Sophie Fuji

The Currency of Payments

An open, unfinished exploration into crypto as the world's payment rails. Please reach out with any thoughts, critiques, or further reading on Twitter.

Trust as a currency

The greatest currency is trust. As our world has expanded, we have lost trust. Instead of living in small societies where everyone you encounter is at most two degrees away from you, our urban and digital lives let us hide behind anonymity, forcing us to use proxies for trust. We don’t trust everyone we interact with because we know their character well, we trust them because they work for a company whose brand we trust, or a friend trusted them and we trust that friend. Crypto offers us a trustless system where we do not need to trust the people around us or a proxy, we only need to trust the technology. If we all operate on a trustworthy system, the problem of trust is abstracted away can be simplified in certain interactions.

These days, financial trust underpins every action in society, since money is our medium of barter. Instead of having to trust one another via potentially faulty proxies, we only have to trust the system we are all operating on. Most people do not trust systems because they have a deep understanding of them, they trust them because they are sheep, blindly following some leader who trusts the system. When we use Visa, most of us don’t know how Visa takes money from our bank account and gives it to the merchant, and we have no way to verify what their private ledgers have done. We only see the top level interface and trust this because Visa is a big brand with auditors and a stellar reputation.

Crypto’s greatest value proposition is that it abstracts trust away from human networks, namely human control. When a society is accustomed to an unstable government, volatile currencies, and predatory conglomerates, trust becomes scarce. The most important criterion in financial providers for these societies is that their money is not controlled by their government.

In emerging markets, there is so much uncertainty around all financial tools that cash and the US dollar are considered safest. Oftentimes, foreign cash is king – physical USD is shipped in swathes to many countries to power black markets where it is traded for 1.1x to 7x the official exchange rate. The black market is so profitable that countries that have long turned a blind eye to it have sometimes even tried to capture parts of the market, like Colombia’s “sinister window”, a central bank-run USD deposit window where drug cartels traded USD for COP at black market rates, or Argentina’s “cuevas”, who run illegal exchanges that help alleviate the regulations on USD in the country at the informal ARS:USD rate, the “Blue Dollar”.

Foreign exchange is not the only bottleneck in emerging markets. Their financial systems tend to be heavily regulated too, making it difficult to move money domestically and abroad. Fintech has tackled every market aggressively, from PayPal pioneering online money in the late 1990s, to blazingly simple solutions like WePay and AliPay in China today. Many multibillion dollar winners have emerged from these efforts. The size of this problem and the strength of the consumer need mean that many things have been tried and tested in many markets. Now, the technology has become a commodity, where instead, markets are won through moats built in trust and compliance.

So if these web2 fintech startups already exist in all these markets, why is there a need for web3 fintech?

The original promise of crypto

The original promise of crypto was permissionless payments, open to all. In the bear market, as we think about what will actually take off in the next few years, many people are turning back to payments. Crypto does not have to reinvent the system from the ground up, it can slot into our existing systems and manage them better.

So far, many web2 products have tried to expand our default western standards to these countries, by creating online banking that is easily accessible and allowing people to transact from their phones in a couple clicks with minimal fees. However, most of this fintech is just a shell for existing payment rails, not fundamentally changing how we move money, only replacing the brand and interface we trust to move our money. Instead of trusting a big name bank, we have derived our trust in this new wave of brands like Stripe, Plaid, and more, which are more convenient but still only deserving of our trust due to established branding.

Many geographies haven’t been won by a specific fintech yet, there is a plethora of options competing for dominant market share by subsidizing fees and high referral rewards. While customers are jumping from provider to provider, the next wave of fintech gets ready to infiltrate and improve the system again. Crypto has the greatest potential to do this.

Does anyone buy into this yet?

People are onboarding into crypto in different geographies for different reasons but it mostly boils down to this: moving money is a basic right. Without it, life is severely limited by capital constraints. The greater the flows of money moving through consumers and businesses, the greater the economy performs. Here are some popular reasons people are on-ramping:

