Intro Guide to Crypto Ep. 8: Cryptopayments
Cryptocurrencies have become increasingly popular in recent years, particularly for making payments as they provide an efficient, secure way to move money around the world. Unlike traditional payment methods, which rely on centralised networks and are subject to delays or fees from intermediaries, crypto-payments are almost instantaneous, with extremely low transaction costs.
What are the existing issues with traditional payments that blockchain technology is solving and how is it doing this?
1. Accessibility
Nearly 1.7 billion people are unbanked globally, which according to the World Bank is close to one quarter of the global population.
The world’s top 5 unbanked countries have more than 60% of their population without bank accounts.
The solution:
You do not need a bank account to hold cryptocurrencies – all you need to create a wallet is access to the internet.
A very large percentage of those unbanked have access to the internet so they have access to crypto.
2. Speed of settlement
Traditionally, business payments take at least three working days for clearance, assuming there are no delays from the bank’s side.
In the case of B2B or more traditional e-commerce a lot of international trade is done by a bank wire transfer which is very inefficient as the payment comes after a few days.
The solution:
Crypto networks can process payments in a matter of a few minutes.
We also see positive developments in layer two payment rails, making crypto transactions even faster, with shorter settlement times.
3. Fees
Usually when you pay with a credit card from the moment you swipe your credit card as a customer to the moment that the money arrives in the merchant bank there are at least five or six intermediaries in the chain.
Fees associated with remittances in less developed countries are astonishing.
As an example, according to data from PYMNTS published a year ago, of the 70% of consumers who pay a fee to send money overseas, 41% pay a percentage fee averaging 6.2%, while 28% pay a fixed fee that averages $14.80.
Money remittance companies make huge revenues from transferring funds on behalf of their clients, in some cases up to and exceeding 10%.
The solution:
Network gas fees can be as cheap as less than a dollar.
All these factors mean that crypto-payments are becoming attractive to businesses because they offer a cheaper, faster, and more innovative way to pay, or get paid - particularly for cross border transactions.
Stablecoins
There are many different cryptocurrencies that can be used to make payments, however stablecoins are growing to be the currency of choice for crypto-payments.
Stablecoins are a specific type of digital asset designed to reduce volatility, making them more suitable for everyday use than other cryptocurrencies such as Bitcoin.
Unlike other crypto payments, stablecoins are pegged to a more stable asset such as the U.S. dollar, which helps the coin maintain its value against market fluctuations and inflation.
Theoretically, this means that each coin should remain worth around one dollar even if the overall cryptocurrency market crashes or experiences rapid price changes.
In retail, individuals can use stablecoins to buy everyday items such as groceries and gasoline with relative ease.
Lower fees
The fees associated with stablecoin transactions can be much lower than other cryptocurrencies like Bitcoin and Ethereum, particularly by using the TRON network.
This makes them ideal for small payments such as those for goods and services.
Overall, stablecoins are a valuable tool for businesses and individuals looking to make or accept payments in cryptocurrency without the risk of market volatility. With their low fees, stability, and ease of use, they offer a safe and efficient way to take advantage of the many benefits that crypto payments can offer.
What does the current state of adoption look like?
Merchants
Crypto-payments are becoming increasingly accepted by merchants and service providers.
This is particularly true for digital services such as software and hosting, as payment acceptance is often not an issue.
Merchants may also benefit from accepting crypto-payments due to the lack of chargebacks or fraud associated with these transactions.
Volumes/adoption
We’re already seeing high volumes of crypto-payments being used in real world transactions. Globally, the volume of cryptocurrency transactions grew to $15.8 trillion in 2021, up 567% from 2020.
While those figures pale in comparison to global GDP, it is clear that mainstream adoption of crypto for payments is not a question of if, but when and how.
Mainstream adoption examples currently
Dubai’s retail giant Majid Al Futtaim has partnered with Binance’s digital asset platform to accept cryptocurrencies at its 29 malls and 13 hotels – to give some context this mall had 175 million visitors in 2021.
More broadly, we are somewhere between the early adopters and the early majority, in the technology adoption lifecycle for crypto-payments. However, we’re not at a stage yet where most people will choose crypto over fiat for everyday transactions.
Why is this the case?
Issues with Crypto-payments
Lack of clear regulatory frameworks
For the majority of governments there aren’t clear guidelines for merchants and consumers around accepting crypto as payment.
Safety concerns
Digital assets can be stolen or lost if the right storage method is not carried out
User education
Consumers are not fully educated on best practices for sending and storing crypto.
Governments want to promote CBDCs instead!
Central Bank Digital Currencies are likely going to be released by the majority of governments/central banks, who will want their own CBDCs to be adopted instead of crypto which they have less control over.
The BIS (Bank of International Settlements) just released a report last year on how the crypto universe is unsuitable as the basis for a monetary system, as they promoted the use of Central Bank Digital Currencies instead.
A lot of the points about cryptocurrencies are valid, particularly the safety and stability of the crypto ecosystem leading to projects like UST collapsing. However, with clear regulation in place, we can eradicate the downfalls of certain algorithmic stablecoins.
If cryptocurrencies succeed as being used for payments, what happens to fiat currencies?
Fiat currencies and cryptocurrencies will likely co-exist for payment use.
Fiat currencies will likely become Central Bank Digital Currencies (CBDCs). These present a unique opportunity and risks for individuals, corporations, and financial institutions to transact in digital assets.
Private currencies do not need to replace incumbent fiat currencies in order to change the world for the better. A lot of people are on one side of the argument, but they are likely to co-exist. If merchants provide customers with the option of choosing both types of payment method, by integrating a digital asset platform, then we should see both being used.
What can government do to promote the mainstream adoption of crypto-payments?
As mentioned before, regulatory clarity is needed to provide confidence to users and the required safety that is needed.
For crypto-payments to go mainstream in the UK, payment service providers who are offering merchants crypto acceptance will need to execute service level agreements and obtain relevant money transmitter licenses in order to integrate digital asset platforms. Even decentralised methods like the Lightning Network which is Bitcoin’s payment layer will potentially require licenses for nodes.
So, we need regulatory bodies to catch up to be able to provide the required licenses to these merchants.
Above all, we need to encourage education. This is the most important part, ensuring the users, merchants and legislators are informed as much as possible, so we can work together to form the right legislation that is needed for this space to grow.
Summary - are crypto-payments really the future?
In conclusion, cryptocurrency payments are becoming a viable alternative to traditional payment methods. With its fast transaction speeds, low fees, secure and private nature, as well as wide acceptance by merchants, crypto payments provide an efficient way to move money around the world. For businesses looking to streamline their payment systems and reduce costs, cryptocurrency is an attractive option.
It is important to note that while crypto-payments offer many advantages, they are not without risk, particularly the security of using and storing digital assets. Additionally, it is important to be aware of applicable laws and regulations, as these can vary from country to country.
With the potential for increased efficiency, cost savings and security that cryptocurrency payments offer, it is no surprise they are becoming an increasingly popular choice among businesses and individuals alike. As more merchant providers begin to accept this form of payment, its use will only continue to grow.
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