Why aren’t we there yet?
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The emergence of cryptocurrencies as a popular financial asset brought a new technology to the fore. Some experts even proclaimed blockchain to be as big as the internet, and in 2017 it really started to gain a lot of attention. Not only because of the rise in popularity of crypto, but also because of a growing recognition of the potential benefits of blockchain technology beyond finance. Klaus Schwab, founder of the World Economic Forum, famously included blockchain alongside robotics, the Internet of Things and artificial intelligence as part of what he called 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 make perfect sense if you thought that by now—six years after people really started paying attention—blockchain would be firmly established in the world of payments and transactions. But you are wrong.
For several reasons, blockchain has yet to live up to the hype in terms of being widely integrated as a method or solution for payments. This article will take a closer look at these reasons and conclude what kind of landscape will allow full blockchain adoption.
Regulation
The biggest barrier to adoption is the lack of a clear regulatory framework around blockchain technology. There is a dark cloud of legal uncertainty looming over any blockchain-powered payment method because the technology is inextricably linked to cryptocurrencies. And anything related 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 means that many businesses simply give up and lean towards more traditional payment methods.
Other snags in the chain follow, such as the difficulty of operating across borders due to a 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 burdensome and costly for many businesses.
The clarity and consistency of the regulations must pave the way for legal certainty and protection for businesses and consumers. It is necessary to strike a balance between protecting consumers and promoting innovation in the blockchain and cryptocurrency space.
Volatility
As with regulation, another curse of being associated with cryptocurrency is volatility, which poses the second most important barrier to blockchain adoption in payment solutions.
Cryptocurrency values often fluctuate rapidly in response to market conditions, making any merchant nervous about accepting blockchain-based digital transactions as a form of payment. Similarly, consumers may be hesitant to use a payment method that can quickly lose value, especially if they are unfamiliar with blockchain technology or how it works.
Another challenge created by price volatility lies between the hesitation of merchant adoption and fragile consumer confidence. Payment reconciliation. When a seller accepts a payment in cryptocurrency, they must 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 designed to maintain a stable value against a specific asset or basket of assets – becomes more widespread, the fear of volatility decrease.
Scalability
The limited scalability of blockchain technology is another major challenge to its use as a payment system.
High transaction volumes can overload 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 accustomed to near-instant processing. It is also the limited capacity of blockchains that can prevent their use in industries that require large transaction volumes.
Security risks also arise when blockchains become overloaded, which can leave merchants vulnerable to double-use attacks – i.e. when a fraudster tries to use the same digital currency twice.
To meet these kinds of challenges, major investments must be made in blockchain infrastructure, including scaling solutions and layer 2 protocols. The Lightning Network is one example of such a solution that can improve the blockchain’s capacity to process transactions. It is 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.
Ease of use
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 handling tokens. This creates a feeling of unfamiliarity, which makes the more familiar traditional payment systems much more attractive.
An example of this complexity in 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, creating concerns about the security of their money and turning them away from the payment system altogether.
More investment in user experience design and education could be the key to tackling this challenge. This may involve developing more user-friendly interfaces, creating educational resources to help users understand how to use the systems, and providing support to 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 must be overcome for it to become a mainstream solution.
Regulatory frameworks must be established to provide clarity and security around cryptocurrencies and blockchain technology. Greater education and awareness of cryptocurrencies and their potential benefits can help build consumer and merchant confidence. Issues of scalability and speed must be addressed to enable blockchain-based payment systems to handle high transaction volumes. And the 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 becoming increasingly popular in the financial world in the coming years.
This article was originally posted on FX Empire
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