Making sense of cryptocurrency: What you need to know

Cryptocurrencies at a glance

There are over 18,000 cryptocurrencies with a market capitalization of $1.7 trillion. Not only that, but an estimated 300 million consumers own cryptocurrencies. While blockchain-based cryptocurrency might still be considered niche today, the numbers show that it may not be a niche much longer.

Cryptocurrency and blockchain

Most cryptocurrencies are built using blockchain technology, which is essentially a public, distributed ledger. A single entity does not own the system of record, and multiple entities within a network can validate the legitimacy of a transaction (called a “block") or the ownership of an asset. The benefit of using blockchain technology is that it solves problems of record keeping and creates a public audit trail for all types of transactions, including cryptocurrency payments.

Cryptocurrencies have become a new store of value for many individuals, relying on security and encryption many don't understand. Often referred to as digital coins, cryptocurrencies are privately owned or created—and are currently largely unregulated. Moreover, cryptocurrency is inherently unstable since the value is determined by supply and demand.

The emergence of stablecoins

In 2021, the supply of stablecoins—cryptocurrencies that use physical commodities (like gold), assets (like stocks), or fiat currency (like the US dollar) as collateral—grew by almost 500% year over year, with a market capitalization over $127 billion. While still unregulated, stablecoins are potentially less volatile than other cryptocurrencies because of their collateral backing, making it easier for financial institutions to validate transactions and participate in blockchain networks.

The potential of central bank digital currencies

Don't expect governments and central banks to let themselves fall behind in the cryptocurrency conversation. To avoid undermining monetary control presented by asset-backed stablecoins, central banks are considering the introduction of digital currencies backed by fiat currency, known as central bank digital currencies or CBDCs. Around the world:

• Nine countries have fully launched a central bank digital currency (CBDC), including Nigeria and The Bahamas.
• 14 countries are piloting CBDCs, including China and South Korea.
• 87 countries are researching or developing a CBDC, including the US, Canada, the UK, and several EU countries.

Regulation

Other countries are considering how to regulate digital currencies. In March, US President Biden signed an executive order calling on the government to examine the risks and benefits of cryptocurrencies—the first step to a federal approach to regulation and oversight. In addition, the International Monetary Fund is actively advocating for a unified regulatory approach to protect the stability of the global financial system. Expect more development as governments take a more active role in regulating cryptocurrencies.

Looking to the future of cryptocurrency

According to Andrew Mathieson, chief enterprise initiatives officer at Global Payments, cryptocurrencies—or any digital currency—are just new forms of money. Any way money can be used today, digital currencies could theoretically be used in the future. That includes the ability to purchase and hold cryptocurrencies in a digital wallet, earn rewards or redeem loyalty points, and yes, even the ability to use cryptocurrency as the agreed-upon tender between businesses and their customers.

Yet there are hurdles to overcome for crypto to become a pervasive form of money.

Because of the volatility of unregulated cryptocurrencies, it might be years before we see the majority of businesses accepting cryptocurrency for payment. Even though companies like Starbucks accept cryptocurrency payments today, the volatility presents a risk too high for most companies.

Crypto-as-rewards

It's more likely in the near future that the list of companies offering cryptocurrency as rewards will expand. In fact, 44% of Americans would be interested in receiving cryptocurrency as a reward in place of traditional cash-back programs, setting the stage for new business opportunities. For example:

• Shake Shack now offers rewards in Bitcoin for its customers that pay through Cash App.
• Cryptocurrency exchanges BlockFi and Gemini plan to launch credit cards offering Bitcoin as reward points.
• Venmo card holders can trade their monthly cash-back rewards for crypto.

It all adds up to the fact that we're going to see more companies leverage crypto-as-rewards in 2022 and beyond.

"Offering cryptocurrency rewards can help brands attract and engage with younger audiences, driving richer consumer experiences and increased brand loyalty." —Dan O'Prey, Chief Product Officer at Bakkt

“Offering cryptocurrency rewards can help brands attract and engage with younger audiences, driving richer consumer experiences and increased brand loyalty," said Dan O'Prey, Chief Product Officer at Bakkt. “Our recent survey found that 72% of those who purchased crypto in the past six months are likely to redeem loyalty points for cryptocurrency and about half are interested in earning crypto instead of points. As a result, loyalty programs can be on the leading edge by providing customers with the option to earn rewards or redeem rewards for crypto."

Crypto-as-an-investment

Digital wallets drive comfort for future crypto use

The growing use of digital wallets and person-to-person digital payment apps like Venmo and Cash App contribute to increased consumer comfort with digital currencies. And it may well turn the tide for cryptocurrency's use for consumer purchasing. If you can use a digital wallet to pay for goods and services with your credit or debit card, why not use the cryptocurrency you have stored there as well?