In the last eighteen months, even formerly “anti” gurus such as JP Morgan’s Jamie Dimon and Goldman Sachs’ Lloyd Blankfein have changed their tune on cryptocurrency. Having previously described the purchase of bitcoin as “stupid” in 2017, and “worse than tulip bulbs”, Dimon for one is relenting, conceding that investors may have a point – though he still says crypto is “not his cup of tea.”
Broadly, the mainstream media have joined the tragic chorus, with James Dean of The Times (UK) reporting Nouriel Roubini’s view that “a bunch of insiders and whales [with large bitcoin holdings] are manipulating the entire system.”
It won’t end well … will it?
There’s no denying the volatility inherent in an investment which isn’t linked to any solid economic performance measure (such as a share) or a government guarantee to pay (bonds and currencies). That said, as valuations soar – especially for bitcoin – the temptation grows for holders to spend some of their gains. As we’ll see, that fact has led to the rise of payments solutions catering specifically for those looking to spend their crypto.
Tim Massad, Senior Fellow at Harvard’s Kennedy School of Government, is one of many policy analysts to call for “more scrutiny of non-bank payment systems reliant on digital assets”, and regulators around the world are responding.
In the US, Congress are preparing a comprehensive Cryptocurrency Act by the end of 2022, having already updated updated the National Defense Authorization Act with provisions for cryptocurrency in 2021.
Meanwhile, the US Treasury’s FinCen (Centre for Financial Crime) has stated that the so-called “travel rule” for fiat currency transactions – under which transaction originators and recipients must be declared and identified – will now be extended to crypto.
Similar moves are afoot in Europe, with the European Commission’s Regulation of Markets in Crypto-assets (MiCA) proposal aiming to regulate crypto assets and service providers and provide a single licensing regime across all member states by 2024.
Michael Ourbah, CEO of telecoms connectivity company BSO, says: “as the adoption of cryptocurrencies continues, mild regulation around protecting consumers will be applauded, whilst strong regulation could accelerate the shift of capital and resources to these assets”.
Revenge of the Nerds
Jim McCarthy, President of crypto payments specialists i2c and an industry veteran of more than 25 years, says while “we’re still in the early innings for crypto”, there are now signs the payments system is adapting: “there’s no doubt the market is moving [towards crypto payments], and there are going to be long-term consequences for both wholesale and retail payments.”
As is widely known, PayPal and Square have announced they are accepting cryptocurrency as a means of payment, while Visa and Mastercard have also recently confirmed they will accept crypto. Square’s CashApp, a person-to-person (P2P) money transfer solution, now allows users to send and receive either crypto-to-crypto, or to send crypto and receive fiat and vice versa.
Although holding crypto does not equate to using it for payment, the recent explosion in those using crypto – now estimated at more than 100 million people globally, and rising by 30 percent a month – will inevitably lead to greater demand for crypto acceptance in both retail and wholesale (B2B) payments.
Across the board – from bank accounts, to POS and ATM systems, cards and money transfer – there’s evidence that industry is anticipating and responding to this demand.
Bank on it
In September 2020, Kraken, an American-based cryptocurrency exchange operating since 2011, was granted the first special purpose depository institution (SPDI) charter in Wyoming. This paves the way for Kraken to open a bank serving customers who use cryptocurrency as their main means of exchange.
As Kraken’s Chief Legal Officer, Marco Santori, told Forbes magazine: “The bank will solely be servicing U.S. persons. The bank can also play a role in the flow of international funds which is a critical element of this. It can process transactions in currencies and fund flows from all around the world.
That’s important for Kraken as a global company with customers all over the world.” Other senior executives in crypto have argued that the EU’s MiCA regulation will likewise create the foundation for crypto-based digital banking and open the door for existing high-street banks to start offering accounts denominated in cryptocurrency.
Across the transaction chain, a wide range of firms outside giants like Visa, Mastercard, PayPal and Square have begun building a crypto-capable payments infrastructure. On the card front, CoinBase, the world’s leading crypto exchange, launched a Visa debit card funded by users’ CoinBase balance – effectively allowing their users to pay for goods and services using crypto.
