Just announced by Visa. A lot to unpack here, but one takeaway ...”the move to build the UPC protocol shows that Visa is expecting digital currencies to play a much bigger role in day-to-day payments in the future.”
Updated analysis
So here’s my analysis, and it touches upon a controversial topic that I believe will only grow more relevant and debated as time goes on.
The title to this post comes from the media outlet Crypto Briefing. They use the term “crypto payments” when referencing the applicability of Visa’s interoperability hub.
But this may be a symptom of being in denial; less so optimism, as this news poses an existential threat to crypto.
According to Visa itself — which refrains from using the term “crypto” altogether, choosing instead to exclusively use the more approachable, less controversial (and simply accurate) moniker, “digital currencies” — “[the Ultimate Payments Channel protocol] ... would deliver the kind of cross-chain interoperability that makes CBDC useful and attractive for consumers and businesses globally.”
This distinction in label preference is important for several reasons. One, crypto and digital currencies are not the same thing. “Crypto,” as envisioned by Satoshi with the invention of Bitcoin, must be decentralized. Cryptography in general refers to the study of encryption techniques for the sake of security. Logically, however, the autonomous nature of cryptography, particularly in the context of a “currency,” points to the heart of its purpose, which is decentralization; self-securing rather than centrally secure. In the specific case of “crypto currencies,” the cryptographic innovation is the distributed ledger, or blockchain. This key technology replaces the need for a centralized issuing authority, such as a central bank, eliminating counterparty risk, or moral hazard. This is critical, as that is the whole point of “cryptocurrency.” Therefore the very viability of crypto as a safe currency option stems from the decentralized innovation of the distributed ledger, provided by cryptography.
Visa’s focus seems to, for now, at least, steer clear of “crypto,” focusing instead on central bank digital currencies. Note their exclusive use of the term “digital currencies,” as CBDCs by definition are not secured by decentralized cryptography but by a central bank issuer; hence CBDCs can also be referred to as fiat, as fiat is any currency issued and backed by government, regardless of whether it is digital or not. Their preferred focus on “digital currencies” is likely due to regulatory/compliance concerns, but also based on the obvious fact that they are still a legacy payments company nearly entirely reliant on the legacy currency system, fiat.
Visa’s project on digital currency interoperability is therefore not in the same arena as Flexa’s decentralized collateral system. However, this development and focus on CBDCs points to a future direct threat and competitor, where the public will ultimately have to decide between centralized fiat or decentralized crypto. Flexa’s use case will be threatened because CBDCs as envisioned with the help of Visa’s interoperability efforts will not need to be collateralized.
Though Fed chair Jerome Powell today said he has “no intention to ban” cryptocurrencies when testifying to Republican congressman Ted Budd of North Carolina during a congressional hearing, even he seemed to confound the term “crypto” with “central bank digital currencies,” referring to stablecoins as “like money market funds” that need to be regulated.
What does this all mean?
Visa seems to be in bed with the government, naturally, not just betting on but building a future where CBDCs with their modernized digital innovations will supplant crypto as the exclusive legally accepted digital currency, with stablecoins being permitted to exist under regulation, because of their peg to fiat.
Flexa may still have a use case in the event stablecoins are permitted to be used as currency; though, as alluded to prior, stablecoins may largely become irrelevant if crypto is supplanted/outlawed by CBDCs.
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