Why crypto is a poor relation of digital payments

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When Balaji Srinivasan stepped on to the stage at Amsterdam’s Network State conference last week, he looked every inch the corporate executive — generally unassuming in a dark suit and sober tie.

But this was no mainstream finance conference. The serial tech investor and former Coinbase technology chief was here to sell his vision for the “Network State” — a supposedly revolutionary next step for the world’s crypto fan base. Srinivasan was clearly promoting his book of the same name, and was unashamed in pushing a movie plan too. But this was also part of a years-long drive by crypto radicals to overhaul societal structures that appear increasingly stretched.

Underpinned by a crypto financial system, Network State’s idea is to reimagine everything from statehood to medicine and tie together millions of people in carved-out enclaves from Honduras to Hungary with a common faith in alternative systems.

Whether it will have more credibility or staying power than other crypto nirvanas is unclear. But this was no crackpot conference — it was attended by some serious global executives and attracted some big-name speakers, from Ethereum co-founder Vitalik Buterin to economist Tyler Cowen. The buzz around the event reflects both the booming enthusiasm for technology-based change, from AI to quantum computing, and the growing dismay with the established financial and geopolitical order.

Such sentiment is most obviously evident in the fevered resurgence of interest in bitcoin, written off by many a few months ago but now trading at double its price at the start of the year. Speculation that BlackRock may soon receive approval for a bitcoin ETF, pushing crypto further into the financial establishment, has been a driver. Never mind that crypto’s effectiveness as a reliable payment system is unproven (beyond black market purchases or the funding of terrorists); the whooping at Network State showed the resolve of the crypto faithful.

Only a few years ago it was mainstream digital payments companies, tethered to good old legacy currencies, that were being whooped. Such was their popularity that in 2019, the French group Worldline was able to issue negative-yielding debt — investors knowingly put money into bonds deemed so secure that they paid for the privilege. Shares in the company are now worth less than 15 per cent of a record high hit 18 months ago, after having slumped more than 50 per cent a fortnight ago on concerns about customer fraud and lower sales. The ride for younger payments fintechs has been no less wild. CAB Payments, which processes business payments to remote locations, suffered a 72 per cent collapse in its valuation after warning on revenues, only about three months after listing on the London Stock Exchange.

Even bigger players have been hit hard. Shares in Adyen, the Dutch group that processes online payments for large subscription giants from Netflix to Spotify, fell by nearly a half in the summer, after years of steady growth stuttered. Its closest competitor, still privately owned, is the Irish-American Stripe, which suffered a halving of its valuation when it raised fresh funds in March. And one of the original payment fintechs, PayPal, is trading at barely one-sixth of its valuation in the heady days of 2021.

Some marketwide forces are at work. The hype around digital payments has faded, partly as pandemic-era online sales enthusiasm declined, partly as inflation has cut consumer spending and partly as funding for fintechs has become more expensive and less readily available. Fintech companies more broadly had attracted extreme valuations because of their intoxicating promise of applying tech to reform a financial sector stuck in the last century. So the precipitous valuation declines of recent months have also been a correction of that exuberance, compounded by a generally jittery stock market.

Ultimately, though, the digital payments sector can still claim a fundamentally bright outlook, with a real-world use case of which crypto fans can only dream. Martina Weimert, chief executive of the European Payments Initiative — a group set up by 14 big banks to build a regional payments provider — says the shift away from cash and cards towards digital, principally smartphone-based payments, is secular and long-term. “It’s an unstoppable trend,” she says, pointing to EPI’s ambition to be an unparalleled cross-border bank-to-bank payments system across the eurozone. So long as the bloc doesn’t sign up for the “Network State”.

patrick.jenkins