In recent years, cryptocurrencies have become very popular as an alternative currency for payments instead of universal fiat money. Let’s get to the point: what are the advantages of decentralized digital coins over traditional payment networks, such as credit cards or bank transfers? In this article, we’ll analyze the key differences between crypto payments and legacy financial systems to understand what value this new technology brings to the table.
Fees
One of the main selling points of pay with crypto is lower fees. Most credit card processors charge a merchant between 2 and 4 percent per transaction and other flat fees. These fees can be a big hit to small businesses or merchants selling low-margin products.
On the other hand, bitcoin transaction fees are generally less than a dollar per transaction for any amount of transfer. There are lots of smaller cryptocurrencies with average fees under $0.10 and free transactions. That’s why crypto fees can be so low: There is no bank or payment processor taking a cut of each payment. Instead, the network is maintained by its users, mining or staking.
According to statistics from credit card processor Square, business owners can save an average of 2.6% on transactions by accepting crypto payments. Obviously, this doesn’t sound like much, but it can make a big difference in profitability for small businesses. If a café sold $10,000 worth of coffee per month, that café could save about $260 that would have gone to credit card fees.
Speed
Slow settlement times are another significant issue with conventional digital payments. While credit card and debit card payments seem instant, the actual money transfer between banks and businesses takes 1-3 business days on average. This creates cash flow issues and headaches with accounting.
But cryptocurrency networks have an average of under 10-minute transaction time, and they offer near-instantaneous settlement. Stellar Lumens and Nano, for example, can confirm payments in less than a second. This opens up new use cases such as cross-border e-commerce, where buyers don’t need to wait days to receive the order.
According to data from CoinMarketCap, the average Bitcoin transaction time is currently around 10 minutes. Compare this to an average of up to 3 business days for bank wire transfers – up to 480 times slower. The lightning-fast settlement of crypto has the potential to accelerate business activity across many industries.
Anonymity
The debate around whether cryptocurrency transactions should be anonymous is hot, but the fact is that most popular blockchains like Bitcoin and Ethereum are pseudonymous. This means that transactions happen from blockchain addresses instead of real-life identities.
Yes, there are ways for advanced blockchain analysis companies to reveal identities behind addresses. But in general, crypto payments offer far more privacy than credit cards or bank accounts, where all your data is linked together in a centralized database.
In fact, up to 30% of all Bitcoin transactions used some form of coin mixing or tumbling to provide increased anonymity, according to estimates. The demand for anonymous internet payments continues to grow rapidly.
This doesn’t mean crypto is mostly used by cybercriminals, as some media outlets imply. However, cryptocurrencies now enable anonymous global commerce, a capability that was previously unattainable.
Security
What happens when a shopper’s credit card gets hacked or a fraudulent transaction goes through? Consumers aren’t liable for fraud, so the bank itself eats the cost of reimbursement and charges higher fees to merchants to offset losses. This system incentivizes banks to pass liability for security holes onto businesses instead of fixing them.
In crypto, however, transactions are irreversible by design, so there is no concept of fraud reimbursement or liability. Security needs to be airtight from day one. This makes cryptocurrency networks far more resilient to hacking, phishing, and fraud, despite what some mainstream media coverage may imply.
Less than 1% of crypto assets have been stolen via hacking thus far. On the other hand, banks and financial institutions lose an estimated $40 billion to fraud every year.
So while crypto holders need to take responsibility for their own security, the system as a whole may end up more robust and secure than legacy financial networks that have too big an attack surface.
Accessibility
Today over 1.4 billion adults globally are unbanked, according to the World Bank. These individuals have no access to basic financial services that most people take for granted, like receiving direct deposits or making digital payments.
Cryptocurrencies, however, only require an internet connection to access. It takes minutes to receive funds from anywhere in the world using a free Bitcoin wallet you download on your smartphone. It offers new possibilities for financial inclusion in developing countries.
In fact, peer-to-peer crypto platforms have provided accessible international remittance services used by over 8% of all unbanked households in developing countries, according to P2P payment platform Sendwyre. The most crypto-friendly countries are often those in South America (Venezuela, Iran & Nigeria), where the locals are searching for alternative stores of value and payment tools during political instability and hyperinflation.
While crypto may still be complicated for non-tech-savvy users, it’s now far easier for the average person to gain access to digital payments compared to opening a traditional bank account. That’s a big step towards democratizing finance.
Environmental Impact
Crypto networks are controversial for their sustainability. In 2022, the Bitcoin network alone used around 205 TWh per year, more than many small nations. This is because Bitcoin utilizes proof-of-work consensus and demands the usage of energy-hungry computing from mining rigs around the world in order to secure the network.
However, the actual carbon footprint of crypto may not be as bad as it seems at first glance. 76% of Bitcoin miners already use renewable energy, according to the Bitcoin Mining Council. In addition, proof-of-stake and off-chain settlement layer models are quickly gaining traction. These alternative models reduce energy consumption by well over 99% compared to proof of work.
So the common criticism that crypto is an environmental disaster is somewhat overblown and mostly applies just to Bitcoin specifically. Emerging Layer 1 blockchains and Layer 2 solutions are introducing far more carbon-efficient settlement.
Even if we conservatively estimate that Bitcoin mining uses 127 TWh of renewable energy per year, that’s still less than half the energy consumed by idle home electronics in the US alone, according to an analysis by the International Energy Agency. And it secures a $1 trillion global payment network in the process – not bad compared to traditional finance!
Regulation
Regulation of cryptocurrency and decentralized finance (DeFi) is still behind traditional finance. Still, policymakers are struggling to determine the right rules for this new asset class. Is crypto legal money or an investment asset? How can we implement KYC/AML policies on pseudonymous chains? What agencies should provide consumer protections without stifling innovation? There are no easy answers.
The complex cross-border nature of crypto also makes consistent international regulation extremely difficult. A decentralized network of nodes and miners does not fit neatly within traditional jurisdictional boundaries. While the EU, UK, US, and others are now establishing crypto frameworks, significant uncertainty remains. And some countries, like China, have opted to ban crypto entirely, cutting off citizens from financial innovation happening in the rest of the world.
Crypto regulation is still the “Wild West” in many ways. For traditional financial institutions and law-abiding businesses, this regulatory uncertainty can create legal risks. However, regulation is beginning to catch up. The percentage of Bitcoin supply held on regulated exchanges has increased from 5.5% in 2019 to over 14% today, indicating the gradual maturation of the space as traditional finance gets involved.
Conclusion
Four key advantages of cryptocurrency payments over traditional financial networks can be singled out: lower fees, quicker settlement, greater accessibility and extra privacy options. This is driving rapid mainstream adoption and the benefits behind it. Recently, global crypto transaction volumes crossed $15 billion per day, on par with the likes of Visa.
But critics are right to say that sustainability and regulatory uncertainty are still challenges for crypto, particularly Bitcoin mining. Inexperienced users who must self-custody funds are still at significant security risk. Unfortunately, cryptocurrencies have also made it easier for cybercriminals to perform certain cybercrimes by providing increased anonymity.
In the end, though, the fact that this money is programmable, permissionless, borderless, and digital-first and ultimately controlled by users rather than institutions cannot be overstated. The technology still has progress to make, but the value it could potentially unlock for society is huge, just like the early internet.
Cryptocurrencies aren’t going away anytime soon. And while the volatility and hype in this emerging space deter some, the efficiency gains for payments are very real. We’re likely still only scratching the surface of what open, neutral settlement networks can achieve as programmable money built for the digital age.
The post Crypto Payments vs. Traditional Methods: What Are We Really Gaining? appeared first on Live Bitcoin News.