Blockchain as a Payment System: Why Aren’t We There Yet?

The emergence of cryptocurrencies as a popular financial asset ushered in a new technology to the forefront. Some experts even proclaimed blockchain to be as big as the internet, and in 2017 it really started to get widespread attention. Not only because of the surge in popularity of cryptos, but also due to a growing recognition of the potential benefits of blockchain technology beyond finance. Klaus Schwab, founder of the World Economic Forum, famously included blockchain next to robotics, the Internet of Things and artificial intelligence as part of what he dubbed the Fourth Industrial Revolution.

Today, blockchain is being explored and used in many different industries, from healthcare to supply chain management to voting systems. So, it would be completely logical if you thought that by now – six years after people really started paying attention – blockchain would be well established in the world of payments and transactions. But you’d be wrong.

For several reasons, blockchain has not yet lived up to the hype in terms of being widely integrated as a method or solution for payments. This article will look at these reasons more closely and conclude with what kind of landscape would allow for full blockchain adoption.

Regulation

The biggest barrier to adoption is the lack of clear regulatory frameworks around blockchain technology. There is a dark cloud of legal uncertainty that looms large over any blockchain-powered payment method because the technology is inextricably linked to cryptocurrencies. And anything linked to cryptocurrencies becomes something of a legal headache, due to the uncertainty of the status of the digital transaction being transferred. Is it an asset, a commodity, a security, or a currency? This lack of definition among jurisdictions makes a lot of businesses simply give up and lean to more traditional payment methods.

Other chinks in the chain follow, such as the difficulty of operating across borders due to lack of interoperability between different countries or jurisdictions. Even in countries that have clearly defined regulatory requirements around blockchain-powered transactions, their anti-money laundering (AML) and know-your-customer (KYC) obligations can be onerous and expensive for a lot of businesses.

Regulatory clarity and consistency need to pave the way for legal certainty and protection for businesses and consumers. A balance needs to be struck between protecting consumers and promoting innovation in the blockchain and cryptocurrency space.

Volatility

As with regulation, another curse of being associated with cryptocurrencies is volatility, which constitutes the second most significant barrier to blockchain adoption in payment solutions.

Cryptocurrency values often fluctuate rapidly in response to market conditions, making any merchant nervous to accept blockchain-based digital transactions as a form of payment. Similarly, consumers may be hesitant to use a payment method that can lose value quickly, especially if they are not familiar with blockchain technology or how it works.

Sandwiched between the hesitancy of merchant adoption and brittle consumer confidence is another challenge created by price volatility. Payment reconciliation. When a merchant accepts a payment in cryptocurrency, they need to reconcile the payment against the value of the goods or services they provided. This can be difficult if the value of the cryptocurrency has changed significantly since the payment was made.

If we get to a stage where we have greater adoption and use of cryptocurrencies, or the development of stablecoins – cryptocurrencies that are designed to maintain a stable value relative to a specific asset or basket of assets – becomes more widespread, volatility fears would subside.

Scalability

The limited scalability of blockchain technology is another major challenge for its adoption as a payment system.

High transaction volumes can congest the blockchain, resulting in slower processing times and higher fees. This limits the appeal of blockchain-based payment systems to consumers and merchants, who are sometimes used to near-instant processing. There’s also the limited capacity of blockchains which can hinder their adoption in industries that require high volumes of transactions.

Security risks also arise when blockchains become congested, which can make merchants vulnerable to double-spending attacks – i.e., when a fraudster attempts to spend the same digital currency twice.

To address these types of challenges, greater investment needs to be made in blockchain infrastructure, including scaling solutions and layer 2 protocols. The Lightning Network is one example of one such solution that can enhance blockchain capacity to process transactions. It’s designed to enable faster and cheaper transactions by allowing users to create off-chain payment channels that can settle transactions instantly and without requiring confirmation on the blockchain.

User Friendliness

Finally, the user experience of blockchain-based payment systems can be complex and confusing for non-technical users, which has limited their adoption.

Users may need to navigate unfamiliar interfaces, understand new terminology, and take additional steps to complete a transaction, such as managing their private keys and dealing with tokens. This creates an air of unfamiliarity, which makes the more familiar traditional payment systems that much more attractive.

One example of this complexity of use is that blockchain-based payment systems often require users to manage their own private keys. This can be a potentially intimidating experience for non-technical users, which can create concerns around the security of their funds and turn them away from the payment system completely.

More investment in user experience design and education could be the key in tackling this challenge. This could involve developing more user-friendly interfaces, creating educational resources to help users understand how to use the systems, and providing support for users who are new to blockchain technology.

So, What Needs to Happen?

The future of blockchain as a widely used payment method is promising, but there are several challenges that need to be overcome for it to become a mainstream solution.

Regulatory frameworks need to be established to provide clarity and certainty around cryptocurrencies and blockchain technology. Greater education and awareness about cryptocurrencies and their potential benefits could help to build consumer and merchant confidence. Scalability and speed issues need to be addressed to enable blockchain-based payment systems to handle high transaction volumes. And user experience needs to be improved to make blockchain-based payment systems more user-friendly and accessible to non-technical users.

If these challenges are addressed and overcome, we can expect to see blockchain-based payment systems become increasingly popular in the financial world in the years to come.