On May 14, Visa filed a patent application for a fiat-backed digital currency on the blockchain. The document describes a system t...
On May 14, Visa filed a patent application for a fiat-backed digital currency on the blockchain. The document describes a system that would allow to digitize and withdraw cash from circulation, replacing it with digital copies on the blockchain, for example, based on Ethereum. In this way, you can digitize any fiat currency: dollar, pound sterling or euro. The volume of issue and the value of the currency should be regulated by central banks. What technologies are mentioned in the application, how similar are Visa digital currencies to stablecoins and the digital dollar, what is the role of the state in the implementation of the project and whether it has a chance to be implemented, we understand the material.
Visa recognizes the advantages of cryptocurrencies over fiat
A preliminary patent application called "Digital Fiat Currency" was filed with the United States Patent and Trademark Office (USPTO) back in November 2018. A year later, in November 2019, the concept of the invention was formalized into a full-fledged patent application, but the office published it only on May 14 of this year. The inventors are Simon J. Harry and Alexander Pierre, and the applicant is Visa. The document describes the general scheme of the project, the core of the system and its key elements.
The application begins with a description of the advantages of cryptocurrencies over fiat currency systems: money transfers using cryptocurrencies are faster than regular money transfers in fiat currency; and the blockchain used in digital assets provides trust in a financial instrument, since transaction records are completely transparent and immutable.
However, the authors of the application note that cryptocurrencies have many disadvantages. The main one is the lack of regulation and control by the state. They also require the use of "electronic devices" that not all segments of the population have. Therefore, you cannot completely abandon fiat funds and build an entire payment system based on cryptocurrencies.
The present invention is seen as a way to combine the benefits offered by cryptocurrencies with those provided by traditional government-issued money. The technology described in the application should help any financial system move towards greater digitalization.
How the digital currency system from Visa works
According to the patent, Visa's digital currency must be pegged to fiat. The number and denomination of a fiat banknote are entered into a special register on “centralized computers”, after which the system generates a digital copy of it on the blockchain. The physical coin is then withdrawn from circulation. "Scanning" fiat funds helps to avoid counterfeiting, fraud and the possibility of double digitization of the same banknote.
The system consists of several parts:
- "Central Computer" - issues coins, regulates the value and quantity of digital currency.
- “Verifying Nodes” are the nodes of the blockchain, which can be banks.
- “Redemption (redemption) organizations” - exchange fiat funds for digital currency, including accepting physical notes. This role can be ATMs or bank branches.
- Users who exchange their fiat funds for digital counterparts.
The digital currency payment system diagram from the Visa application. Source .
The user can digitize his funds himself. It is assumed that a redemption organization such as an ATM or bank branch will be able to accept physical currency in exchange for digital fiat currency. And the "centralized computer" of the system makes sure that the banknote is not duplicated. The application does not say about the development of its own blockchain for the operation of the system. But Ethereum and Hyperledger Fabric are given as possible options.
The document states that the payment system can become completely digital, and cash "withdrawn from circulation without any complications." However, in comments to Forbes, Alfred Kelly, head of Visa, clarified that digital currencies should only be seen as an addition to the payment ecosystem, and not a full replacement.
To manage their funds, customers will be able to use digital wallets in the form of "electronic devices or online services." Wallets can store information about the user, his bank and digital account, passwords, etc. Each has a pair of public and private keys.
In this case, transactions can be carried out anonymously, provided that the privacy of users can be partial. For example, in the blockchain only the names of banks are indicated, not the names of the sender and recipient. Or, anonymity can be limited by a limit on transactions: for example, transactions up to $ 1000 are anonymous, and over $ 1000 are recorded in the blockchain with identifying information about the users involved.
The entire circulation of digital currencies is regulated by a central governing body, which retains exclusive rights to create and destroy an asset in a specific region. Of course, this should be a government agency. If we are talking about an entire country, then the most suitable candidate for this role is the central bank or another issuer of national money. The regulator will be able to implement monetary policy and issue currency, controlling its value and volume.
