The news that PayPal, the payments giant with 325 million active user accounts worldwide, was considering the direct sale of crypto assets — along with custodial services — had the crypto community buzzing last week, even if the reports couldn’t be verified. On July 1, a PayPal representative told Cointelegraph: “PayPal does not comment on rumors or speculation.”
Guy Hirsch, the United States managing director of eToro, told Cointelegraph: “The importance of a global company like PayPal and Venmo getting into crypto is profound.” It will change the nature of cross-border transactions, which are now expensive and slow. Moreover, Hirsch added: “We’ll see more companies following the footsteps of Facebook, and now PayPal, to leverage crypto for cross-border payments, settlement and other use cases needed to optimize for a global economy.”
Sidharth Sogani, the founder and CEO of research firm Crebaco, told Cointelegraph: “The future of payments is in cryptocurrencies and P2P transaction settlements. Whether you like it or not, it’s here to stay,” adding: “PayPal has been the leader in simplifying online payments, and that’s the reason it recognizes the simplicity and capability of cryptocurrencies.”
So, does this mean that large traditional enterprises are now ready to embrace crypto payments? Maybe not, at least according to two recent research reports.
In a May 2020 report that was shared with Cointelegraph, Gartner, a research and advisory firm, warned the chief information officers of large companies to be “very careful toward claims that bitcoin and other cryptocurrencies could succeed as a medium of exchange,” adding:
“For all the promise of bitcoin and other cryptocurrencies, none of the largest online or traditional retailers accept them at scale. While bitcoin is used as a store of value, it has not become a medium of exchange for day-to-day commercial exchanges.”
The study questioned whether blockchain-based payments would really reduce fees to the extent claimed. In addition, “there is a lack of clarity around accounting and tax treatments, and most merchants are not able to handle the cryptocurrency exchange risks.”
A recent Credit Suisse report, meanwhile, predicted that “cryptocurrencies will be challenged to make a meaningful impact on the existing consumer payments (C2B) ecosystem over the near to medium term.” Problems cited were taxation issues, regulatory uncertainty and “lack of chargeback and dispute processes.”
Others agree that challenges remain. Nick Saponaro, a co-founder and the chief information officer of The Divi Project — a masternode solution — told Cointelegraph: “We need more solutions that facilitate B2B payments and invoicing before we see corporations adopting en masse.” In the U.S., the current tax treatment of cryptocurrencies makes them unattractive as a medium of commercial exchange. “You don’t have to pay capital gains on fiat accepted at your point of sale, and you shouldn’t have to do so with Bitcoin. For now, however, you do,” he said.
These obstacles can be overcome, though, according to Hirsch: “While there are local issues in every jurisdiction with taxes, regulations and risk management, the benefits outweigh the downsides.”
The current system is fragmented, inefficient
The allure of secure, frictionless, low-fee payment transactions remains. Gil Hildebrand, the CEO of Gilded — a financial services provider — told Cointelegraph that while the internet makes it easy to contact people: “Paying them and getting paid from them is still incredibly fragmented and inefficient. Crypto removes middlemen and makes payments cheaper, faster and more global.”
On the other hand, Saponaro said: “There are several large organizations accepting crypto as payment from customers,” enabling people to pay their phone bills and even taxes in some U.S. states. Bill Zielke, the chief marketing officer of BitPay — a Bitcoin payment-acquiring processor — told Cointelegraph: “We are seeing increased demand for crypto payment services.” According to him, transactions on BitPay were up 7.2% in Q1 2020 compared to Q4 2019, while volume increased 9.1% over the same period.
Among nonprofit organizations that are now accepting Bitcoin (BTC) and other cryptos are the American Cancer Society, Score and CARE. GlobeAir, a large jet charter firm in Europe, recently became the first private jet charter operator to accept Bitcoin payments. The NBA’s Dallas Mavericks accept Bitcoin as an alternative payment method for both game tickets and merchandise, as well as online electronics retailer Newegg, which operates in 72 countries.
Still, some of the blockchain-based programs haven’t exactly panned out, according to Gartner’s report. The firm suggested that some companies have been motivated more by corporate public relations than a real desire to tackle inefficiencies. In May 2019, for instance, AT&T announced that it had selected BitPay as a bill payment option for its customers. Gartner’s report stated:
“Notwithstanding an announcement short on details and the lack of an update on the usage level one year later, AT&T is not the first company making such a move, notably to benefit from PR on how innovative it is, and at the relatively low cost of consuming an API. But, the track record so far is not positive, as detailed in an article exploring Burger King’s use and acceptance of cryptocurrencies at some of its stores.”
