Unblocking the Blockchain

Digital currencies like Bitcoin have been beset for years by a limited user base and merchant indifference. As mainline players like Visa and PayPal create new services, is that about to change?

Dust off any textbook on economics and you’ll find, buried somewhere in the early pages of the tome, a tripartite definition of money. The test is that the candidate token must be a store of value, a unit of account, and a medium of exchange. Bitcoin and most other digital currencies meet the first two criteria, more or less, but fail miserably on the third.

More than a decade after Bitcoin’s emergence touched off a blockchain revolution, the ranks of sellers taking cryptocurrency, online or in person, is pitifully small. For cryptocurrency enthusiasts, indeed, “acceptance remains the hurdle,” notes Tim Sloane, vice president for payment innovation at Mercator Advisory Group, a Marlborough, Mass.-based consultancy.

Other problems also afflict this market. They aren’t insurmountable but they are big enough to intimidate both consumers and businesses. They include what can be wild swings in value, sometimes painfully slow processing times, and even tax liabilities in cases where the crypto is considered an asset rather than a currency.

In fact, crypto transactions can slow down markedly when the blockchain is busy, as it often is. “It’s not instant. It can take a while to do a transaction,” says Ronny Yakov, chief executive of The OLB Group Inc., a New York City-based technology provider for online sellers (sidebar). “If it takes a minute or a couple of minutes to get a cup of coffee, people lose patience.” As a result, he adds, “it’s much more suitable at the moment in e-commerce.”

But perhaps the biggest hurdle just now is volatility. If a currency risks seeing thousands of dollars shaved off its value in a matter of days, as has happened this year with Bitcoin, merchants are reluctant to accept it for fear of seeing its value melt before they can convert it to fiat money.

“You can’t have the risk of a 10% loss in one day,” says Aaron McPherson, founder of Payments-101.com and a longtime payments researcher.

Bitcoin, which remains number-one in market cap, has had a rocky year. In mid-April, it boasted a price exceeding $63,000, only to lose 22% of its value over the next 10 days. By June 9, the coin had shed nearly half of that mid-April price. Indeed, for McPherson, all other issues pale beside the problem of these big value fluctuations. “Making it easy to spend at the point of sale is not the problem,” he says, “Volatility is the problem.”

Going Native

Still, major payments players like Mastercard Inc., PayPal Holdings Inc., and Visa Inc. are steaming full speed ahead into cryptocurrency commerce. The trick is to find ways to draw in merchants without letting volatile values scare them away. The answer is twofold: convert the crypto instantly into fiat money—that is, dollars in the case of U.S. merchants—or deal in stablecoins, which are blockchain currencies tied to fiat.

Visa is following the latter approach. Its big move came late in March when it said its integration with San Francisco-based Anchorage Hold LLC, the first federally chartered digital-asset bank, allowed the network to process its first transaction involving direct settlement with a stablecoin, in this case, USD Coin, a currency linked to the dollar. The processor in the transaction was Crypto.com, a digital-currency trading platform.

The significance of the transaction lay in the fact that, historically, banks have had to settle through the Visa network in dollars or other national currencies. That has forced fintechs or digital-asset exchanges to first convert settlement assets to fiat, a step that adds costs, particularly as volumes grow.

Now, Visa says, more such transactions may be coming, at least for cryptocurrencies that mirror national currencies. Some 80% of central banks around the world are working on so-called CBDCs—central bank digital currencies—according to Visa.

“We’re seeing more interest from consumers in [cryptocurrency] wallets,” says Cuy Sheffield, Visa’s head of crypto. “We want to ensure Visa is the preferred partner for crypto wallets on [crypto] exchanges.”

Taking a similar tack, Mastercard announced in February it will later this year start processing cryptocurrency “natively”—that is, directly—on its network. Another way of looking at it, according to a spokesman, is that the network will move a cryptocurrency transaction as it would any card transaction.

This is a significant departure from Mastercard’s current practice, in which it has processed fiat transactions for operators that have already converted their crypto assets.

Mastercard made no bones about the work it will have to do to re-engineer its network for this effort, but the company projected the new capability “will allow many more merchants to accept crypto,” according to a blog post by Raj Dhamodharan, the executive in charge of the project.

As with Visa, Mastercard’s starting point could lie in stablecoins. Mastercard has been working with central banks around the world, Dhamodharan’s post says, and last year created a test bed for them to experiment with their currencies.

“Using our deep experience in payments technologies, we look forward to continuing these partnerships with governments and helping them explore the best ways to develop these new currencies,” the post says.

