During a Senate hearing last week, Federal Reserve Chairman Jerome Powell suggested: “With cryptocurrencies, it’s not that they didn't aspire to be a payment mechanism, it’s that they’ve completely failed to become one except for people who desire anonymity, of course, for whatever reason.”
Setting aside that distributed open ledgers like Bitcoin are pseudonymous rather than anonymous, providing greater transparency into transactions compared to the existing financial system, there are several reasons why Jerome Powell is wrong in saying that cryptocurrencies have failed as a payment mechanism.
The volatility and complicated tax treatment of cryptocurrencies are often held up as reasons why they aren’t suitable for payments. The growing adoption of crypto payments seems to counter that argument overall, however for those who are concerned about using crypto payments due to this, stablecoins offer a solution.
Stablecoins, pegged to fiat currency like the USD, allow payments to be received instantly at a fraction of the cost of traditional card payments, reducing fees for merchants that can then be passed onto customers. With payment processors like Visa now integrating stablecoins such as USDC into its global network, there are fewer technological barriers in accepting stablecoin payments too.
Layer 2 Technology
Second-layer solutions like the Lightning Network on Bitcoin and Polygon on Ethereum are countering the old arguments that such cryptocurrencies cannot be used for small or micropayments due to lengthy transaction times and high fees.
By transacting on layer 2 network technology built on top of these base layer blockchains, payments can be made instantly with near-zero fees, opening up small payment use cases like buying coffee, as well as micropayment use cases like content streaming. The exponentially increasing capacity of these layer 2 networks is also driving other forms of crypto payment solutions from debit and gift cards to e-commerce and remittance services as costs are driven down further.
Crypto Debit Cards
Crypto debit cards from platforms like Crypto.com and CoinZoom offer an interim solution for users, allowing crypto to be spent at merchants in the real world in the same way as fiat, eradicating any technological barriers.
Solutions like Nexo also remove concerns over tax treatment by using users' crypto assets as collateral for a credit line on a card, from which payments are taken instead. Many of these cards also offer cash back on purchases in crypto to further incentivize their crypto payments use case.
With payment processing plugins like BitPay, BTCPay Server, and now PayPal allowing merchants to integrate crypto payments into their websites, it’s becoming easier for crypto users to transact online, both within crypto circular economies and more traditional venues.
Again, such services are breaking down the barrier to integrate the technology to facilitate crypto payments, and significantly reducing costs for merchants compared to traditional payment methods. Crypto payments are also helping merchants to avoid the major problems of fraud, card declines, and cart abandonment.
The appetite to make payments with crypto is such that many users are willing to use crypto gift card services such as Bitrefill, allowing them to buy gift cards for their favorite products and services where there is not an option to pay with crypto by other means.
Gift cards offer another way for users to hold on to their crypto assets, then use them to buy fiat vouchers for merchants when they want to spend them or buy something. While like debit cards, this is something of an interim solution, it points to the demand for crypto payments rather than a failure.
The global remittance market represents the top use case for crypto payments, with cross-border transactions accounting for nearly 16% of the total crypto market, according to Statista. Remittance is big business, particularly in developing countries with many expats sending money home to friends and family.
The traditional remittance market is very slow and expensive, particularly on low-value transactions, meaning that for some payments, remittances can take days to arrive and cost up to 50% of the amount transferred in fees. Using crypto directly or services built on top of blockchain technology like Strike, remittance payments can now be made instantly at near-zero cost, sent using crypto, and converted to and from fiat if required, as demonstrated in El Salvador's adoption.
Far from failing as a payment mechanism, crypto is increasingly integrating into the mainstream, with a 2020 survey finding 36% of small-medium businesses in the US accepting crypto payments.
Larger companies like Mastercard have also said the trend is unmistakable and that they are “preparing right now for the future of crypto and payments,” while announcing that Mastercard would start supporting select cryptocurrencies directly on its network.
Other examples include insurance companies like AXA, which have begun accepting cryptocurrencies for bill payments. Microsoft accepts bitcoin payments for an array of services, Starbucks customers can pay for drinks with crypto, and travel giant Expedia accepts bitcoin via a partnership with the crypto-friendly Travala platform. Even the US Federal Government has recently offered to pay for services with cryptocurrency for the first time in its history.
The crypto industry is thought to be at the equivalent stage of adoption to the internet in 1997, with approximately 100 million users. Applications like crypto payments will take time to reach critical mass. But, with projected adoption to reach 1 billion users by 2025, the genie is out of the bottle, and just like the internet, it won’t be returned, regardless of what critics have to say.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.