Why more and more companies want consumers to pay with cryptocurrency? -

This week, it seemed like every major company wanted consumers to start paying with digital assets.

Yesterday, PayPal began allowing customers to pay with their cryptocurrency balances. Intercontinental Exchange-owned crypto custody company Bakkt also launched a consumer app that allows users to buy, sell and spend cryptocurrencies. On Monday, Visa said it had made its first settlement using the stablecoin USD Coin (USDC) on its network, the first step in a broader effort to settle payments in digital currencies.

James Wester, research director of IDC's global blockchain strategies, said: "Crypto payments have become a discussion we are happy to accept and are no longer so marginal."

But as of today, Bitcoin is still not a very good medium of exchange. Being able to make purchases with Bitcoin does not help consumers understand why they should buy with Bitcoin, nor does it show merchants why they should accept Bitcoin payments.

“Bitcoin is used as an inflation hedge and remains constant over a long period of time,” said Lisa Ellis, partner and senior equity analyst at MoffettNathanson. “There are a lot of cryptocurrencies that can be used for different purposes.”

Novelty Factor

By accepting cryptocurrencies, household names such as Visa and PayPal are making the concept of cryptocurrencies and other digital assets accessible to the masses and laying the foundation for supporting digital dollars and other central bank digital currencies (CBDCs) around the world.

PayPal’s crypto payments feature appears limited in terms of innovation, with users actually selling cryptocurrencies for dollars to fund purchases and merchants getting paid in dollars. But it could play an important role in bringing digital assets further into the mainstream, as it owns the largest digital wallet.

Today, the company has 361 million consumer digital wallet accounts worldwide.

“PayPal is taking the idea of ​​cryptocurrency mainstream, beyond just the retail fringe investors we thought of it for the last few years,” Wester said.

Meanwhile, Goldman Sachs said today that it will soon help its wealthiest clients gain exposure to Bitcoin and other digital assets, following a rush by industry peers including Morgan Stanley and JPMorgan Chase to offer digital asset services to high-net-worth clients.

But from a consumer perspective, it’s unclear why people would want to spend cryptocurrencies, Ellis said. “There’s a novelty factor.”

In most cases, merchants don’t know that customers are funding transactions with cryptocurrency, Ellis said. They will still pay the same amount for the transaction either way. But while PayPal doesn’t charge consumers a transaction fee, it does profit from the foreign exchange spread when they convert cryptocurrency into U.S. dollars.

Game Changer

In contrast, cryptocurrencies really changed the game when Visa (and Mastercard) began settling more payments using stablecoins.

“This is the first known legitimate intersection between a crypto network and a fiat payment network where they’ve actually successfully conducted a cross-network settlement,” Ellis said.

For many companies working in digital assets—building wallets, apps, and otherwise leveraging cryptocurrency networks—there’s a huge and frequent problem they run into whenever they try to settle payments: Banks demand that they settle in fiat currency, forcing companies to convert digital currencies into fiat and absorb the fees that come with that.

“There are inefficiencies in transactions, and they always have to convert from the crypto ecosystem into fiat currency and back and forth,” Ellis said.

Now that Visa will settle payments in USDC, companies may still have to convert their cryptocurrencies into USDC to eliminate the volatility associated with other assets like Bitcoin.

USDC is a stablecoin designed to minimize the volatility of other digital assets. It is pegged to the U.S. dollar and runs on the Ethereum, Stellar, and Algorand blockchains.

“The goal is to promote the utility of cryptocurrencies and make it more feasible to actually do things with cryptocurrencies,” Ellis said. “They are working on a way to do native cryptocurrency transactions over their network, which is amazing because it’s a completely different technology.”

She added that this is just a stepping stone to enabling a government-backed digital currency.

Visa’s research team, like many financial institutions’ innovation labs, has been working on cryptocurrencies for several years, but a spokesperson for the company said the USDC initiative is being led by the product team.

“There’s a real idea and a real need that’s being met,” Wester said. “It may be a small idea and a small need, but it may be the beginning of a much bigger opportunity.”