It’s been said that money is composed of four functions, ably described in this Victorian couplet from William Stanley Jevons’ “Money and the Mechanism of Exchange:”
Money's a matter of functions four,
A Medium, a Measure, a Standard, a Store.
Cryptocurrencies, the latest instruments to lay their claim to being money, have been making an increasingly convincing case for being a “store”, meaning a store of value. Bitcoin, in particular, has come to be regarded as a digital substitute for gold, which is mostly acquired for its ability to hold value over time.
But cryptocurrencies, including Bitcoin, set out not only to become inert stores of value, but also dynamic media of exchange, the “medium” mentioned in Jevons’ lyrics. Indeed, the Bitcoin white-paper, the document that started it all, is subtitled “a peer-to-peer electronic cash system.”
Bitcoin’s early promise lay in a vision to create a payments network that relied on no central intermediaries. That included central banks who issued and circulated cash; credit card companies who ran the electronic payment networks that routed around physical cash; and commercial banks who could handle your cash for you. The first line of the Bitcoin white paper’s abstract says:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Yet this medium of exchange function of cryptocurrencies has lagged its story as a store of value. Recent weeks however, have seen a resurgence in interest in using cryptocurrencies for payments. The owner of the New York Stock Exchange has, through its startup Bakkt, released a wallet that combines Starbucks loyalty points with cryptocurrencies so that people can spend their Bitcoin on a Frappuccino.
But perhaps the case that generated the most interest has been Visa’s trial with a partner to settle accounts using a cryptocurrency. The test, which took place last week, saw a Visa card issuer called Crypto.com, an exchange, pay Visa with a cryptocurrency called USDC, which is a stablecoin on the Ethereum blockchain.
News outlets covered the Visa announcement with various degrees of confusion. Many outlets described the transaction thus: someone who holds a Visa card issued by Crypto.com could pay for a coffee, or some other thing, with cryptocurrency, and this cryptocurrency could be passed on directly to Visa, instead of being converted to fiat first.
This scenario is slightly inaccurate, and it speaks to the complexity of the payments infrastructure. As Michel Rauchs, a managing director of the consultancy Paradigma, explained to me, what’s really happening with the Visa trial is this: Visa card-holders buy their coffees and other stuff with their cards. The merchants get paid in fiat by Visa. At the end of each day, Crypto.com has a mass of transactions to settle. Once it nets out all those transactions, it’s left with a balance that it has to settle with Visa. It settles that balance in USDC, the stablecoin, by sending a sum to an Ethereum address in Visa’s name that’s held at Anchorage, a one of a handful of new “crypto banks” in the US.
What’s interesting about the Visa case isn’t the erroneously reported case of card-holders paying directly in crypto for their goods. Instead, it’s the fact that Visa is now accepting payment in a unit of account that exists on the Ethereum blockchain. As Rauchs puts it, “the most interesting thing is that it’s on Ethereum and it’s a public, permissionless network.”
You see, the USDC stablecoin is just another token on Ethereum engineered according to the ERC-20 standard. It exists as a smart contract on the Ethereum blockchain. Anyone can, in theory, create an ERC-20 token on Ethereum, and it’s precisely these tokens that are fuelling the current boom in decentralized finance, or DeFi, on Ethereum. Some $40 billion worth of funds are locked in various DeFi protocols as of today (April 5), according to data provider DeFiPulse.
There’s another angle to the Visa story. While there’s a futuristic spin to the thought of a credit-card network integrating with cryptocurrencies, the reality is a little more prosaic. After all, Visa is a payment network that’s interested in maximizing the number of transactions that take place on it. It’s less interested in how those transactions are ultimately paid for.
“It has very little to do with how crypto itself works,” says Rauchs. “It’s essentially what good old finance always does, which is to be as capital-efficient as possible. You try to integrate [payment methods] into one network and then balance it all out.”
For Visa, and other legacy finance pipes, cryptocurrencies are just another payment method. Fusing cryptocurrencies into the existing pipes simply makes the current system more efficient. But this simultaneously increases the utility of cryptocurrencies themselves, taking them one step closer to fulfilling the classic functions of money. “By integrating cryptocurrencies or whatever digital assets,” says Rauchs, “This is how you will accelerate cryptocurrencies as a potential medium of exchange.”