Is there still value in cryptocurrencies?

A FLURRY of initial coin offerings (ICO), beginning late last year saw billions of dollars being pumped into the purchase of digital currencies issued by startups aiming to raise funding for blockchain applications and development. However, as this bullish sentiment cools, investors are beginning to question the fundamental value of cryptocurrencies in circulation.

Broadly speaking, cryptocurrencies are either categorised as utility tokens or security tokens. Utility tokens act as "digital coupons" that a startup sells as pre-payment for a service or product.

For example, Singapore startup, Electrify, raised US$30 million earlier this year, by selling tokens that allow users to transact with energy retailers. Service tokens derive their value from an external asset and become subject to regulatory compliance hurdles, which is why most tokens in existence are utility tokens.

A major challenge for utility tokens is the fact that outside of speculative investments and low cross-border payments, widespread adoption of cryptocurrencies for retail payments has yet to be seen.

Barriers to widespread adoption

The value of fiat currencies is closely tied to the demand for real goods and services in national economies. The same cannot be said for cryptocurrencies.

In fact, even non-blockchain tokens, such as store coupons issued by major retail brands, fare better than many cryptocurrencies, in terms of being used as payment by the masses. One reason for this is due to the volatility of these cryptocurrencies' prices. Tokens, even major ones such as Ethereum (ETH) can gain or lose up to as much as 60 per cent of their value in a single day. This makes it incredibly problematic as a form of payment, or for retailers' book-keeping.

But a "chicken-and-egg" paradox exists here. Cryptocurrency prices are volatile because they are not widely held and circulated, resulting in merchants and consumers being reluctant to accept them as payment because of their unstable nature.

Another barrier to cryptocurrencies becoming mainstream is the sheer complexity of buying, paying with, and selling them. Converting cryptocurrencies into cash is an additional hurdle.

This is not surprising since the blockchain technology behind cryptocurrencies emerged from cryptographic software development, and only recently moved into the world of financial trading. Its complexity and the jargon involved makes it inaccessible to all but a fraction of people who have the interest and time to comprehend and experiment with it.

The push to make cryptocurrencies mainstream

A number of blockchain projects are attempting to address these hurdles, and encourage the mainstream adoption of cryptocurrencies as a form of payment.

A popular approach in the early years of cryptocurrencies was to allow people to easily purchase these currencies through Bitcoin ATMs. Unfortunately, these ATMs did not make it any easier for people to spend their cryptocurrencies. Projects such as TenX (another Singapore startup), have tried offering crypto debit and credit cards, albeit with limited success due to the suspension of cryptocurrencies' access to Visa's networks in January this year.

Other companies are still persisting in the creation of card-based payment solutions and even traditional payment processors, by riding the rising trend of e-wallets and mobile payments.

The problem is that most of these solutions have largely focused on the individual, and are used for peer-to-peer payments.

Such peer-to-peer payments do not meet the needs of retail merchants - a key component of the financial ecosystem if cryptocurrency payments are to become mainstream. In order to fill this gap, an enterprise-level Point-of-Sales (POS) solution needs to be developed that enables retail merchants to accept payments in cryptocurrencies, as well as regular cash.

Singapore as a cryptocurrency testbed

Compared to other countries such as Japan and South Korea, Singapore has adopted a relatively open approach to blockchain and cryptocurrency. On Oct 31, 2018, Singapore had a "Token Day" project, initiated by Bizkey.

This is a public trial with selected retail merchants using POS systems to accept cryptocurrencies, including Bitcoin and Ethereum, as payment.

Such projects could assist in the mass adoption of cryptocurrencies as a form of payment for consumer goods and services.

These early experiments to push cryptocurrencies into the mainstream are exploratory and experimental. The extent to which such solutions are able to address the chicken-and-egg dilemma in the economics of cryptocurrencies remains to be seen.

Additionally, questions remain as to whether these projects will be usurped by traditional payment gateways and financial institutions that are already experimenting with the use of blockchain-based technologies, such as Hyperledger for processing payments.

However, as the previous spectacular fall of market leaders, such as Kodak and Nokia indicate - sometimes giants, encumbered by internal resistance, bureaucracy or sheer hubris, may not be nimble enough to remain relevant in the face of new and disruptive technologies.

The writer is CEO at Bizkey, a blockchain-based POS platform that provides business intelligence tools to retail merchants.