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by Sadie Williamson, May 09, 2018

How Blockchain Solutions Can Transform the Payments Industry


Payments

More than eight years have passed since the introduction of Bitcoin and the promise of “a peer-to-peer electronic cash system.” As of today, there are around 1,500 cryptocurrencies — a testament to the power people see in blockchain-based solutions.

Many of the hundreds of cryptocurrencies out there do not focus on payments at all. Instead, they seek to apply distributed ledger technology (DLT) to a wide range of industries, all the way from diamond dealing to cloud storage.

Still, payments remain a key area of competition between the purveyors of blockchain solutions.

Making Blockchain Solutions Mainstream

While the flexibility and scaling issues of cryptocurrencies are still being addressed, it appears likely that blockchain-based payment systems could soon rival our current mainstream payment methods.

Among some of the most interesting scaling solutions currently being developed is a solution known as “sharding,” which effectively gives all users their own child blockchain.

Telegram, a company that has raised a total of $1.7 billion so far from its two pre-initial coin offering (ICO) sales, will adopt this approach. It is becoming increasingly clear that as more projects move from theoretical constructs toward real-world application, continuous adjustment will be required in order for success to be achieved.

In some countries, central banks have received pressure from law enforcement agencies to remove large denomination notes from circulation due to their use by criminals for money laundering.

Crypto exchanges have received similar pressure and have responded by instituting anti-money laundering (AML) and anti-terrorism funding business processes. However, in the blockchain development area, only recently have the dangers and benefits of privacy coins that embrace AML been perceived.

Monero’s unique selling point is its increased privacy that explicitly hides the meta information such as the address a transaction has been sent from. However, while there is a lot to be said for the protection of user privacy, the flip side of this is that there is a lot of room for criminal activity to take place in such a system. Due to this, these kinds of coins will receive greater attention from regulators and, in some jurisdictions, they may even be outlawed. 

Anonymity is not a required feature of cryptocurrencies. However, blockchain technology is often described as a “trustless” ledger, meaning it is not necessarily a requirement for users to know where transactions were sent from. However, it is becoming clear that such anonymity could become a barrier to wide-scale adoption in the future if governments choose to increase regulation.

As a result, a coin that shuns anonymity may actually be favored among regulators and, thus, more easily accepted by the general public.

Solving Real-World Payment Issues

With these issues in mind, one possible solution could be creating a way for users to be rated as to how trustworthy they are. This way, both parties would know each other’s payment record before entering into a transaction in order to comply with anti-money laundering regulations.

COTI (Currency of the Internet) is a trust-based online payment ecosystem working to solve this issue. The platform features a unique mediation system that rates users in terms of their payment reputation. They use a Proof-of-Stake (PoS) algorithm that decreases fees for those with a good score. Buyers don’t need to pay anything to use the platform — only sellers are charged a fee.

The reputation adjustment is handled inside a mediation system that uses artificial intelligence and human intervention determined by crowd governance to settle disputes. 

The mediation system also addresses another significant issue: Bitcoin’s immutability feature. While this feature does have many benefits, it also means that transactions cannot be reversed once they have been made. This has caused huge problems, as it means that unlike traditional bank payments, there is no way of getting back money that has been mistakenly sent to fraudulent third parties.

A mediation system that has the ability to reverse such payments would greatly simplify the process of dispute resolution and rectifying fraudulent transactions, and that is a system many consumers would feel more comfortable using for their purchases.

Similarly, platforms like ZenCash are allowing users to protect their identities when carrying out transactions. Essentially, ZenCash takes all of the top security use cases on the market and effectively combines them all into a single token using three main systems. There’s ZenChat, which enables encrypted, text-based messaging through a blockchain; ZenPub, a secure content publishing platform; and ZenHide, a domain fronting feature that protects both user and crypto data from hostile regulator bans.

Other dispute resolution systems, such as UTRUST, are currently centralized mechanisms, meaning that they are vulnerable to a single point of failure, and therefore less secure than solutions built upon blockchain technology.

Blockchains Incentivize Good Behavior

Settlement blockchains should aim to incentivize honest behavior. This would result in fewer abandoned transactions, lower fees and, ultimately, a better chance of achieving meaningful adoption rates — the higher your trust score, the lower your fees.

It will allow the development of deeper trusted relations between consumers, between consumers and merchants and between issuers and acquirers in non-payment environments. In addition, if more blockchain projects follow suit toward AML compliance, it could deliver other adoption advantages.

As it stands, approximately 2 billion people worldwide are not part of the formal banking system. These people have no way of proving who they are by recourse to a bank account or their creditworthiness via a credit score from an agency.

Once development is finished, a community-based mediation setup such as COTI could potentially provide life-changing benefits to these users.

The long-term benefits of blockchain technology are becoming increasingly apparent, and this is still just the very beginning. In a few years’ time, it’s likely that our society will look radically different. Right now, the playing field remains relatively level. With so much new development in the space, which could radically change lives, it seems that we are truly on the cusp of a new technological era.

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