Payments, especially those across borders, are often touted as a key use case and value proposition for the blockchain industry. Unfortunately, a look at both the technology, competition, and regulatory environment doesn’t really support that idea. And the launch of FedNow by the Federal Reserve in late-July is a good occasion to take a look at why, for most people and companies, the value proposition of using crypto or blockchains for basic payment services isn’t very appealing.
Paul Brody is Global Blockchain Leader for EY (Ernst & Young). Under his leadership, EY is established a global presence in the blockchain space with a particular focus on public blockchains, assurance, and business application development in the Ethereum ecosystem.
Blockchains and crypto ecosystems have compelling advantages in other areas, but fiat payments aren’t one of them. First and foremost, simple, high-volume payments are cheaper and faster to execute in centralized systems. Blockchains have complex consensus mechanisms and many nodes in which ledger data is distributed. This means that while centralized payments flow quickly through a single infrastructure, blockchain payments get copied to thousands of nodes and are subject to varying degrees of speed and cost based on network congestion.
Transaction fees for FedNow are expected to be in the range of $0.05 each or less. Automated Clearing House (ACH), the most common inter-bank payment method in the U.S., presently costs between $0.25 and up depending on the provider. Bitcoin fees average around $1, though they can vary a lot, and transaction fees on Ethereum are similarly high and variable. Both Bitcoin and Ethereum have accelerator networks that can bring costs back down towards $0.04, though these are not yet widely available and we don’t have experience with large volumes to know if they will stay that low.
The second big obstacle to widespread adoption of blockchain payments is path dependency. We already have widely deployed simple payment systems linked to debit cards and bank accounts. It’s rare for new technologies to come in and wipe out older infrastructure unless it has a compelling advantage and, in most cases, blockchain payments are at best price competitive, but without many advanced features that retailers and others…
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