‘Interest Is Increasing’

PayPal’s approach is more immediate—and more widely followed by other players, such as veteran cryptocurrency specialist BitPay Inc. PayPal last year began letting its wallet holders spend their crypto assets at PayPal merchants—but with immediate conversion to local fiat.

While some observers scoff that this approach, which has been followed by a number of processors in recent years, isn’t really “acceptance” of crypto at stores, it does open a vast array of retailers to crypto holders. PayPal is accepted at 31 million merchants and serves about 360 million consumers.

PayPal has also proved willing to invest heavily in building out a cryptocurrency capability, including security assets. In April, it closed on its acquisition of Curv Inc., a crypto security firm based in Tel Aviv. PayPal has not disclosed a purchase price, but estimates have ranged from under $200 million up to $300 million.

Other companies have been at this far longer—a decade in the case of Atlanta-based BitPay. The company processes wallet-based transactions but also offers a Mastercard backed by the holder’s crypto assets.

Of the roughly 6,000 merchants on BitPay’s platform, some 80% have elected to have the customer’s assets converted to fiat upon acceptance, according to chief marketing officer Bill Zielke. “The CEO doesn’t want that volatility on his balance sheet,” he adds.

Building up merchant acceptance is critical for companies like BitPay. “Ninety-three percent of folks who have crypto want the ability to spend it,” he says, citing company research. And, with the publicity surrounding valuations like that of Bitcoin, merchants are starting to be more welcoming.

“We’re in discussions with a lot of merchants in the Internet Retailer 500,” Zielke says. “Interest is increasing.” Indeed, a recent survey by chargeback-management firm Chargebacks911 found 15% of a sample of small and mid-size merchants were accepting crypto, a cohort that had doubled from the previous year.

Now, some sellers who tried and dropped crypto are looking at taking it up again. Jackpocket Inc., a processor for lotteries in 11 states, accepted Bitcoin for tickets at one time but discontinued it in 2017, put off by the digital currency’s volatility. Now, chief executive and founder Pete Sullivan says he is looking at resuming acceptance.

More consumers are holding crypto these days, and lottery regulators are more comfortable with the currency, Sullivan says. And volatility is a less pressing issue now that the company is processing $30 bundles rather than $2 or $4 individual tickets, he adds.

40 Million

Other developments in the works could also help boost crypto payments in coming years. Fiserv Inc.’s AllData unit, a data aggregator that verifies financial accounts, is partnering with financial-accounting firm Verady Inc. to extend its reach to crypto assets. The idea of the new service is to serve wealth advisors, lenders, and fintech apps that enable investment.

And the need stems from the sheer number of consumers sitting on digital currency. “What we have seen is that consumers have assets in newer places” like crypto, notes Paul Diegelman, vice president of aggregation and verification at Brookfield, Wis.-based Fiserv.

Apparently, a lot of consumers do. “We verified 40 million people in the United States have assets in crypto,” Diegelman says. “There could be more than 40 million.”

 

Consumers Spend Their Way While Online Sellers Get Bitcoin

Most payments processors that deal in digital currencies let consumers pay with Bitcoin or other cryptocurrencies and then may translate that money into dollars or other fiat money for the merchant. This spring, a company called Paxful Inc. announced a service that does the opposite: it lets users pay with any of nearly 400 methods and then pays the merchant with Bitcoin.

New York City-based Paxful says Paxful Pay is now available for online merchants to add to their checkouts. Though the 6-year-old company only launched the service commercially early last month, it says it already has more than 100 sellers on the platform. It will add “select” merchants in the weeks to come, it says, and “expand more generally” thereafter. Information about pricing and transaction volumes was not available.

Paxful’s service, which is aimed at a global audience, also lets merchants track transactions on an online dashboard and convert their Bitcoin holdings into a local currency. Later on, it says, the platform will add more cryptocurrencies and enable merchants to automatically convert their holdings inside a bank account.

On the user side, consumers who choose Paxful Pay are prompted to log in to the service. If not a current user, they must create a profile. A Paxful spokesperson says the user count is “limited” for the time being as the service rolls out, but the number added is expected to be “in the thousands” per month.

In recent years, some payment services have looked to tap into the consumer market for cryptocurrency by allowing users to pay both online and physical merchants with Bitcoin or other digital coins. But in most of these cases, the cryptocurrencies are converted to dollars or other fiat money by the service enabling the feature for the merchant.

“There is a clear need to offer local options for Bitcoin, and this product is a culmination of our efforts to deliver on that demand,” said Artur Schaback, chief operating officer and co-founder of Paxful, in a statement issued with the June announcement.

“By offering users the ability to complete purchases using almost 400 payment methods, they will now have an even stronger financial solution at their fingertips,” Schaback continued. “We cannot wait to expand this offering to encompass as many merchants as possible.”