A stream of crypto payments services coming to market give new life to the debate around whether bitcoin can be both a store of value and a payments token.
With the wild journey that is bitcoin price swings so far this year, you might have missed the accelerating rhythm of companies announcing services to support bitcoin for payments.
We’re not talking about small idealistic startups, either.
A week ago, on Visa’s Q1 earnings call, CEO Al Kelly said the company may add cryptocurrencies to its payments network. He acknowledged that bitcoin is “not used as a form of payment in a significant way at this point,” but went on to discuss a strategy to “enable users to purchase these currencies using their Visa credentials or to cash out onto our Visa credential to make a fiat purchase at any of the 70 million merchants where Visa is accepted globally.”
You’re reading Crypto Long & Short, a newsletter that looks closely at the forces driving cryptocurrency markets. Authored by CoinDesk’s head of research, Noelle Acheson, it goes out every Sunday and offers a recap of the week – with insights and analysis – from a professional investor’s point of view. You can subscribe here.
Visa also currently provides credit card infrastructure for 35 crypto companies, with the aim of making it easier for users to pay with bitcoin.
In PayPal’s Q4 earnings call this week, the first since the company started allowing the purchase and sale of a handful of cryptocurrencies via their PayPal account, the company revealed that it was planning to start allowing customers to use their crypto balances to pay for goods and services at any of the approximately 29 million merchants on the network, and that it was “significantly investing” in the crypto business unit.
Large crypto companies are also moving into payments. Last month, crypto exchange and custodian Gemini launched a credit card with a 3% reward on purchases. In December, crypto lender BlockFi announced that it would launch a similar product in early 2021.
This is just scratching the surface. Binance, Coinbase, Paxful and BitPanda are just some of the crypto exchanges that over the past few months have introduced crypto debit cards for retail spending. This week, crypto platform Uphold announced the acquisition of card issuer Optimus Cards U.K.
Also this week, Binance, the largest cryptocurrency exchange in the world in terms of volume, announced the launch of a payments system called Binance Pay, aimed at encouraging the use of crypto in cross-border payments. Binance CEO and founder Changpeng “CZ” Zhao said: “We think that payments is one of the most obvious use cases for crypto.”
Not so fast
Is he right?
Obviously “crypto” encompasses a range of assets, but let’s focus on Bitcoin for a moment.
The white paper that introduced Bitcoin to the world in 2008 opens with:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Whether Satoshi Nakamoto, the pseudonymous writer of the paper, meant for payments to be the main use case or not (this is a point of contention, as he* also wrote elsewhere about its potential role as a store of value), over the years it became clear that scaling limitations inherent in the protocol design made the network impractical for high transaction volumes.
(*I am not assuming Satoshi is a he, but I am using this pronoun to avoid linguistic clutter.)
Another critique of Bitcoin-as-a-payments rail is its relative lack of speed, although this can be misleading. A bitcoin payment will take around 10 minutes on average, and up to an hour for assumed settlement finality. Credit card and contactless payments are faster, but they usually don’t have settlement finality until days later. And data gathered in electronic transactions removes any financial privacy. Cash, on the other hand, is instantaneous and private, but you need to be physically present.
What’s more, bitcoin transactions are relatively expensive. This week the average fee reached its highest point since January 2018.
Solutions such as the Lightning Network aim to solve for these barriers by offering fast and cheap throughput on a transaction layer that anchors to the Bitcoin blockchain at certain intervals. Adoption of this technology is growing, but is still in its early stages.
The existential question
Then again, most of those that complain that Bitcoin doesn’t work for payments have access to other mechanisms that work well. That’s not the case for much of the world. Some jurisdictions have strict capital controls that block payments to other regions. Some countries don’t have sophisticated payment rails that make even simple internal transfers easy. Even some demographic groups in developed countries don’t have access to online payments and are still largely dependent on bank relationships.
For many, bitcoin is a tool for freedom in that it facilitates online payments where previously they were inaccessible. For others, using bitcoin is a way to support the network by giving the asset a broader utility.
This raises an important question: should bitcoin be encouraged to be both a store of value and a payments mechanism?
Some reasons why it should:
It can be argued that bitcoin’s worth as a store of value depends on its utility. The more there is residual demand for bitcoin as a payment token, regardless of its price, the more investors will believe that demand for it will rise in a sustainable way.
It can also be argued that it is essential for the health of the network that bitcoin’s use as a medium of exchange be encouraged. As successive halvings reduce the block subsidy (in which miners get new bitcoin as compensation for the work expended in successfully processing blocks of transactions), miner incentives will increasingly rely on transaction fees.
And current demand for this use case is not insignificant. Binance Research this week published the results of a survey of 16,000 crypto users across 178 regions, which found that 38% see bitcoin as a medium of exchange. In December, Susquehanna Financial Group revealed a survey of PayPal customers that showed 53% would use bitcoin to pay for goods, if they owned it.
Some reasons why it shouldn’t:
There is a not totally unfounded concern that, if bitcoin becomes seen by governments as a widely used payment token and a potential threat to fiat currencies, they may decide to act, and not in bitcoin’s favor.
While it may seem that governments care more about markets and asset prices, it’s payments that matter for monetary policy, consumption and wages – all things that get you votes. Investments sit there (and hopefully grow) while payments move, and both animal and regulatory instinct is to focus more on things that move.
In addition, you have the theory that if bitcoin is seen as a store of value, it will not be spent. Gresham’s Law dictates that bad money crowds out the good – if bitcoin is “good” money, people are more likely to hold onto it, and use other assets with less potential value.
This segues into what is perhaps the endgame of many of the crypto payments providers.
It’s perhaps not about Bitcoin at all.
Bitcoin is the crypto asset with the least regulatory uncertainty at the moment. Even stablecoins are not totally out of the regulatory woods yet. (The OCC’s letter that said banks could handle stablecoins could be walked back under a new chief.)
So, maybe Bitcoin is the safe starting point for these new rails. Ethereum will probably come next, and where Ethereum goes, so do stablecoins.
Maybe the banks and payment companies working on bringing crypto payments services mainstream have their eyes on a potentially bigger pie – that of tomorrow’s payments, the bulk of which could run on blockchains that handle a range of assets. Maybe the forward-thinking institutions are preparing for a day when we hold cryptocurrencies in our digital wallet right along with our private stablecoins and our digital dollars and our tokenized GameStop shares.
Maybe they’re all looking at a financial landscape where the user has more choice.
The crypto payment functions today serve their purpose. They offer a useful service to many, nudge along the sophistication of market infrastructure, and set the scene for mainstream adoption of a range of assets with a range of utilities.