Thursday, 27 February 2020

The European Central Bank are Pushing Digital Payments

Does the TIPS system spell the end for blockchain currencies?

Quietly, in the last week, the European Central Bank (ECB) launched a new digital payments system aimed at competing with the likes of Paypal and Apple Pay.

The TARGET Instant Payment System (TIPS) will ensure, “individuals and firms can transfer money between each other within seconds, irrespective of the opening hours of their local bank.”

The not-for-profit scheme is built as an extension of the “TARGET2” payments system, which was developed for settlement between central banks and commercial banks. TARGET2 requires a central bank account and is therefore another centralized payments system, which is the opposite goal of the cryptocurrency world, which is seeking to offer decentralized options that are independent of the traditional government and central bank controlled currencies.

The first point I’d make on this development is that it brings us back to my previous Medium article: Forget Cryptocurrencies and Focus on Cryptoassets. In that piece, I argued that governments and central banks will not simply give up control over the monetary system without a fight. This has been tried many times in the past and failed. The governments own the regulators, and more importantly, the tanks. Investors may therefore be better served by pivoting to blockchain projects with a use-case that doesn’t rely on payments alone.

The second point is that TIPS is basically a central bank-owned version of XRP, which makes the Ripple offering irrelevant and is maybe a reason why the much-anticipated xRapid product saw little uptake from the large financial institutions.

Some of the TIPS features include:

- secure an end-to-end processing time of 10 seconds or less
- support the expected large volumes of transactions and meet scalability requirements
- secure availability around the clock without maintenance windows
- enable a deployment process with no interruption in the service.

Further to this, “there are no entry or account maintenance fees. The price per instant payment transaction is fixed at 0.20 eurocent (€0.002) until at least November 2020,” and the “first 10 million payments made by each TIPS participant before the end of 2019 are free of charge.”

This would remove some of the issues regarding cryptocurrency, such as high exchange fees and a grasp of the technical elements of buying and selling.

The ECB also notes that, “the TIPS project got underway in October 2016”, so this will explain the lack of regulatory movement on crypto and the reason why ECB members talked down the prospects of the blockchain currencies. This is the first glimpse of control that I hinted at and it’s the peaceful first step at retaining the current monetary architecture.

The IMF have recently advised central banks to create their own digital currencies and economist Martin Armstrong stated that this was being done to eliminate cash and impose negative interest rates- again to protect the current system by increasing tax receipts and saving the zombie banks and governments with lower and lower interest rates.

So, what comes next?

As Armstrong also noted, “It is true that central banks can control the short-term rates, but long-term rates are established by the free market.” Cryptocurrencies are therefore at a crossroads, where only a financial crisis will usher in their adoption as currencies. First as a safe haven and then as a payments medium. The reality of the TIPS idea is that, similar to XRP, it only survives if the banking institutions themselves survive. This is not a given as risks pile up across the world and even the ECB itself is at risk after being the only buyer of the troubled Italian debt since 2015.

As a cryptocurrency investor you should go with my previous advice: Look for blockchain projects that have a use-case outside of a payments system only. The currency options may rally as a safe haven in a crisis but it’s hard to see them adopted en masse in a straight line without government intervention.

By Coin Techs
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