Why Everyone Wants You To Spend Your Crypto

This week it seems like every big company wants consumers to start paying for things using digital assets. 

Yesterday, PayPal started letting customers pay for things using their crypto balances. Bakkt, the crypto custodian owned by the Intercontinental Exchange, also launched its consumer app yesterday, which allows users to buy, sell and spend cryptocurrencies. And on Monday Visa said it made the first settlement on its network in the stablecoin USD Coin (USDC), the first step of a broader effort to settle payments in digital currencies.

“It’s all becoming a discussion that we’re comfortable having, that’s no longer quite so fringe,” said James Wester, research director for worldwide blockchain strategies at IDC.

Despite all the discussion, today, bitcoin is still not a very good medium of exchange. Being able to buy things with bitcoin doesn’t help consumers understand why they should buy in bitcoin, or show merchants why they should accept payments in bitcoin (except for Tesla, which turned that function on last week). 

“You don’t usually see these things used for more than one big use case,” Lisa Ellis, a partner and senior equity analyst at MoffettNathanson, told Blockworks. “Bitcoin is used as an inflation hedge and to hold for a very long period of time. There are lots of cryptocurrencies that’ll be used for different things.”

Novelty factor

By accepting cryptocurrencies, household names like Visa and PayPal are getting the masses comfortable with the idea of cryptocurrencies and other digital assets, and also laying the groundwork to support a digital dollar and other central bank digital currencies (CBDCs) worldwide.

PayPal’s crypto payment function seems limited in innovation — users actually sell their cryptocurrency for dollars to fund their purchases and merchants get paid in dollars — but it will have a big role in ushering digital assets further into the mainstream, if for no other reason, because it has the largest digital wallet.

Today, the company has 361 million consumer digital wallet accounts globally, and doesn’t break out numbers by region.

“[PayPal is] mainstreaming the idea of cryptocurrency, not just with the retail fringe investor that we think of from the past few years, it’s mainstreaming it with that person who has a PayPal account and says ‘sure, I’ll put  in $100 and say that I have bitcoin,’” Wester said.

Meanwhile, Goldman Sachs today said it would soon help provide its wealthiest clients — those with at least $25 million to invest — exposure to bitcoin and other digital assets, following industry peers like Morgan Stanley and JPMorgan Chase who are also scrambling to offer digital assets services to high net worth clients.

But from a consumer’s perspective, it’s not clear why people should spend their cryptocurrency, Ellis said, adding “it’s a novelty factor.”

And in most cases, the merchants won’t have any reason to know that the customer funded the transaction with cryptocurrency, Ellis said. They’ll still pay the same amount for the transaction, regardless of how it’s funded. But PayPal, while it won’t charge transaction fees to consumers, will make money on the FX spread when they convert their cryptocurrency to dollars.

Credit cards are the most expensive form of funding for PayPal, followed by debit cards, ACH, followed by the cash balance in the wallet. Crypto adds a funding method that essentially has negative funding costs because they’ll actually generate revenue on the spread, Ellis said.

Game changer

By contrast, far fewer people will notice when Visa (and eventually, Mastercard too) begins settling more payments using stablecoins. But it’s truly a game changer. 

“This is the first known legitimate intersection point between the crypto networks and the fiat payment networks where they’ve actually managed to do cross-network settlements,” Ellis said.

For many companies in the business of digital assets (building wallets, applications and leveraging cryptocurrency networks in other ways) there’s a big and frequent issue whenever they try to settle payments: banks require they be settled in fiat, forcing companies to convert their digital currency to fiat and take on the fees that come with that.

“They always have this inefficiency in transaction costs, they’re always having to convert out of the crypto ecosystem into fiat and back and forth and back and forth,” Ellis said.

Now that Visa will settle payments in USDC, companies may still have to convert their cryptocurrency into USDC to eliminate the volatility associated with other assets like bitcoin. USDC is a stablecoin, meaning designed to minimize the volatility of other digital assets. It’s pegged to the US dollar and runs on the Ethereum, Stellar and Algorand blockchains. (Visa is settling on the Ethereum blockchain.)

But they don’t completely leave the crypto economy to transact. 

“It’s intended to facilitate the utility of cryptocurrencies and make it more viable to actually do things with cryptocurrencies,” Ellis said. “They’re figuring out a way they can run cryptocurrency transactions native through their network, which is amazing because it’s an entirely different technology.”

It’s just a stepping stone to enabling government backed digital currencies, she added.

And it’s probably more than innovation theatre this time. Visa’s Research team, like many financial institutions’ innovation labs, has been studying cryptocurrency for several years, but a company spokesman told Blockworks the USDC initiative is led by the product team. 

“There’s a real idea and a real need being filled,” Wester said. “It could be a modest idea and a small need, but it could also be the start of something bigger that Visa has identified as an opportunity.”