Aug 4, 2020

6 min read

Examining How Fintech Giants and COVID-19 Impact Crypto Spendability

Cryptocurrency spendability has come under the spotlight following a series of partnerships between traditional fintech giants and crypto-focused companies in recent weeks.

On July 20, Mastercard announced its plan to push forward its Master Accelerate program by granting the first principal membership license to borderless cryptocurrency payment platformWirex, making the London-based company the first crypto platform to directly issue cards accepted within Mastercard’s network. Additionally, PayPal — along with its subsidiary, Venmo — is reportedly set to offer direct crypto sales via Paxos’s Crypto Brokerage.

While Mastercard and PayPal are both reportedly making inroads into the cryptocurrency world, what does this mean for the adoption of cryptocurrency payments, specifically? OKEx Insights examines the current state of crypto spendability — and its future.

Cryptocurrency spendability

Cryptocurrency payments can be examined in two ways:

  1. Accessibility, or how easy it is to purchase or receive cryptocurrencies.
  2. Spendability, or how easy it is to spend cryptocurrencies on goods and services.

The spendability of cryptocurrencies will be the primary focus of our analysis.

Offramps on cryptocurrency exchanges

When individuals want to spend cryptocurrency, they typically go through a process of exchanging their cryptocurrencies for fiat. In many cases, users make this conversion by using an exchange and then depositing the fiat to a bank account. The main drawback of this common method is that users cannot access the value of their cryptocurrencies in a timely manner, because the entire process takes an extended period of time. For instance, Coinbase may take up to one to two business days to complete the cryptocurrency off-ramping process for customers in the United States.

Cryptocurrency debit cards

Cryptocurrency debit cards are another method of making cryptocurrencies spendable.

In general, there are two ways users can spend cryptocurrencies with cryptocurrency debit cards:

  1. Users can top-up their fiat account prior to making a purchase.
  2. Users may allow automatic conversions from crypto to fiat at the time of a purchase.

The spending mechanism of the existing Wirex Visa debit card is an example of this top-up approach. Users first need to top-up their GBP, EUR or USD accounts via bank transfer or exchange cryptocurrencies into fiat via Wirex.

Automated cryptocurrency conversion is another approach for spending cryptocurrencies with debit cards. At the time of a purchase, the payment will be automatically converted from a cryptocurrency balance to fiat for settlement. Coinbase Card is an example of this automated-conversion approach.

Crypto debit cards offer more convenience than traditional offramps, as they shorten the lengthy fiat-to-crypto conversion process.

Cryptocurrency point-of-sale terminals

The adoption of cryptocurrency point-of-sale terminals is another aspect of the cryptocurrency-payments market worth examining, as they enable merchants to directly receive cryptocurrency payments — mostly commonly Bitcoin — from their customers.

As opposed to payments settled in fiat, reversing cryptocurrency transactions recorded on the blockchain is virtually impossible. As such, cryptocurrency point-of-sale terminals protect merchants from losses incurred by dishonest customers who attempt to reverse legitimate transactions.

However, the lack of compatibility with traditional POS systems is the major obstacle for crypto acceptance by merchants. Felix Mago, co-founder of Dash Next, told OKEx Insights that merchants are reluctant to integrate crypto POS systems. He explained:

“For cryptocurrency POS terminals to scale, the best way is to get POS providers and large acquirer networks on board. However, sometimes it’s hard to onboard these key players because of three reasons. Firstly, cryptocurrencies haven’t gone mainstream as a medium of payment. Secondly, it’s difficult for merchants to collect user data in decentralized networks that show a compelling business use case. Finally, merchants need to answer various compliance questions before they adopt cryptocurrency POS terminals.”

In comments to OKEx Insights, PundiX CEO Zac Cheah also outlined the importance of the merchants’ network effect for the mainstream acceptance of cryptocurrency POS terminals, stating:

“Ultimately, for any new solution to take off, you need a successful merchant network effect. Cryptocurrency POS terminals should focus on two fronts for mass adoption: onboard as many partners with a strong merchant network and refine the product to make it secure and user-friendly.”

