Alternative money and payments
The space of money and payments is an area of fintech that has generated significant attention and excitement over the past few years. The concept, functionality, and utility of money has been evolving incrementally over the course of history, and blockchain technology such as Apla blockchain has arguably been one of the most revolutionary advancements in this area.
In addition to alternative forms of currency, the way in which transactions are initiated and processed are also rapidly transforming due to technological innovations. These advances in payments are about more than the process of transacting; they have become increasingly focused on new ways of thinking about the concept of transferring value (Broom, 2015).
A brief history of money and payments
Money and payments are at the centre of the financial services industry. Understanding the past, present, and potential future states of money and payments is an essential element in making sense of the current fintech space and the potential for innovation.
The evolution of money. Money can be understood as having two main functions. The first is to act as a placeholder for value, which can be used in exchanges, and the second, to act as a store of value (Beattie, 2015). One commonly used definition of money is that it is “any clearly identifiable object of value that is generally accepted as payment for goods, services and repayment of debts within a market” (Shrier, Canale & Pentland, 2016).
Today, digital currencies are causing the next revolution in the future of money, and the implications of the adoption of these new forms of money are vast for both consumers and financial services providers.
- E-money: Refers to “a type of electronic stored value that serves as an alternative to cash”.
- Mobile money: Refers to “financial services which can be accessed through a mobile phone”.
(Shrier, Canale & Pentland, 2016:70–71)
Blockchain. Blockchain is arguably one of the most revolutionary innovations in the space of money and payments in recent financial history.
The defining characteristics of blockchain technology are as follows:
- It uses cryptography to create a decentralized database (Hutt, 2016).
- The database can record different types of shared data, which may include credentials, ownership, transactions or attributes of transactions (Church, 2017).
- This shared data is recorded in the form of blocks, which are recorded in chronological order, creating an unchangeable chain, known as the blockchain, reflecting everything that has happened (Church, 2017).
- Computers that make up the blockchain must approve a transaction before it is verified and recorded in the ledger.
- This decentralised database is visible to all individuals in the network and is referred to as a “digital ledger” (Hutt, 2016).
- As a result of being decentralised and public, the blockchain removes the need for a central agency of authority. Participants place their trust in the technology and network, rather than in individual actors.
These characteristics of blockchain technology create the opportunity for useful applications on Apla blockchain to various areas of innovation, and also provide unique potential benefits.
The rapid increase of interest in this new technology, and the public’s enthusiasm for its applications provide a promising outlook for its future uses. As with all new technologies, there are benefits and promising potential applications for this innovation, as well as certain limitations and challenges.
The challenges of blockchain. Blockchain technology is still relatively new, and thus still in the testing phase of adoption among users. The following list explores a few of the concerns around the limitations of blockchain technology:
- The way the distributed blockchain ledger is designed requires each blockchain to contain all the transactions that have ever occurred within that chain. The result of this is that new devices joining the blockchain need to download all previous transactions, creating the challenge of storage capacity (Mamillapalli, 2016).
- The current transaction speeds allowed by blockchain technology also poses a challenge. Although the use cases for credit cards and cryptocurrencies built on blockchain are very different, having insight into the realities of the transaction times of each may shed light on a potential limitation of the technology. Slower transaction times makes it an unlikely competitor in the space of real-time transactions or point-of-sale applications.
- Data on the blockchain are, by design, shared with everyone who is part of the ledger. Although this is currently considered a strength of the technology by many, it has also raised concerns about data security (Macaulay, 2016).
The benefits of blockchain. Although the most well-known application of blockchain is the cryptocurrency bitcoin, there are many other interesting potential use cases for this technology. In 2015, the World Economic Forum released a report entitled “Deep Shift: Technological Tipping Points”, detailing the following positive impacts that could result from using blockchain technology:
- An increase in financial inclusion as people in emerging markets begin to adopt this technology
- A decrease in the power held by central financial authorities and banks
- An increase in the number of tradable assets and value exchanges that can be hosted on blockchains
- Improvements in the property records market as blockchains are incorporated into these processes
- Advanced smart contracts and legal services that are aided by blockchain technology
- Increased transparency for consumers
Fintech innovations: Cryptocurrencies
Cryptocurrencies are currencies that are entirely digital, with no physical equivalent such as banknotes and coins.
