Cryptocurrencies for Payment: The Twain Series

Since I wrote the article on why the next driver of crypto’s mass adoption will come from consumer fintech companies in July this year, two big news has shown how more traditional fintech players will enter into crypto payment.

It seems the last article’s logic remains intact for now. If you want to review the complete rationale, you can find here.

In the last few years, smartphones, e-commerce, and the sharing economy are the key forces moving consumers’ payment habits from cash transactions to mobile/online payment. Besides these factors, on the demand side, COVID-19 urged consumers to look for non-cash transaction methods. For underbanked/unbanked population, the options are even more limited, showing the current short-comings of payment solutions.

While the preparation has been in place years before, Square and PayPal have formally announced their venture into crypto payment in 2020. The rationale behind the strategy discussed last time is supported.

Let’s check out the most common scenario of payment — shopping and see how crypto payment can function nowadays.

While more retailers are accepting crypto than before, most of the crypto payment solutions today don’t require shops to change infrastructures. That is, innovation happens more on the customer-facing products side. The implication is that the current solutions are mostly centralized, depending on Visa/Mastercard or middleman platforms. As more retailers officially stating crypto as acceptable currencies, the direction of innovation shall change.

While there are some coffee shops installing POS terminals accepting crypto, Starbucks, along with many big retailers, hasn’t joined the gang so far.

Just as with regular fiat-based debit cards, customers need to have balance in their digital wallet for spending their crypto debit cards. Crypto-native business models also apply here — some companies offer higher-than-market cashback in tokens and additional bonus achieved through their own utility tokens. Take Crypto.com for example, the more tokens you bought, the higher tier of membership you can get with an additional bonus. Issuing prepaid Visa cards has also become the strategy of big exchanges like Coinbase and Binance, which can offer up to 8% of each consumption.

For crypto credit card, Nexo, one of the earliest crypto loan platforms, is preparing to launch the first crypto credit card allowing customers to get instant credit lines when swiping their Nexo MasterCard.

The reason why crypto debit/credit cards can complete the final step of payment in the real world relies on the network Visa and Mastercard supported.

Quite a few platforms have accepted cryptocurrencies as one of the payment methods such as Gyft and Alagoria which allows customers to buy gift cards from 200+ retailers. The process behind is still centralized, with the platform connecting people wanting to sell redundant gift cards with people paying in crypto (In the case of Gyft, the platform itself accepts Bitcoin, acting as a middleman for the transaction of gift cards). The two leading platforms have partnered with Coinbase by requiring users to use Coinbase wallets. Spedn, a crypto payment app backed by crypto exchange Gemini, also leverages gift card purchases at the back end to allow customers to pay their crypto at different shops (yes, including Starbucks).

Most of the current crypto payment solutions discussed above are like the transition before big retailers accepting crypto. I think it’s even fair to say that their existence originates mainly from consumers’ incentives to spend crypto.

Although through crypto payment solutions mentioned above, consumers can pay in crypto indirectly, most of the big brands like Amazon and Starbucks haven’t officially stated crypto as acceptable currencies (usually due to regulation/ accounting factors). But the tide is changing as e-commerce companies like Shopify integrating more than one crypto payment companies since last year, including CoinPayments and OpenNode. More SMEs have begun accepting crypto payment with more ready-to-use facilities and fiat on-ramp/off-ramp gateway. The most common ones on the market currently are POS terminals accepting crypto or crypto payment gateway for e-commerce/ off-line retailers like BItpay.

Another driving force of crypto payment relates to blockchain-based infrastructure given its unique features vs. digital fiat, including decentralization and detachment from a bank account.

One core feature is the inherent immutability of blockchain. With blockchain as the underlying decentralized ledger to record transactions, merchants can save the time and costs of settling chargebacks.

Blockchain-based payment app also lowers the criteria and costs to open a digital account on crypto wallets. In this category, Facebook-initiated Libra and Celo have the grand vision that emphasized financial inclusion, potentially replacing bank accounts with easy-to-access digital wallets.

One main key driver of crypto payment stems from the ongoing innovation within blockchain/web3 projects. Lightening Network, which is a protocol making P2P transfer on Bitcoin faster and cheaper than ever before, has shown great strides in increasing 7 blockchain per second to more than 400 blocks per second on Bitcoin. Quite a few startups are leveraging the improved Lightening Network for crypto payment services, such as OpenNode and LastBit.

Besides, the progression of regulated stablecoins can enhance the crypto payment industry as people don’t have more choices instead of spending volatile crypto assets. In 2020, European Commission and G20 have officially proposed regulatory efforts. In October, The People Bank of China (POBC) also started tests of its digital yuan by giving out $1.5m to Shenzhen citizens.

The initiative of PayPal and Square has strengthened the trend.

Crypto exchanges are the most direct beneficiary with more fintech companies expanding the business into crypto payment. These big fintech clients can be a bigger driver than the retail market for crypto exchanges. Big companies will need to partner with existing crypto exchanges for liquidity for quite a long time at least till their own buy&sell market grows big enough. PayPal has partnered with Paxos on liquidity and custodian while Paysafe Group, another leading payment provider, has tapped Kraken Exchange for cryptocurrency liquidity.

For many projects in decentralized finance (Defi), the target client base has always been crypto-savvy users. But when it comes to payment that requires vast merchant networks, enterprises, or startups tapping into enterprises’ resources will have an upper hand. Crypto can further enhance peer-to-peer payment (which all the existing crypto wallets can do), especially that even in fiat world, p2p transactions have already on the rise.

The main advantage of big payment gateway like Visa and Mastercard in this crypto trend is in their vast networks of merchants. In the past, companies hoping to launch crypto Visa/Mastercard had to work with principal members, such as PaySafe, Wirecard, and Railsbank, to issue cards. But in 2020, Visa/Master began to accept crypto companies as principal members, showing more openness toward cryptocurrencies than before. Coinbase and Wirex has each become the first crypto company among principal members of Visa/ Mastercard respectively this year.

Worth noting is that Visa Fast Track program has accepted several crypto startups, showing its ambition in tapping into crypto startups, including crypto card solutions (Ternio), payment startups leveraging improved Bitcoin lightning network (Strike, LastBit), digital wallet (Zengo), and crypto lending (Cred). All these announcements are made in 2020.