So far this is only a project
Visa's digital currency concept is very similar to stablecoins and central banked digital currencies (CBDCs). It does not claim to be decentralized, and private companies and large businesses play a large role in it. Similar projects are already being discussed in a number of international organizations.
So in September 2019, IMF staff proposed their version of the CBDC - synthetic digital currencies of central banks, or simply sCBDC. In their opinion, private companies should be engaged in the release and support of CBDC. They are better able to handle areas that are not specific to central banks: innovation, development, marketing, customer service. Central banks, on the other hand, are better off focusing on their core functions - oversight, ensuring confidence in new assets and protecting them. Whatever the regulators decide, IMF staff are confident that the financial system of the future will still change under the influence of innovation. Visa is obviously of the same opinion.
Of course, the technology described in the application is just a project. Large companies like Visa are constantly experimenting with new technologies and are submitting hundreds of similar applications. US law allows patenting not only inventions, but also business practices. Therefore, companies try to patent any ideas just in case. The vast majority of them will never be implemented or even get a working prototype.
It is possible that the same fate awaits the application for digital currency from Visa. Alfred Kelly also noted in Forbes comments that a patent is unlikely to translate into a working product. But the very fact of filing an application speaks of the interest of financial giants, at least Visa, in working with the authorities to create a new monetary system.
Visa is closely following the blockchain
Visa is closely monitoring the crypto market and blockchain ecosystem, trying to keep up with the development of financial technology. The company invests in dozens of fintech companies, many of which work with cryptocurrencies or blockchain.
Back in 2015, Visa invested in the Chain project, whose blockchain was later used to develop a B2B Connect corporate payment service that eliminates intermediaries in the form of correspondent banks from international transfers. The project was launched last summer, in October the company announced its intention to transfer it to Hyperledger Fabric. In July 2019, together with Blockchain Capital, the company also raised $ 40 million for cryptocurrency custodian services provider Anchorage. Last year, Visa was among the founders of the Libra Association, but due to regulatory uncertainty withdrew from it in October 2019 with a number of other companies.
At the same time, in the spring of last year, the company recruited employees for its own crypto division. In November 2019, Visa announced the development of its own blockchain system called LucidiTEE. This is a specialized project for the confidential exchange of personal data of users between banks and financial applications in a trusted runtime environment (TEE) without intermediaries. The project has not yet been launched and still exists only on paper. Whether the concept will be implemented is unclear. But the idea itself shows the company's desire to minimize the number of third-party operators and make its payment system more independent.
Last December, Coinbase became the first crypto company to qualify as a full Visa member, gaining Visa Principal Member status. Thanks to this, the site was able to start issuing crypto cards directly, without the mediation of other companies. Now the company issues such cards for residents of several countries. In April, Lightning developer Fold joined the Fintech Fast Track Visa program to support fintech companies developing the next generation of payment solutions to issue bitcoin cashback cards.
As of this year, in January, Visa bought fintech startup Plaid for $ 5.3 billion, which allows users to securely connect their bank accounts to financial applications. Plaid is connected to 80% of US fintech applications, including cryptocurrencies such as Coinbase. The purchase should help Visa enter a new fintech market and take a key position in it.
As you can see, Visa is well aware of the importance of blockchain in the future of the financial sector. It is important for a company to find its place in new technologies and maintain a dominant position. Visa's collaboration with blockchain companies is helping to promote cryptocurrencies and their wider adoption.
However, there is a downside to Visa's interest in blockchain. The company is researching new technologies but is afraid of losing its leadership position. It is easier for her to buy up all the startups that threaten her and adapt the blockchain for herself, depriving it of decentralization. The concept published in the application is a vivid confirmation of this. After all, the digital currency Visa seems to exist on the blockchain, but it is far from the ideals supported by the crypto world.
