Wen p2p electronic cash system?

16 years have passed since the Bitcoin whitepaper came out. Bitcoin was cypherpunk cash. Cash means easy payments. But bitcoin found its PMF as 'digital gold', not as 'digital cash'. What happened to cash? What needs to happen for mass adoption of crypto payments? We will go through an overview of common narratives.

The goal of a p2p electronic cash system is sending money without needing a trusted third party like a bank. A great promise capturing the imagination of millions. However, after 16 years it’s fair to say that bitcoin found product-market fit as

Cash is not payments. Cash payments are simple and direct, involving only the sender and the receiver of the money. When we say payments, we often mean paying for a coffee. When you make a card payment it is a complex and rich bundle of services. It involves authentication, rewards programmes, consumer protection (chargebacks, dispute resolution etc.). These added services make traditional payments more complex and more expensive for cases when these extras are not needed.

So why has bitcoin not become p2p electronic cash?

Simply put, for Bitcoin to become an important cash alternative, it would need to be widely accepted. There is the simple maximalist thesis: simply use Bitcoin instead of cash. This approach was attempted by early adopters such as Bitcoin, Dash and Litecoin. There are two primary challenges here.

1. There is the general issue that bootstrapping payment networks is extremely hard. They tried to bootstrap these blockchains as payment networks. To bootstrap a payments network is incredibly hard. After all, a payment recipient is likely to need the cash in a broader payments system. A sandwich shop will take a part of their daily revenue to pay for the bread the next day. This means they would have to offramp anyway. This would only be possible if you had a sufficiently cheap offramp which would in turn require a banking or offramping partner who would accept money that originates from crypto assets. This problem is largely solved today.

2. Then, there is the more specific issue that the dollar price of Bitcoin increases with adoption, which creates a disincentive to spending it. Non-stablecoins usually behave more like commodities, the more popular they are, the more expensive they get. This makes hoarding and speculating more attractive than using it for money.

An Onchain TransferWise

A radically different approach would be making the blockchain is invisible to the end users. That is, only settle onchain. This assumes that both parties can simply deal with fiat. At first glance, this seems like a good idea.

After all, some subset of tradfi payments have been broken for years. There are many unrelated inefficiencies. For example, international transfers often involve multiple intermediaries and high fees due to a complex system of inter-bank agreements resulting in several "hops" as a payment moves between various institutions. This complex process increases both the cost, uncertainty and time associated with the transfer.

These come from the very nature of tradfi, which relies on custody and debits. Since the Medici Bank in the 15th century, the fundamental principle of depositing funds into custody and settling them on a general ledger with debits and credits. This system relies on two basic mechanisms. First, custody solved the issue of carrying your net worth on you in bandit-ridden Europe. Second, debiting allowed sending money across branches, thereby allowing for cash to be teleported across borders. Branches settled funds between each other. After interbranch money transmission, the next step was interbank sending. Banks would debit each other and thereby accept debit from another bank’s client. This, however, requires custom agreements and trust between the banks.

This becomes more obviously inefficient when doing international transfers between rare country pairs. In such cases, two local banks will not have any relationship with another. The debiting bank might need to go through many banks until it reaches the destination bank in another country.

In such scenarios, an onchain payment would be more efficient even if it were 10X more expensive. Clearly, there is a subset of transactions that would be done more efficiently with this extremely cheap global settlement.

Yet, few businesses want to accept Bitcoin or stablecoins as Bitcoin or stablecoins. Why would that be? If two merchants know that a tradfi payment cost is 5% but an onchain payment costs <1%, then both should be willing to make the switch.

Maybe, then, we could have a brilliant startup idea: an onchain TransferWise. Transferwise has many bank accounts in many countries. This lets them front the funds to your destination country easily. Instead of doing many hops, they simply settle the balances internally. So if you’re sending money from Tbilisi to Seoul, you only need to do one hop through Transferwise, rather than many hops that would you with a normal transfer. It seems like one could replicate this easily on a global scale using crypto, which is global already, without having to set up as many accounts as Transferwise.

