Q&A: What Apple’s embrace of cryptocurrency could mean for the payment industry

Apple has become the latest in a flurry of mega companies exploring the use of cryptocurrency, the implications of which could drastically transform payment processing.

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An Apple executive last week confirmed the company is interested in cryptocurrency, a revelation that came months after the company launched its CryptoKit for iOS 13.

While still speculative, Apple's CryptoKit is likely the first step in enabling the exchange of private and public keys that could allow users to make purchases with  bitcoin and other cryptocurrencies stored on an iPhone.

Apple would be only the latest in a flurry of financial services, ecommerce and social media giants establishing stable coin technology or cryptocurrency backed by traditional fiat money. Those companies include JP Morgan Chase, Visa and Facebook, which unveiled its Libra Coin and Calibra digital wallet earlier this year.

A stablecoin and a digital or crypto wallet could give Apple a competitive advantage over other etailers and ratchet up pressure on the banking and payment processing industry. The cryptocurrency marketplace, however, has no widely adopted industry standards to ensure security and privacy best practices.

Clifford Rossi, an executive-in-residence and professor in the Robert H. Smith School of Business at the University of Maryland's Finance Department, believes Apple has a lot to gain from launching its own stable coin.

The following are excerpts from an interview with Rossi about Apple and crypto:

What would make cryptocurrency an attractive proposition for Apple? "This is a whole revolution. If you take a look at current payment methods..., take Apple Pay for a moment, you have many different ways in which a consumer can transact online or through mobile devices today, and really what it comes down to is they're still fairly cumbersome methods and still fairly costly. When I say cumbersome, even through Apple Pay you're still required to set up your account by way of credit card. So you've got to give credit card authorization and the PIN and all the other pertinent information. While that may not seem like a big deal, you then have intermediaries – the credit card companies or your bank account in some cases. So, it's not an efficient means of payment processing.

"The other part of it is the cost. From a cost standpoint, you've got fees associated with credit card interchange and ancillary fees from payments processing centers.

So costs are a big part of this, as well. If you can reduce cost and reduce time for consumers, you'll find you'll be able to broaden your market penetration, and ... for Apple beyond their existing Apple Pay customers – if it can demonstrate the following things: trust, account protection and ease of use.

"If it can do that, [and considering] the various other players jockeying for position like Google and Amazon and even the large banks, it's going to allow you to break out of that pack. And even for a brand like Apple it will allow you to attract new customers."

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Images of the Calibra digital wallet app.

You noted that Apple Pay has to be attached to a credit card or bank account, but what does cryptocurrency get attached to? "It's cryptocurrency coupled with a digital wallet that will alleviate the need for having traditional banking accounts set up. If you look at Facebook and what it's doing, if they go online with their cryptocurrency, they'd have their own proprietary stable currency; you'd still need to, either through wire transfer or other means, establish an account with them. So, there's still a need to get your money, in whatever currency it is, uploaded into a cryptocurrency wallet. There is that.

"Creating this stable currency environment provides the medium of exchange for consumers to set up their accounts; ...thereby everything can be denominated into bitcoins or Libra Coins or whatever they may be and effectively be able to establish their own medium of exchange, both for the purposes of creating an account. And, that account can be managed by the consumer, which is another important feature of these.

"The reason we like banks is they can let us know when there may be some fraudulent activity on the account. Well, in this case, there are a couple benefits from this combined cryptocurrency and a digital wallet. You get a much more secure environment based on the tokenization of currency and as a consumer you have to push the transaction rather than it being pulled from your credit card or bank account. From that perspective it creates a safer platform as well.

"So, while there is a need to upload dollars into a digital wallet..., over time that may be decoupled, because the creation of a stable currency could be that which you buy into and then transact with it."

When you say "buy into," do you mean purchasing stablecoins and then storing them in an online hot or offline cold wallet? "That's correct."

It's a bit of a wild west out there. Do you think the ecommerce and banking industry needs a standard for cryptocurrency - one ring to rule them all? "Eventually. Many processes in our corporate lives to various degrees have come about in multiple ways. If you think about electricity – AC/DC current – there was no standard in the day. Eventually that got sorted out by competition and the markets.

"I think it will be the same case for some time for this. You've got government regulators and central banks who are kind of at the beginning of this themselves in figuring out what to do. Over time, I think a type of standardization will come forward, likely through some consortium.

"I think quite honestly any of these players in the market today, in order for widespread adoption to occur, will have to have fairly big partnerships with major participants in this area. The best example of this is what Facebook has done with its Libra partnerships. So there's a consortium there. You need payment processing companies; you need credit card companies; you need banks; you need merchants to widely adopt it. As you can see with this consortium that Libra has put together, they are going down that path. If Apple believes they're going to do this themselves, I'm not sure they'll get much traction – or any company for that matter.

"So I think partnership is key to getting to the top of the heap to dominate and eventually, perhaps, becoming the industry standard for this kind of application."

Do you see any downsides to crypto or stablecoins – security issues or processes that become more complex? "One of the dangers that's been there for some time is the potential for bad actors to take advantage of cryptocurrency technology to hide fraudulent and other kinds of criminal activity. That's a big one.

"The other one I'm a little concerned about if you have huge companies like Google, Amazon and even Apple involved in this, and we just heard the other day there's potential anti-trust behavior for which Google is being investigated by various [states]. So, think about a company the size of Google being able to control not only vast amounts of personal data, but also the way in which we transact. They could be able to create a monopoly...that could displace traditional payments processing. It would initially be more efficient and less costly [for consumers], but in the process they could find new avenues for raising revenue and in their own way impose new costs on both merchants and consumers. That's just speculation, but based on what's going on with Google today I could see that as one potential problem.

"It's all about money. These companies are very savvy, and they'll exploit this to the nth degree knowing they'll have to thread the needle carefully around potential regulatory oversight; they are capitalists in the end and will find a way to make this work."

Copyright © 2019 IDG Communications, Inc.

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