Dee Duncan, PundiX’s distributor in the United States, added his comments about how merchant education remains a key to mass adoption of cryptocurrency POS terminals, telling OKEx Insights:

“Education and awareness of merchants remain the key. If we want to boost merchants’ adoption in cryptocurrency payments, we need to let the merchants understand the benefits of using crypto, as opposed to traditional payment methods. For example, whether the acceptance of crypto payments helps the merchants cut costs and generate extra profits.”

How COVID-19 has impacted crypto spendability

The COVID-19 global pandemic has led to a surge in the demand for digital payments — with nearly 50% of global shoppers spending online more frequently than before the pandemic. This, in turn, has increased interest in cryptocurrencies. In April, fintech unicorn Revolut indicated a 57% value increase in the purchase of cryptocurrencies.

PundiX’s Duncan noted in his comments to OKEx Insights that the COVID-19 outbreak has driven the growth of alternative payment solutions — which, in turn, has boosted the prospect of cryptocurrency payments:

“We are seeing merchants looking for alternative payment solutions to update contactless-payment POS hardware. Retailers are now open to accepting cashless payments including Apple Pay, Google Pay, Samsung Pay and QR code-enabled solutions. This has opened the door for cryptocurrency in the payments industry.”

Since the arrival of COVID-19, the retail adoption of cryptocurrency payments has been slowly increasing. As of July 22, crypto statistics provider Coinmap.org indicated that there are 19,495 venues that accept crypto payments — a 6.8% increase since the start of 2020.

The limitations of cryptocurrency spending

Compared to the enormous market size of the digital-payments markets ($38 billion in 2018), the current size of the cryptocurrency-payments market remains minuscule ($754 million in 2019). With that in mind, there are three obstacles on the road toward the mass adoption of cryptocurrency payments:

  • Slow processing times
  • High cryptocurrency-price volatility
  • Regulatory/compliance concerns

In contrast to traditional digital payments, the processing of cryptocurrency payments is perceived as slow — since each transaction needs to be validated on a blockchain. Bitcoin processes approximately four transactions per second, whereas Visa claims to process 24,000.

The high volatility of cryptocurrencies is another barrier to the mass adoption of cryptocurrency payments. Many merchants are hesitant to accept a means of payment that may decrease 10% in value in the span of only an hour — something that is known to happen suddenly in even the BTC/USD market. Because of this, some cryptocurrency POS terminals providers enable instant conversion from crypto to fiat once the purchase is made.

The ambiguity of cryptocurrency regulation, such as the treatment of taxation, has also hindered the potential of digital assets as a medium of payment. One example is how cryptocurrencies are taxed in the United States. According to the Internal Revenue Service, the conversion of cryptocurrencies into fiat currencies is taxable as a potential capital gain. The IRS also indicates that using cryptocurrencies to buy goods and services, and even holding crypto, “generally has tax consequences.” This can be problematic for taxpayers in the U.S. and other countries with similar tax policies.

Blockchain, not crypto

The increased interest from global card issuers toward the cryptocurrency world has recently gained attention. Their interest stems primarily from two reasons:

  1. Extending their business network to crypto companies.
  2. Adopting blockchain technology to optimize their centralized network operations.

Global card issuers face competition in key areas such as cross-border transactions. To stay ahead of the competition, they aim to lower the fees for cross-border transactions charged to customers. For transactions settled in a foreign currency, Mastercard charges 1% of the transaction amount as fees. Visa, on the other hand, charged an international service assessment fee (0.8%-1.2%) and an international acquirer fee (0.45%) for cross-border transactions.

The cost-cutting potential inherent to blockchain technology has accelerated the race between Visa and Mastercard. The latter partnered with R3 in September 2019 to develop a blockchain-powered cross-border payments platform that aims to facilitate frictionless real-time payments within Mastercard’s network. Visa launched its Connect network in June 2020, which utilizes distributed ledger technology to facilitate direct bank-to-bank transactions.

Though Visa and Mastercard’s recent moves are noteworthy, the payments giants have been steadily filing patents focused on blockchain technology. According to the 2019 blockchain patent ranking by IPR daily and incoPat Innovation Index Research Center, Mastercard and Visa filed 101 and 51 blockchain patent applications in 2019, respectively.

Visit https://www.okex.com/ for the full report.

OKEx Insights presents market analyses, in-depth features, original research & curated news from crypto professionals.