A currency serves two purposes – a medium of exchange and a store of value. So far crypto isn’t good for either, it’s tough to use (you first have to convert it to another currency and that’s costly) and good stores of value don’t fluctuate wildly in price.
However crypto is no longer a flash in the pan either, many very smart people are working developing businesses, tools, and use cases, and prices have dropped – and recovered – for the most popular currencies. The price of crypto doesn’t seem to behave like a classic bubble.
It’s worth separating blockchain from crypto which is a particular use case for blockchain technology. Blockchain promotes trust and verification and that’s incredibly useful (e.g. self-executing contracts). Think about the last time you rented a car. You walked into the lot, they gave you keys, you drive away with something worth $30,000 or more and they simply trust you’ll bring it back.
Trust is crucial to economic activity, and blockchain will matter a lot especially in lower-trust societies but also to allow unknown players to act with trust which expands markets and makes them more contestable. That’s great.
Credit card companies and payment networks are dipping their toes in crypto but financial services is heavily regulated and Treasury Secretary Janet Yellen hates crypto. So we’re not going to see wholesale adoption of crypto in traditional finance. Crypto can undercut traditional interchange pricing perhaps but it won’t be as cheap as it seems today once we layer on regulatory compliance like Know Your Customer sorts of rules that government will impose.
Crypto is a competitor to traditional payment networks, and the existence of low cost alternantives will likely compete down price. Lower interchange rates mean less rewards over time. That’s because it won’t make sense to spend as much to incentivize transactions through the network.
But crypto isn’t going to replace credit cards because credit cards actually bundle a variety of services that are useful to consumers.
- payment clearing
- financing (APR)
- protections – from security of transactions and guaranteeing that you’re only charged for things you buy, and that merchants get paid – plus add-on services like price protection, extended warranty, etc
Crypto and other financial innovations can disaggregate these, but that isn’t the same as replacing them. In other words, new technologies are going to matter but they aren’t going to eat this highly-regulated world.