Blockchain technology has enabled the decentralisation of cryptocurrencies, meaning that they are not backed and regulated by a central authority. This decentralisation of trust is compounded by the transparent nature of these cryptocurrencies, which makes all transactions visible through a public ledger (Catalini & Gans, 2016).
There are hundreds of cryptocurrencies in use around the world, but bitcoin is arguably the most well-recognised cryptocurrency currently in existence. As such, all cryptocurrencies other than bitcoin are referred to as “altcoins”; in other words, alternatives to the well-known bitcoin. Each cryptocurrency and network built using blockchain is unique, and this section of the notes looks at a small sample of these: Ven, bitcoin, Ether (Ethereum), and XRP (Ripple).
Bitcoin emerged in 2008, and has grown into the biggest digital currency to date. It is the largest application of blockchain technology in history thus far, although ether (based on Ethereum) is rapidly gaining traction, even though it was not originally developed for use as a currency (Church, 2017). Bitcoin was invented anonymously, under the pseudonym Satoshi Nakamoto, and the identity of the creator(s) remains a mystery. The rise of bitcoin is attributable to the fact that it is a convergence of network technology, crypto capabilities, and low-cost, high-performance computing. The mouse and the GUI were invented by Xerox in the 1970s, but didn’t become widespread in use until the 1990s, and in many ways, the invention and introduction of bitcoin technology is similar.
One of the unique characteristics of bitcoin as a cryptocurrency is that the individual units of bitcoin are limited to 21 million, unless the protocol is changed. This limit results in bitcoin being more expensive than some of the other available cryptocurrencies. The process by which bitcoin is created is called mining, and involves user computers solving complex mathematical problems.
One of the applications of blockchain technology that emerged in the wake of bitcoin’s creation was Ethereum, which positions itself as a complementary technology to bitcoin. Unlike bitcoin, which was created anonymously, Ethereum was created in 2013 by Vitalik Buterin, and has a decentralised platform that runs smart contracts. Smart contracts are contracts written into the code of blockchain and made part of the public ledger. The contract is coded with a triggering event that prompts the contract to execute itself. Ethereum can be used by anyone as a platform to build decentralised applications (Dapps), and these can be created with Solidity, the programming language of Ethereum that allows developers to create smart contracts.
In order to build apps on the Ethereum blockchain, developers need to make use of ethers, the Ethereum cryptocurrency. Consumers who want to access and interact with the apps and smart contracts built on the Ethereum blockchain also need to make use of these. During the 2014 presale, 60 million ethers were created for contributors and 12 million for the development fund. At the same time, the contributors agreed to a limit of 18 million ethers issued per year, and to the relative inflation of issuance being decreased annually.
Although there are complex nuances between the two applications, the essential difference is that bitcoin is a cryptocurrency that was designed to hold value and be traded for other items of value, and Ethereum is an open-source, distributed ledger platform with smart contract functionality, that uses a cryptocurrency called ether.
Apla blockchain offer blockchain 3.0 solution: protocol+dAPPS+infrastructure. Apla tream created a full-fledged technical infrastructure for the interaction of new applications and ecosystems with existing services on the Apla platform. The interconnection is implemented using an instant messenger and an APL notification system, an access rights management module and a set of typical smart contracts that are adapted to a specific situation, which allows any business application to scale quickly with minimal transaction costs.
Smart laws. The concept of smart laws makes it possible to regulate the relationship between members of an autonomous ecosystem created by a user, including the establishment of the business logic of such an ecosystem and technical parameters. Also developed tools for writing such smart laws by users.