There are still hundreds of multinational organizations that don’t accept crypto as payment, added Saponaro. “I believe this is due to the dichotomy between consumer and corporation, as it specifically pertains to this asset class. Users either don’t understand it or are using coins that are ‘unspendable.’”
This chasm can be bridged, however, in Saponaro’s view, as hybrid finance ecosystems continue to evolve: “Benefits become more evident to users, and the fiat and crypto services become more consolidated. They will start using crypto more.” However, according to Hildebrand: “The main issues for businesses in 2020 are custody and liquidity,” he told Cointelegraph, adding:
“A crypto wallet needs to feel as safe, secure and functional as a bank account in order for businesses to trust it. There should be approvals, so no one person in the organization can go rogue. There should be a phone number they can call with support questions. And there should be bulletproof recovery features, in case private keys get lost.”
Liquidity also becomes key because it determines whether crypto transactions become too costly and/or slow. As Hildebrand explained, buying BTC on a U.S. exchange may entail a 1% fee paid to a vendor in Singapore. That vendor will then withdraw funds into their local fiat currency for yet another 1% fee. This would make the whole process just as expensive as a credit card payment and would require several days due to bank deposit/withdrawal lag.
The lack of merchant awareness of accepting crypto payments as a business benefit is the largest obstacle to adoption, said Zielke. “Many merchants are unaware of the massive size and value of crypto users. With a market capitalization more than $200 billion, the crypto market is a massive possible customer base to merchants.” Purchases made with Bitcoin are, on average, two to two and a half times higher than credit cards, with many of these customers being new, according to Zielke.
Eventually, some large corporations might even pay their employees in crypto, suggested Sogani: “Companies with international employees spend up to 3% to settle salaries every month. This can be reduced to just a few dollars [per employee] if Bitcoin is used.” Moreover, employees will receive payments faster — “it will be settled in less than one hour.”
Talking of PayPal specifically, Sogani added that the sale of crypto assets will be a simple integration, “as it will be more of an exchange+wallet service which they will provide.” The new PayPal/Venmo entity will emerge as a direct competitor to crypto-focused companies like CoinBase, he predicted.
Are stablecoins the solution?
Still, what about price volatility, which has long been a source of woes for proponents of crypto-based payment systems? Aibek Amandanov, the head of global marketing and big data at HUPAYX — a payment solution — told Cointelegraph that price volatility is indeed a big issue, adding that “large companies know that well and steer away from it.” So, can one expect widespread acceptance of Bitcoin and Ether (ETH) in the payments process, or must corporate acceptance inevitably involve stablecoins?
Hildebrand voiced the opinion that “BTC is still king of crypto payments,” adding: “However, stablecoins resolve many of the issues around volatility and taxes that prevent businesses from being able to adopt it.” Within the next two years, stablecoins will overtake Bitcoin as the primary form of crypto payments, he opined, particularly with improvements in user experience and resolution of many regulatory issues.
Sogani added: “When there are more users of Bitcoin, who accept and pay in Bitcoin or any other currency for that matter, the volatility aspect will soon disappear.” That may still take some years, though, and in the meantime, he expects to see more use of SegWit and the Lightning Network. Meanwhile, according to Zielke, stablecoins have been gaining traction, especially for cross border transactions, but all Bitcoin alternatives — including Bitcoin Cash (BCH), ETH, USD Coin (USDC) — still account for only 8% of BitPay’s transaction numbers.
One shouldn’t overlook demographics, either. Crypto-exchanges’ largest customer base is individuals between 22 and 34 years of age, according to Gartner’s report, and they “tend to have a stronger need to deal with urgent payments due to their life stage, and they attach a greater weight to any solution saving time and improving their monetary liquidity.”
All in all, PayPal/Venmo, with over 325 million active users, dwarfs anything seen so far in the crypto space, excluding Facebook’s Libra stablecoin, which has yet to roll out. Binance, the world’s largest crypto-exchange, has only 15 million users, by comparison. Therefore, a PayPal entrance is bound to shake the ground underneath the crypto industry — even as questions about price volatility and tax treatment continue to dog the crypto sector. Hirsch from eToro provided an insight into how such a service may ultimately operate:
“A customer in one country could buy crypto using their local currency, send it via PayPal wallet, settle on the blockchain, then redeemed to the local currency in the country where the recipient is residing. All with the backing and security of a company like PayPal, which can introduce millions of people around the world to the benefits of crypto.”