Blockchain and Payment Systems

Abstract

Bitcoin—the first virtual currency based on blockchain technology—was born out of an anarcho-libertarian dream to create a monetary system that—by relying on ‘trustless trust’—would be completely independent of the state and established financial institutions. Today, there is no doubt that blockchain technology will transform payments, the financial industry, and many other areas. However, this chapter argues that in regard to payments, this transformation will be far from the libertarian ideal. Rather, blockchain (1) will enable the rise of new powerful intermediaries and (2) it will be embraced by established payment services providers, who will use blockchain to modernize their services. As a result, decentralized virtual currencies like Bitcoin will remain on the periphery of the mainstream payments landscape. Blockchain has focused too narrowly on providing a technological solution to the issue of scarcity and solving the double-spending problem. Yet, problems involved in monetary and payment systems are broader. In particular, payment systems provide for a broad range of mechanisms supporting circulation of money which, for the scale and complexity of a modern economy must be backed by the state. Money is a hybrid public–private institution and it seems naïve to think that technology alone could render the role of state institutions in monetary and payment systems obsolete.