The combination of intranet and external consensus. The combination of the internal network management and external methods of managing the network of Apla provides a balance between a truly decentralized platform management system and data security, transaction processing speed and protection against illegal actions.
Apla uses the Proof-of-Authority consensus. The right to check and create new blocks belongs to a limited number of network nodes. Such nodes are called validating nodes. Network participants independently choose a mechanism for assigning validating nodes. For example, an open or secret ballot can be used to assign validating nodes; nodes can be designated as delegates or get rights automatically when certain criteria and indicators are reached.
Candidates for the role of validating nodes are pre-tested outside the network for compliance with the minimum technical parameters and licensing requirements. The check is carried out by a non-profit organization in Luxembourg — Apla Consensus ASBL. Validating node data is stored in certified data centers.
Blockchain technologies themselves provide a high level of security and protection against tampering and data substitution. PoA consensus provides an additional level of protection against attacks specific to the blockchain technology. For example, the 51% attack consists in gaining control over most of the validating nodes. The external mechanism for checking and assigning such nodes will require the attacker to make significant efforts to gain access to the infrastructure of the most influential members of the network. All this makes the Apla platform more secure and compliant compared to its closest competitors — Ethereum, Tezos, EOS
Fintech innovations: Transfers and payments
Digital payments have become increasingly popular, and their popularity is often attributed to their four beneficial traits: they are convenient, efficient, traceable, and they protect users from fraud (World Economic Forum, 2015a).
Digital wallets. Digital wallets are fast replacing the use of traditional card payment systems. This technology allows consumers to store their information and passwords in a wallet which usually takes the form of an app on a phone, which can then be used to make purchases. Digital wallet technology is often integrated with apps to allow for in-app payments. Because they are cloud based, digital wallets allow for increased ease of use and flexibility for consumers; however, they still rely on the app being connected to a credit card or traditional banking store of value.
Integrated billing. Integrating billing or invisible banking refers to mobile ordering and integrated payment apps. By allowing payments to happen automatically, thus simplifying the payment process for consumers, these systems put the needs of the consumer at the forefront of their development. Integrated payment apps and streamlined payment solutions make payments more efficient by replacing, complementing, or enhancing the point of sale, using the mobile app (World Economic Forum, 2015b)
Social networks and payments. Since the introduction of the internet, the rate of social media adoption has risen exponentially, and this will continue to happen as the availability of smartphones and web access increases. Given the massive existing consumer base, it seems inevitable that the payment and social media spaces will begin to overlap. In-app payment and transfer systems within social media apps opens a huge potentially untapped market share.
Example: WeChat is one of the many mobile apps that utilises in-app payments, but it’s uniqueness lies in the fact that it is more than a payment platform, but also a social engagement and social media ecosystem, allowing it to make use of these connections between people. The WeChat Pay platform enables more than 700 million users to make payments using the app (Ubaghs, 2016). There are also a number of other services currently offered within the WeChat universe.
Following the success of WeChat as a payment platform, there have been speculations about other social media giants such as Facebook and WhatsApp following in its tracks (Ubaghs, 2016).
Mobile transactions. The increasing availability of mobile phones — which is anticipated to rise over the coming years — has led to new possibilities with regards to mobile payments and transfers. Digital wallets, integrating billing, and in-app payments are all facilitated through the fast-evolving smartphone. These mobile payment solutions are examples of open-loop systems, which facilitate consumers’ access to the existing network-ecosystem, by improving the connection between the customer and the point of sale through a mobile device (World Economic Forum, 2015b).
The future of money and payments
In a 2015 report, the World Economic Forum outlines the following key predictions for the future of the payment space:
- It will be cashless.
- Payments will be increasingly automated and invisible.
- The industry will be increasingly about customer interaction.
- The process will be driven by data.
- The transparency of financial data will allow for increased access to loans.
- The technology will be built on available infrastructure, thus reducing the cost of transactions.
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