By Ralf Gladis, CEO and founder, Computop
We’re all used to paying digitally. Every day when we tap to board a train or pay for our coffee, we make use of digital technology. If we use our smartphone the transaction is smooth because our credit or debit card details are held within our digital wallets and the service provider will either receive our payment immediately, or they will receive a settlement document from their acquirer and payment will be bundled along with all the other card payments they are due at a later date. But can digital payments continue to be so straightforward?
The fact is that while the methods we use to pay have changed and evolved, behind the scenes we still rely on processes and systems that are well-established, and which are strictly governed by regulation and legislation. The framework of regulation allows merchants, payment service providers and consumers to interact with confidence, share data and complete payment transactions smoothly and quickly, whether they are initiated by an app on a smartwatch or on an eCommerce website.
Even as new technology trends emerge, innovations in cross border payments continue apace and banks evolve their role in the payments’ process, these changes are occurring within a carefully controlled ecosystem. However, new developments are shimmering on the horizon and they don’t always follow the same rules of engagement.
Cryptocurrency and the metaverse
Cryptocurrencies such as Bitcoin offered great promise, theoretically, in terms of freeing currency from national borders and central bank-controlled regulation. The reality is quite different. With the range of cryptocurrencies now available numbering anywhere from 10,000 to 30,000, and the value of those different cryptos rising and dropping in value at an alarming rate, many concerned parties, not least those that trade in crypto, are seeing how regulation could bring benefits.
Meanwhile, cryptocurrencies are being widely accepted as the financial bond between the physical world, and the virtual. So far, virtual worlds are proprietary spaces with their own currency, for example Roblox and Fortnite, in which “Robux” and “V-Bucks” are purchased with credit cards or APMs. However, as the metaverse – the online parallel world – and Web 3.0 applications grow to create virtual hubs, users will start to make monetary transactions using local fiat currencies such as the pound sterling or euro, which they will be able to exchange into crypto by setting up a crypto wallet and use a financial exchange to process the conversion.
There is a natural assumption that crypto coins, or even stable coins, which tend to be less volatile because they are ostensibly backed by fiat currencies, fit naturally with the metaverse because they are digital in nature. However, regardless of whether a purchase is being made in the real world, or in a virtual one, it still needs to be authenticated. All the progress made in enabling fast, secure digital payments, depends entirely on the ability of the payer to be authenticated.
In the real world, of course, we use our bank cards, or they are stored on devices and authenticated through face recognition or a fingerprint, or by entering a pin number. This is much harder to achieve in the metaverse where it is challenging to type anything and where providing a fingerprint would not be straightforward. The only biometric authentication method that could currently be supported by a payment service provider, like Computop, in the virtual world is voice control or voice detection.
Central bank-backed digital currency
Against this complex backdrop and recognising the choice of consumers to pay for items using a broader range of mechanisms, the central banks of several countries, including the UK, are looking at the creation of Central Bank Digital Currency (CBDC). The European Central Bank, for example, is considering a digital version of the euro which, unlike private crypto platforms, will have the same backing as its analogue variants: the performance of the respective associated economic area and the trust of the population. The UK digital currency and the e-euro will be able to be exchanged 1:1 for their analogue equivalent at any time, so the exchange rates will not diverge, and the problems of a fluctuating crypto valuation will not exist. In practice both the UK digital currency and the e-euro will also be managed in wallets.
Clearly, the intervention of central banks in the digital currency space will move it towards greater regulation, and while this, and its convenience, will be welcomed by many consumers, it most certainly will not be favoured by crypto purists. A CBDC will fall into the category of a fiat currency and will not have the independence of either cryptoassets or stablecoins. In addition, access to a CBDC will be restricted by geography or the sphere of influence in which the customer operates and it is also likely not to be issued directly but instead transactions will be through commercial banks with a link to current accounts being most likely.
CBDCs are not a solution to the metaverse challenge
A CBDC, while it is as appropriate as any other form of currency, does not solve the challenges of transactions in the metaverse. The development of CBDCs rather is in reaction to the growth in unregulated cryptocurrencies. In the metaverse sphere, in fact, traditional methods of payment like credit cards and bank transfers are probably a more viable option and as Web 3.0 applications start to build-in biometrics, using digital payments such as Apple Pay will actually be easier.
Which brings us back to what the future does hold for consumers who want to buy digital goods in the metaverse. Certainly voice recognition will have a part to play, and we can expect to see support for this from PSPs such as Computop and payment companies. Where big banks, such as JP Morgan and HSBC, and major card issuers including Visa, Mastercard and American Express have already made forays into the metaverse, we can expect many others to follow as financial institutions innovate to respond to the trends.
But what will really determine the speed of innovation and commitment to launch new payment platforms is demand from consumers. While many will continue to accept the risks inherent in cryptoassets, others will look for safer alternatives, and this provides an opportunity for banks and PSPs to innovate, particularly if they want to ensure they can facilitate transactions in the metaverse or in Web 3.0 applications. This means that the onus is on the development of new biometric authentication methods that enable payments to be authorised, regardless of whether the payer is purchasing in this world, or in their virtual second life.
