The crypto industry exploded in 2021, particularly through individuals and institutions investing in digital tokens.
But crypto payments haven't kept pace with the rest of the industry's growth. Since the earliest days of digital cash, making payments easier has been a key promise of the technology. Yet widespread access and adoption are still missing, which places big roadblocks in crypto’s path to the mainstream.
Broadly speaking, crypto insiders differ from tech analysts and investors in their near-term expectations for crypto payments: Enthusiasts and evangelists think 2022 will be the year, while more skeptical outsiders think the technology will continue to disappoint.
Paying by crypto for everyday purchases faces many challenges. Those include the volatility of the most popular coins; a lack of efficient and cost-effective onramps from fiat to crypto; a dearth of consumer-friendly wallets geared to spending, not trading; regulatory questions about stablecoins; the chicken-and-egg problem of simultaneously educating a base of consumers and a wide range of merchants; and a lack of credit card-like incentives, such as reward points or cash-back offers for consumers.
"We're not at the point where crypto is being used as a regular mode of payment," said Urvashi Barooah, principal at Redpoint Ventures. "We're very far from where we can use crypto to pay a restaurant bill. … We're just not there yet."
To be clear, the technology for consumers to pay with crypto and merchants to accept it is already here — in theory. Coinbase enables merchants to accept crypto, either directly or through automatic conversion of crypto to fiat. PayPal offers a similar service for merchants. Both companies also offer consumers the ability to pay in crypto through their consumer apps. When consumers use the PayPal app, the option to pay with crypto shows up if the user holds crypto.
Square — now Block — was early, but didn’t see a big uptake with paying in crypto. It introduced a feature allowing Square sellers to accept bitcoin in 2014. In 2017, CEO Jack Dorsey told Forbes it hadn’t seen meaningful volume, and references to accepting bitcoin with Square no longer appear on Square’s website. Today, users of Block’s Cash App who hold bitcoin can use the “proceeds” of their bitcoin to spend, meaning after it’s converted back to fiat.
Still, more consumers are trying crypto, and those who hold it are interested in being able to use it for payments, said Roy Zhang, group product manager at Coinbase. “They're always asking us, ‘How can I use it more? How can I actually spend it on a day-to-day basis?’” he said. “Over the course of the next year or so, I imagine that growth trend is going to continue and accelerate even further.”
Merchants that accept crypto are more interested than consumers because there are no chargebacks or interchange fees with crypto, saving them costs and headaches, whereas credit cards have higher fees and can have chargebacks weeks later, said Sundeep Peechu, general partner at Felicis Ventures. But that doesn't interest consumers, who benefit from the wide acceptance of credit cards and the protections of chargebacks. “Consumers will end up using it if it's beneficial to them — not to save merchants 1%," Peechu said.
Even if crypto payments cost less and were easy to accept, merchants still have concerns about issues such as the privacy of transactions, said Jose Fernandez da Ponte, SVP and GM of Blockchain, Crypto and Digital Currencies at PayPal.
“A payment is not a transaction,” he said. “If you're a merchant, even if there is a stablecoin that does not have the volatility risk, you still have all the things that are associated with payments: refunds, chargebacks and returns, and integration with the payment stack and reporting.”
Crypto incentives now are not clear for mainstream consumers: Many get 2% cash back from a credit card and don’t understand how or why they can get higher returns on their money by using BlockFi or other crypto services. Indeed, it’s more common to see bitcoin rewards for spending fiat than rewards for spending crypto. But crypto incentives will get better and consumers will soon see the benefits, said Walter Hessert, head of strategy at Paxos Global, which issues a stablecoin and provides crypto services for the likes of PayPal, Meta and Mercado Pago.
“You're going to see incentive programs emerge that are going to help accelerate the adoption of what's just an inherently cheaper and more efficient way to settle, which is moving these dollars on the blockchain versus between a bunch of banks and a card network all taking a toll,” Hessert said.
Crypto is also volatile and, in the U.S., taxable, which makes it tricky to convince consumers to spend it when that transaction could generate tax obligations and forego future gains. Felicis’ Peechu said today’s crypto consumers are "buying because an asset will go up, not for payments."
Stablecoins could be a better way for consumers to adopt crypto payments, said Coinbase’s Zhang, since they’re designed to hold their relative value against fiat, not fluctuate.
To address some of the lack of trust or comfort with crypto, apps could use stablecoins as stand-ins for dollars, Hessert said. Consumers could hold fiat dollars that are converted to pay in crypto, or they could hold stablecoins that look just like dollars.
But there’s another hitch: Many popular DeFi lending programs currently promise a high yield on stablecoins, which is another disincentive to spend the tokens.
And all this assumes that stablecoins have ample, trusted reserves to back their fiat peg — an issue regulators and other observers are increasingly scrutinizing.
In addition, many stablecoins have limitations in terms of scalability or are built on Ethereum’s ERC-20 standard, which is not cheap and not fast enough to make them suitable for payments, PayPal’s da Ponte said. “I don't think that we have seen a stablecoin that works well for payments yet,” he said.
One more roadblock to crypto payments is that the onramps from fiat to crypto are still not robust yet, Redpoint’s Barooah said. Conversions are still not easy enough and there are compliance issues, so banks sometimes reject transactions, she added.
The crucial wallet
One key to winning the battle to own crypto payments is the consumer wallet, Peechu said. "Whoever owns the wallets wins this game," he said. "Like the browser was the gateway product to the front page — Google, Yahoo in the early days — wallets are the way to access Web3 infrastructure being built."
In this scenario, any website or crypto project you go to will accept a wallet that holds your crypto, NFTs and identity credentials. This includes the ability to access certain privileges or enter places or environments through holding NFTs or tokens. Payments are a natural to accompany those identity features. Coinbase appears to be moving in this direction with its recent metaverse announcement.
The problem now is that many wallets and other crypto products are still too complex and not built for mainstream users, Peechu said. "We're a little further away from a true 'aha moment' of onboarding hundreds of millions of users who are not technically savvy," he said.
There are other ways mass consumer adoption could happen beyond crypto wallets, such as messaging apps or other payments apps, said Paxos’ Hessert.
A company with a massive user base could turn on crypto payments and instantly have crypto wallets for millions of users to use for peer-to-peer payments or business payments. One company that intended to launch a cryptocurrency to enable payments, Telegram, shut down its crypto efforts last year.
Longer term, real network effects that will help crypto grow require products that allow people to transact directly in crypto, said PayPal’s da Ponte, who expects crypto payments to take off in 2022 as better payment integrations, better stablecoins and clearer regulation all roll out. “The true promise of crypto for payments is that you can arrive at fundamentally new payment rails and for those fundamentally new payment rails, you should be able to stay on the protocol on the blockchain.”