However, if this idea needs fiat bank accounts on both ends anyway, then it is clearly easier to settle internally, than onchain. TransferWise simply lets you send money to a Tbilisi bank account, and then fronts you the funds at the destination in Seoul. They rebalance in batches at a later point, which makes it cheaper and more efficient than doing a traditional transfer with its many hops.

Anyway, this "TransferWise but onchain " model hinges on the cooperation of banks. Convincing at least two banks to process Bitcoin payments or even fiat coming from Bitcoin exchanges is hard. Banks are prejudiced and have regulatory concerns like AML compliance. The crucial point is that it is easier to convince two banks to do a standard deal around debiting than to accept money coming from crypto. And one would need two banks to collaborate with you anyway. If you have two banks do what you need them to do, then just settle between them with a private ledger rather than the global one that Bitcoin offers.

The main point here is that common narratives such as:

• Blockchain payments can’t have large scale adoption because they do not have the technical scalability for it.

• Early cryptocurrencies (non-stablecoins like Bitcoin, Dash, Litecoin) are volatile and therefore unsuited for payments.

• Being public and not having private transactions makes blockchains unsuitable for payments.

• Blockchains rely on private-public keypairs which are hard to manage and prone to hacking, which prevents mainstream adoption.

All of these are dwarfed by the real issue which is the interoperability of crypto, primarily to fiat rails. The reason is for ‘crypto TransferWise’, especially one for larger b2b transactions, is unaffected by any of these issues. Let’s look at them one by one.

Scalability

Bitcoin can already and always has been able to handle large transactions, such as a million dollar transfer, for a fee of just $1 (and 5 cents on Lightning). This is significantly cheaper than traditional methods, especially for international transfers, which often involve multiple intermediaries and high fees. Therefore, while scalability might be a concern for some types of payments, it is not a major obstacle for large transactions where speed is less critical.

Volatility

In our TransferWise-like model, Bitcoin only replaces the international hops. That is, to do an international transfer, we have a fiat-to-crypto trade at an exchange in country A, and then a crypto-to-fiat exchange in country B. That is, volatility is irrelevant because the funds are bought and sold within seconds, where price movements would be small. In fact, smaller than any fees charged by banks for international fees.

However, even if we had very cheap and fast on- and off-ramps (which we only start getting now), the issue still persists: it’s easier to settle between two banks with fiat than to convince them to accept money that comes from crypto exchanges.

Privacy

Privacy: While privacy is undoubtedly a crucial concern in a world with widespread on-chain payments, it is not the primary obstacle to adoption currently. The current volume of on-chain payments is too small for privacy to be a major factor. Furthermore, specialised blockchains like Zcash or Monero could provide hard privacy and existing centralized solutions can already provide a degree of soft privacy for users. Using these to settle would solve the issue.

Accounts

Finally, some argue that the complexity of account management in cryptocurrencies is a barrier to adoption. Managing private keys, wallets, and security measures can be challenging for users unfamiliar with the technology. However, for certain types of payments, especially larger business-to-business transactions, professional custodians can manage these complexities, making the process smoother for businesses. While simplified account management tools are undoubtedly beneficial for broader adoption, they are not the main obstacle preventing crypto payments from taking off.

Interop

Interop is the main challenge for payments adoption. Interoperability is necessary to exchange value. This interchangeability is a fundamental characteristic of money, allowing it to function effectively as a medium of exchange.

Interoperability in practice means establishing compatibility between different blockchains, diverse tokens, crypto and fiat systems, and - as importantly - traditional payment rails. For example, users should be able to transfer funds between different blockchains without friction, or seamlessly convert stablecoins to fiat currency. This level of interconnectedness would unlock numerous use cases and make crypto payments more practical for everyday transactions.