Most recently, European digital-only broker Bitpanda announced the launch of a Visa-branded card that allows crypto balances to be spent in fiat transactions – with crypto being converted to fiat to pay off balances after the transaction has settled on the card.
More POS, ATM availability
As of early March 2021, there are at least ten different companies globally offering POS terminals with the capacity to accept cryptocurrency payments. Ingenico and Salamatex were first to market with a crypto-capable POS terminal in February 2020: since then, BitPay, Coinbase and other players have followed suit, with XB Terminal offering the capacity to pay using crypto as a currency and contactless QR code as the payment method.
On the crypto ATM (also known as Bitcoin Teller Machine, or BTM) front, leading player Bitcoin Depot recently announced that it operates more than 1,300 BTMs in the U.S. and Canada, and estimates that as of Q1 2021, the number of bitcoin-capable ATMs had almost trebled in less than two years to reach over 7,000 world-wide.
While these are clearly miniscule numbers – there are more than 7,000 ATMs in Ireland, for instance – the company says that by 2030 there will be as many BTMs in the world as there are traditional ATMs today.
Money Transfer – the first step
In February 2021, the Lightning Network announced the launch of Bolt, an instantaneous global money transfer system using bitcoin and distributed ledger technologies. Lightning’s money transfer systems provides a template for how wider consumer and B2B payments could work.
In brief, the Lightning Network is a protocol ‘layered’ on top of the Bitcoin blockchain, like an expansion pack for a video game. The system works by converting fiat money to bitcoin, transferring the bitcoin across its network, then cashing back out into fiat for the recipient.
There are a number of significant points about this system. This system charges users a flat fee, rather than a percentage – as well as being super-fast, almost instant.
What’s more, recipient and sender ID are encrypted into the transaction itself, making sending money more secure. Such a super-fast and secure system will have broad appeal – especially since it operates on a flat fee, rather than a percentage basis.
Ivan Soto-Wright is Chief Executive of MoonPay, a company that specialises in creating the payments infrastructure for crypto. Like Jim McCarthy, Mr. Soto-Wright says, “we’re in the early days for crypto – think of the movement from dial-up internet to broadband back in the early days of the internet.
Using that analogy, the challenge we face is to scale up the infrastructure.” For now, Mr. Soto-Wright says the more immediate use case is likely to be in what he calls “macro transactions”, or larger-value B2B transactions. Because most crypto transfer systems are based on a flat fee, it’s possible for companies to realise cost savings of around 100 times when transferring large sums of money compared to traditional, percentage-based corporate money transfers.
Looking ahead, Mr. Soto-Wright says it’s likely we’ll see the mass adoption of cryptocurrencies for consumer payments via the existing card infrastructure and local banking rails. Crypto would provide an advantage over existing systems by offering lower transaction costs and faster transaction times.
For his part, i2c’s Jim McCarthy is optimistic to the point of being bullish: “We are definitely heading towards the mainstream use of crypto [in payments] over the next 2-3 years”, he says. “If you look at players like Square and PayPal that are already accepting crypto, they offer access to a huge user base – and that’s when you’ve got the capacity to change public behaviours.”
From ATMs to the instant movement of billions of dollars between major companies around the world – if current trends continue, it sounds as though crypto will transform at least parts of the payments landscape over the next five years. Even if the experts quoted here are only half-right, the advent of crypto in payments could be a boon for consumer and corporate clients.
Crypto’s arrival in payments may also worry some intermediaries, as their prices and margins are squeezed and customer expectations increase.
From its humble beginnings as a White Paper in 2008, cryptocurrencies have the potential to solve some long-standing challenges faced by the payments industry, including rocketing fraud, expensive cross-border transactions and money transfers, and slow settlement times.
That said, it’s early days and we’ll soon know whether – and how rapidly – consumers and businesses will embrace crypto for payments.
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