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Digital Assets Payments Systems: An Overview

Gunnar Jaerv
Gunnar Jaerv 8 June 2020

Digital assets payment systems work by transferring digital tokens between accounts on a blockchain. At its most basic, this is how Bitcoin works.

If you and I both have Bitcoin addresses (accounts on the Bitcoin blockchain), we can transfer BTC from one account to the other. That’s a payment.

But modern digital assets payment systems are more sophisticated than this.

Now, huge numbers of digital assets are listed on exchanges. Some, like Bittrex, list hundreds. The great division is between centralized and decentralized digital asset exchanges, and while both have their benefits, they both have great drawbacks too.

Centralized digital asset exchanges can list any digital asset, because they’re not operated on blockchains. They’re just websites. As a result, they’re often vulnerable to hacks which have grown increasingly sophisticated and remunerative as the space has grown.

Decentralized exchanges are access points for a blockchain. Exchanges take place on the blockchain and are thus not hackable by conventional means, but there is often very low liquidity, a problem with few users, and many decentralized exchanges struggle to list coins on multiple blockchains.

Others, like OpenLedger, are theoretically capable of listing any digital asset, using a technology that ‘mirrors’ the digital asset inside the exchange’s own blockchain. This is effective but these exchanges have low liquidity too.

The biggest problem faced by these exchanges is that they aren’t user-friendly. There’s no unified structure and no oversight, and the actual exchange interface is a long way removed from the sleek, intuitive interfaces we’re accustomed to using. That’s less of a problem for business use, of course, but businesspeople are still people. It’s tough to attract new users to a novel technology that looks arcane and difficult to use.

Why digital assets payments?

If it ain’t broke, don’t fix it. And we’ve seen that digital asset payment systems come with their own set of challenges. But the traditional payments system is also fundamentally broken.

Traditional finance is using the equivalent of copper wires, or old railroad rails. It’s bumping up against the technical limitations of its infrastructure. Traditional financial transactions require banks to authenticate the transaction, independently, at both ends. Other payment tools like digital credit card purchases actually lie on top of this system, adding another layer of fees and complexity. The traditional financial system has the following systemic issues:

  • Long settlement periods, delaying payments by between three and 14 days
  • Costly processing: the system takes in $40-50 billion in fees annually in the USA alone
  • Cross-border transactions are limited by regulations, customs and infrastructure
  • Data is controlled by third parties
  • Fraud and theft are common, security and privacy are both poor
  • Microtransactions aren’t practical
  • Unbanked people have no access or very limited access to the system
  • Innovations only take place on top of the traditional network — Paypal, etc — rather than structurally

These are all problems that the digital assets space can solve. A fully-functioning digital assets payment system can deliver basic, systemic change at the infrastructure level. Because authentication is built-in, there’s no settlement period. Processing is very low-cost, partly for the same reason, and fees can be totally transparent. Individuals or entities using the system can control their own data and inspect the system’s data safely and securely, transaction size doesn’t matter so microtransactions are fine, and security and privacy are as good as it’s possible to get.

The digital assets payment systems space

What does the global digital asset payment systems market look like?

While the digital assets space is growing and evolving rapidly, and is now in its twelfth year, the digital assets payment system space is still relatively new. Both the business and technological elements had first to mature to the point where it was possible, so it’s a space with few players. Notable among them are PlasmaPay, a ‘free, borderless bank account’ aimed at startups and freelancers, and emphasizing the value of release from cross-border and currency conversion fees; Crypto.com, with locations worldwide and supporting over 20 digital assets; and Finterra, which allows conversion from fiat to digital currency via an API.

Integrating digital assets and traditional payment systems

Building digital assets payments into the global financial system will mean bringing them into line with the regulatory requirements and professional standards that keep users secure when they move from one technology to another — as when they move money from fiat to digital and back. The blockchain can only protect you while you and your money are inside it, after all.

But it’s not just a question of digital assets payments tools reaching the standards required by the traditional finance world. They can also offer an entirely new way of looking at transactions. With a digital assets payment system, you can keep accurate, private and trustworthy records and trace all activity within the ecosystem. This is advantageous and profitable as people can hold their investments and assets for generations. Thus, they can become a tool equally for facilitating investment and payment.

Disclaimer:

Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.