the industry remains bright, the technology is still far from being pervasive in everyday consumer usage. However, the opportunity has not gone unnoticed, particularly by VISA, which is spearheading innovation between digital and traditional fiat currencies, with digital corporate treasury operations settled using stablecoins, shortening settlement times for merchants.
In addition, digitally native users have already demonstrated that there is strong demand for privately issued stablecoins, with $120bn of US dollar-backed stablecoins issued across the top two issuers (Circle’s USDC and Tether’s USDT) and measured an average of $33bn in daily trading volumes during 2023 (Coingecko).
Interested to find out more?
Click here to contact the team
AI will drive unprecedented exponential usage of digital currencies
Since December 2022, much of the hype in the digital space has been about artificial intelligence and generative artificial intelligence (AI). This raises the question about how AI and blockchain will work together and feed off each other in the future. There’s no doubt that the future growth in the usage of digital currencies is likely to co-exist with existing banking payment platforms in an increasingly digitally native way.
Any new technology has to fight for its place in the market and often new applications start off by focusing on imitations and relatable replacements of existing systems, which ultimately provide limited improvements over incumbents.
However, true exponential demand comes from specific and unique-use cases that are only unlocked by uniquely new designs. For example, the global dominance of Uber was not possible prior to the combination of app stores and smartphones.
As human interactions become ever more digital, so AI becomes more relevant and its integrations are already becoming pervasive in the digital ecosystems that humans interact with on a daily basis, often out of plain sight.
AI and blockchain in finance
With AI demand on an exponential trajectory, so its world will collide with the blockchain world, and we are likely to see a new digital economy emerge. In this new economy, AI applications will trade economic value directly with each other, for example by sub-contracting specific tasks to specialised sub-AIs, or granting access to on-demand computation or storage hardware and in some circumstances even pay for tasks performed by human contractors.
Due to the unique transparency, speed, and ability to construct complex transactions, digital currencies will find a comfortable home in an integrated micropayment AI future.
The world of digital currencies is a fast-moving space and will be ever more dominant in payment ecosystems as the world gets comfortable with incoming regulations and the pace of digitisation of money. Many of these technologies will be intertwined in customer-centric ways, led by industry-leading businesses, from technology to payments.
READ MORE - SWOT: Central Bank Digital Currencies
Today, stablecoin payments are integrated by leading platforms such as Stripe, which is forecast to process over $1 trillion in gross merchandise value for 2023, and Shopify, which has indicated its long-term commitments to implement blockchain infrastructure as an edge over competitors.
Locally, the market is paying attention, with an uptick of cryptocurrency payments being implemented as alternative payment options, even at a large national retailer.
Adumo, a market-leader in the payments sector and an Investec client, has developed a unique platform integrating dynamic QR codes into point-of-sale terminals for retailers to enable modern-method payment from loyalty programmes to cryptocurrencies.
The company notes that while the transition of payment methods has historically proven to have slow evolution cycles as consumers need to gain trust in new systems, there are several catalysts that could accelerate the development and implementation of stablecoins or central bank digital currencies as payment tender such as lower transaction costs for both retailers and consumers and novel digital integrations.
Investec is engaged with local bodies on sandboxed pilot programmes to test design and development of blockchain opportunities in the local banking sector. We have also separately supported the growth of large-scale clients in the South African and global payments market, including Adumo.
Looking beyond the hype, there’s no doubt that we are at an exciting juncture, where two powerful technologies come together to change the way we do business, often in ways that we cannot predict.
It’s likely that all industries will be affected, just as all industries were transformed by the confluence of the telecommunications and internet booms of the late 20th and early 21st century. That’s why it’s important for all business leaders to stay abreast of these changes.
Browse further in