Global Finance Is on the Brink of Massive Disruption — Will the U.S. Continue to Lead?
By Thomas Hodge
Since the adoption of 4G LTE — a cellular network technology created in large part by U.S. companies — the globe has experienced a rapid technological transformation that has disrupted legacy industries and transformed every aspect of our daily lives. Uber, Facebook, Instagram, WhatsApp and the many other products that make up the “app economy” have brought about technological change we never could have imaged when internet networks were first introduced. As the U.S. prepares for the roll-out of next-generation networks with the release of the latest in wireless technology — 5G — consumers and the global economy are about to experience a new wave of revolution that will forever change how we communicate, travel and conduct business. One sector taking this challenge head-on is within the financial technology sector and in particular cryptocurrencies.
Today, there are a few services in the app economy that have transformed how we send money and pay for goods and services. Products like Venmo, the Cash App, and Zelle have made it easier for customers to send money to one another. While fast, these products move at a snail’s pace when compared to the power of cryptocurrencies and blockchain technology. Even with products like Venmo sending money and depositing it into your account incurs fees, can take 1–3 business days to process and are limited to just under $3,000 per transfer.
For America’s small businesses issuing cross border payments, Venmo isn’t going to cut it. Thankfully the Consumer Financial Protection Bureau (CFBP) has noticed the work of cryptocurrency companies and their efforts to reduce compliance costs and make it easier for businesses to issue cross border payments.
How the CFBP could kick start the next wave of the crypto revolution
One of the key reasons listed for the CFBPs recent decision to increase the “safe harbor” on cross border payments from 100 transactions per year to 500 transactions — a decision that will significantly reduce compliance costs on businesses — was the “continued growth and expanding partnerships of virtual currency.” The CFPB event went so far as to cite the cryptocurrency company Ripple, and the company’s on-demand liquidity products powered by RippleNet as one of the key services revolutionizing virtual currencies.
By expanding the safe harbor, the CFBP may just open the flood gates and kick start the mass adoption of cryptocurrencies on a global scale. In a 2016 report, McKinsey found that for every international payment transaction 13% of costs are due to compliance. For big businesses, it may be easy to eat these costs and move on, but for the thousands of small to medium-sized businesses conducting business across borders cutting these costs is incredibly important.
In 2019, the Small Business and Entrepreneurship Council reported that of the over 55,000 U.S. businesses exporting to Mexico 57.6% had less than 20 employees and of the over 94,000 U.S. businesses exporting to Canada 61.8% also had less than 20 employees. For any of these businesses conducting less than 500 transactions per year (or 41.6 per month) the decision to use cryptocurrency products to conduct these transactions now has the potential to save firms a lot of money that they’re currently wasting on compliance.
But reducing compliance costs isn’t the only benefit to American businesses brought on by the mass adoption of cryptocurrencies — the other is speed. Typically it takes as many as five days to settle a cross border payment, which in today’s modern times should no longer be the case.
In a 2019 article from the World Bank discussing the impact of distributed ledger technologies — like blockchain technologies — on cross border payments, the authors discussed the difficulty of sending money internationally through traditional means:
“Traditional B2B cross-border payments tend to be slow and opaque, which affects the business and cost structure of remittance service providers…
Moving funds through the current corridors requires transferal through the relevant domestic payment systems, which often have different operating hours and are located in different time zones. For certain corridors, the funds must be routed through several banks and intermediaries before they reach their destination, leading to higher fees and slower payment settlement.
These shortcomings make the cross-border payment industry ripe for disruption and innovation.”
This little known proposed rulemaking from the CFBP is a powerful signal of how blockchain technology is breaking its way into the real economy. If crypto innovators like Ripple and others, develop financial settlement products that can slash over 10% of costs for small to medium companies doing cross border business in North America, imagine the impact on economic growth if the safe harbor rule scales up? It would mean mass adoption is near.
What does this all mean?
Over this last decade, cryptocurrency has been largely a U.S. led industry and innovation with U.S companies working hard to transform the world of finance for the better. The dark side of this debate is that the U.S. government, both Congress and the Federal branch, are moving too slow to create the regulatory framework needed to allow these companies to continue to grow and innovate here in the U.S — a crucial step in our fight against China and to remain a global leader in the technology sector. As reported recently, between 2009 and 2018, China submitted around 7,600 cryptocurrency-related patents — three times that of the U.S., and China’s President Xi Jinping is quickly advancing the nation’s plan to release a state-backed digital currency.
As we close out 2019, we can only hope that Congress, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the CFBP will work together to create a framework that will foster, not crush, the future of the cryptocurrency industry here in the U.S.