Web2 fintech often still requires a bank whereas crypto P2P exchanges don’t require a bank - for the unbanked or in places where using banks is slow and unreliable, crypto offers a solution to circumvent this. They have the freedom to move money in any amount, at any time, to anywhere. In China, we have seen digital wallet systems at a large scale take off, proving that bankless systems are possible, but even they are pioneering alternatives built with crypto. Plus, this requires trust and centralisation to execute if not done on-chain.
Liquidity and speed of transactions can be very important - in situations of instability, quick access to your money can be the difference between life and death. In less immediate situations, faster liquidity means better financial management and fewer predatory loans, resulting in a healthier economy. Crypto rails settle transactions instantly, including on-ramping and off-ramping in seconds, meaning people can send money to those in need at their moment of need and withdraw their money at will. This is already more popular than most people realise.
Countries with volatile currencies lead their citizens to turn to stablecoins to retain value - if a country’s currency is being devalued day by day, holding savings in a USD-backed stable coin is highly preferable. Venezuela and Argentina have both seen huge rises in crypto adoption as their currencies have plummeted.
Currency controls restrict movement of money across borders - people who want to hold alternative currencies often cannot because there are legal limits that restrict them from doing so. This is also an issue when people want to go abroad, or send remittances. Crypto provides a source of arbitrage that bypasses limits. With dollar-backed stablecoins, people in these countries bypass the foreign currency limits their governments have imposed through traditional institutions without having to pay massive premiums.
Crypto is seen as an investment for more sophisticated, educated or wealthy people - in some countries, access to stocks, bonds or other traditional investments is limited, making crypto an alternative. For those who are wealthier, holding BTC or ETH instead of stablecoins is also seen as an investment instead of just storing value in stablecoins. Vietnam is a prime example, where traditional equities are hard to access, and so altcoins have grown in popularity.

Open questions

Does the value of crypto payments just come from regulatory arbitrage?
- As Scott Alexander argues, “the crypto financial system is just reinventing the regular financial system except worse in every way, and that’s fine”. Maybe this opportunity will go away when equivalent regulation settles.
- More optimistically, if regulation for all financial systems were better, there would be less useful regulatory arbitrage, especially in emerging markets. This could be the catalyst for better banking services for many countries, like it was in Ukraine.
- Binance and Tron are leaders in emerging markets, despite their reputations in the west. This is because they work and are cheap – the aim for many users is to hold money that the government does not control, not decentralization.

Once we get people to move money in crypto, how do we get people to keep their money in crypto?

Lots of crypto usage in the west is as a speculative asset, not a medium of exchange.. Stablecoins are changing this, but the current incentives with stablecoins compared to fiat are still limited. It is often used as a form of settlement, or something behind the scenes for more complex transactions. It has not reached widespread adoption as a replacement for local currencies.
Non-finance related crypto use cases are mostly crypto-native, meaning they are limited to NFTs, DAOs, gaming and other niche interests. Since these technologies are far from reaching widespread adoption, there are very few non-crypto use cases to spend crypto. We need to create use cases where we leverage low fees and fast settlement times, not just crypto-native use cases, to create compelling ways for people to use their crypto.

Can we generalize a solution for payments across different countries?

For such a ubiquitous need: the transfer of money, the way in which payments are done is surprisingly localized. This is because of regulation, cultural norms, and current adoption. In many countries, payment systems have risen and dominated by bending themselves into the tight web of government regulation. In others, they have bought and earned trust. These strategies tend to be dependent on the developmental level of the country. Needs differ like this: in southeast Asia, most people use mobile data to access the internet, meaning latency and mobile applications are crucial; in China, they skipped the credit card era, hailing straight from cash to digital payments, so digital wallets don’t need to account for credit cards, like an Apple Pay wallet.
One of the recent success stories of crypto is Argentina, where more people than ever are receiving their salaries and remittances in crypto and storing their money in DAI and other stablecoins. The driver of this is inflation, and we have seen similar behaviors in countries whose currencies have lost as much value as quickly. However, the existence of such volatile markets are not consistent and such variability does not make for a viable market to plan a business model around.

Will CBDCs take over?

It doesn’t make sense for governments with a CBDC to make existing stablecoins legal tender. If this happens, will there be as much freedom of programmability and usability as there is today for crypto? China has already pioneered the digital yuan, introducing features like a spend-by date, where your currency can expire. These new ways to control money could spur or hamper crypto adoption massively.
There is a strong argument for private blockchains superseding public blockchains. We have yet to see how great the dominance of Onyx, JP Morgan’s blockchain arm, and Visa Crypto, and similar institutional blockchains will be, although it is already shockingly high. These have a leg up in being transparently regulated, instantly deployable to millions of customers, and high consumer trust in legacy brands. CBDCs have all of these perks on an even grander scale.

Will crypto replace cash?