A long-running thesis pertaining to the growth prospects of the cryptocurrency universe is that digital coins will eventually make significant inroads in global payments, reducing friction and increasing efficiency in the process.
To some extent, that’s already happening, but it’s been a slow slog. However, some analysts believe the evolution of various networks and stablecoins will speed crypto’s ascent in the global payments area. That could boost the long-term outlook for exchange traded funds such as the VanEck Digital Transformation ETF (DAPP ).
DAPP, which follows the MVIS Global Digital Assets Equity Index, doesn’t feature direct holdings of bitcoin or other digital currencies, but essentially all of the ETF’s 25 holdings can credibly be considered crypto-correlated. Some DAPP member firms are levered to crypto’s growth in global payments, and that could be a compelling attribute going forward.
“We think that the development of the Lightning Network (LN) and fiat-backed stablecoins could position crypto as an increasingly viable rail in global payments. Major friction points in the existing ~$156T cross-border payments market, high payment processing fees on merchants, and inequalities in financial inclusion are well known and the target of crypto enthusiasts,” according to Cowen research.
Essential to the growth of crypto in the payments space is the ability of providers to prove to regulators that they’re compliant and not subjecting users to undo risk. Some DAPP holdings could be involved in smoothing out those bumps, and that’s undoubtedly an important endeavor.
“The U.S. government intends to regulate crypto payments to ensure consumers have the same rights with crypto as traditional payments,” added Cowen. “This includes being held harmless for unauthorized transactions. Crypto payment providers will need to demonstrate an ability to comply with these rules and AML/BSA controls. Crypto may also need to compete against a digital dollar, which the Federal Reserve has been working on for several years.”
Global payments are integral in boosting the broader crypto usage case. It’s likely that bitcoin will be one of the leaders in the crypto-meets-payments space, and that’s relevant to DAPP investors because several of the fund’s components are bitcoin miners, which are highly correlated to the digital currency’s price action.
Potentially bolstering the long-term case for DAPP is that despite the lingering crypto winter, work continues on easing crypto into the global payments system.
“Crypto payments have been limited to date due to low transaction throughput and elevated fees on blockchains that prioritize decentralization and security. However, traction is increasing due to scaling solutions that are developing during the crypto winter. including lightning networkand fiat-backed stablecoins,” concluded Cowen.
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