This is an opinion editorial by Shinobi, a self-taught bitcoin educator and tech-savvy bitcoin podcast host.
With the advent of the Lightning Network, the notion of Bitcoin as a medium of exchange has regained momentum in recent years in terms of dominant narratives in this space. Ultimately, this is a necessary part of anything that aims to become money. Storing value is meaningless in the context of money without the ability to easily exchange it, and Lightning is the most promising tool here for really scaling that ability.
Conceptually, however, the focus of the medium of exchange as functionality was mainly on consumers – meeting the needs of an average person and their day-to-day needs of grocery shopping, online shopping, paying for services, etc. This is not the only scope of exchange in an economy . Companies pay suppliers, they also have to pay for contractors or services, international shipping companies have to receive money from all over the world from their customers – most of whom are not consumers but companies. Imports flow widely around the world and have to deal with the complexities of exchanging foreign exchange between many different national currencies.
Medium of exchange isn’t just about people paying for their coffee, the entire medium of exchange function occurs at every level and scale of the economy when it comes to purchases much larger than your daily Starbucks latte.
This is where Bitcoin will really shine as a medium of exchange at scale, not Joe buying his coffee every day. SWIFT processes approximately $5 trillion in payments daily, approximately $1.25 trillion per year. One need look no further than numerous Russian banks being cut off from the SWIFT system to see the potential risks of relying on it to process international payments. This follows a curved distribution where 5% of the total payments processed account for 95% of the value and the vast majority of payments are for much lower amounts (average payments are ~$400,000 and median ~$5,000 in October 2010). So payments of very large value make up the bulk of the value transferred across the network, but that remaining small percentage of value is shared among a wide variety of individual actors making small payments that are still not, by and large, small amounts of money. This distribution actually shows why SWIFT is ripe for disruption from Bitcoin in this latter category.
As I addressed in this March article, which discussed the same issue in the context of explicitly circumventing sanctions, the main limiting factor in using Bitcoin to settle traditional fiat currency payments is liquidity. I broke down how even if the government owned 100% of the mining hashrate in Iran, which makes up 5% of the network, and they kept 100% of the proceeds, they could acquire $700 million worth of Bitcoin per year to pay for imports. Overall, that’s not really a lot. Iran imported $38 billion worth of goods in 2020 – $700 million is just a fraction of that.
This dynamic changes when you start considering a country with a thriving fiat market for Bitcoin. The situation with Iran was that they were considering burning oil rather than being able to directly export it for sale and used bitcoin mining to fill that gap. The problem is that it limits how much mining hardware they can get their hands on. Imagine a country that isn’t sanctioned as heavily, but is potentially threatened, that can still export stuff and has a thriving ~$10M/day bitcoin/fiat market. If people from all over the world were willing to pay for exports from this country with bitcoin, there would be a $10 million a day market that could convert that into fiat every day. That’s potentially $10 million of money pouring into the country every day to pay for exports (I know…this is an oversimplified analysis that ignores changes in market conditions, how that will affect market liquidity, which Consistency of demand for bitcoin, etc. — but stick with the simplified analysis, just to get the point). That’s ~$3.6 billion a year. Now imagine a market volume of $100 million per day, that’s ~$36 billion per day. That’s almost Iran’s annual imports as of 2020.
Now imagine that the last 5% of the value processed by SWIFT accounts for 95% of all individual transactions. Imagine all the different companies and individuals making international payments that fit into this payments space. As long as the source country has the liquidity in a fiat/bitcoin market to allow someone making a payment to buy it and the destination country has enough liquidity for the recipient to sell it, bitcoin is a perfect vehicle to process this international payment minimal slippage/fees and settle it within a few blocks. Add the lightning network to the image and it can be done in seconds.
The more speculative liquidity surrounding Bitcoin, the more value can be processed in such a system across jurisdictions to facilitate international trade. You don’t even have to be a sanctioned country to see the value in it. Settlement can be literally instantaneous. SWIFT can take days, sometimes even weeks, depending on where the money is being moved and the checks SWIFT performs on a payment. Bitcoin eliminates this delay and removes the ability for third parties to stop payment. It boils down to just the two exchange points between fiat and bitcoin in their respective jurisdictions in terms of counterparty risk faced by the two transacting partners.
However, even that can be removed by simply storing and controlling the bitcoins directly yourself. The only risk at this point is then the volatility of Bitcoin itself. This too can be dealt with. At the most basic level, a small portion of the bitcoin a company holds can be deposited on an exchange with futures products, and leverage can be used to shorten the price of bitcoin to hedge against volatility. 10x leverage means you only need to put 10% of your bitcoin on such a platform to hedge that risk. If the Bitcoin price increases and your short is liquidated, the Bitcoin price increase will offset this, leaving you with the same amount of fiat value. If the value goes down, the money you make from the short position offsets the bitcoin’s fall in value, and you still have the same amount of fiat value.
Discreet Log Contracts (DLCs) even provide the ability to natively insure yourself against Bitcoin price volatility on the network via a smart contract. This allows you to control bitcoin directly, have contracts settled directly back into custody under your control when it is closed, and even allows for the use of multiple price oracles so that no one is relied upon to get the price honest report bitcoin.
People are acting like Bitcoin has to reach the point of hyperbitcoinization to become a major backbone of payment processing in the world, or to become a system as important to the economy as SWIFT. It doesn’t. Market volume of a certain level means that that amount of bitcoin is actively being bought and sold. This means that there is a demand to process regular buys and sells of Bitcoin within this value range during the period you are analyzing. The same is true of the futures markets, whatever the volume there is, it is available to people who want to hold Bitcoin themselves rather than face counterparty risk to hedge against that volatility and not have their business ruined if the Bitcoin price suddenly crashes on a massive scale.
Bitcoiners have focused so much on the notion of grassroots adoption – which in itself is not a bad thing as it is an absolutely necessary aspect of bitcoin adoption in order to truly become real money – but they have started to see the other side of it losing sight of coin. Big players, big value settlement. Bitcoin is ripe for a massive disruption to systems like SWIFT, and given the rate at which the world is becoming unstable both politically and economically, I think that time will come sooner rather than later.
I think Bitcoin and Lightning will be widely adopted by businesses as an alternative to SWIFT and other billing systems before they are widely adopted as consumer payment methods. It’s just easier to convince a few thousand companies of the value and benefit and do the work to integrate them there than it is to convince hundreds of millions of people of the value and do the work to integrate them there. It would probably also make the latter’s job easier if the former were done first, since most people tend to follow in the footsteps of things that seem believable.
What could put more credence in the minds of your average person than constantly hearing about Bitcoin being used to process international business payments and business being pulled away from traditional settlement systems?
This is a guest post by Shinobi. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.