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Crypto as a Payment System? Here We Go Again

How many users will take advantage of PayPal’s Crypto at Checkout feature? Skepticism is justified, given the track record of technology in commerce, says the executive editor of CoinDesk.

Hey, PayPal: 2013 called, he wants his narrative back.

This week, the global payments giant announced that it has started allowing users in the U.S. to pay for things online with cryptocurrency. “We think it’s a transition point where cryptocurrencies are no longer predominantly an asset class that you buy, hold or sell to become a legitimate source of financing to make transactions in the real world for millions of merchants,” said CEO Dan Schulman to Reuters.

Transitional is a suitable word to describe the situation, especially for those who use cryptography with PayPal. Since last fall, the company has allowed customers to buy or sell bitcoin (BTC, -0.33%), ether (ETH, + 5 , 35%) and some other currencies, but don’t do much more with them. Not even removing them from the platform, nor depositing the encryption they already had.

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Until now, the service was arguably just a way of betting on the prices of these assets. Which, to be fair, is probably the most popular use case for cryptography, at least among those privileged enough to not need it to carry out transactions.

You still can’t deposit or withdraw digital assets from PayPal, which detracts from the technology’s appeal as a way to put individuals back in control of their money in a world of unverified asset seizures and involuntary bank bailouts. But now you can at least use the service to buy things.

How many users will take advantage of the new feature? Despite Crypto Twitter’s usual hyperventilation, a minimum of skepticism is justified, given the long struggle of this technology to become a payment mechanism.

And I say this having believed (in the prehistoric days of 2013) that the payment use case would be a big part of bitcoin’s appeal.

The age of innocence

Even so, I had a point of doubt:

[A] 20-minute wait for Bitcoin confirmations is awkward for retail purchases in stores. Depending on the size of the purchase, a trader who accepts Bitcoin may be at risk if he allows the customer to leave before the transaction is confirmed. But, without a doubt, he is already taking that risk if he accepts credit cards, since from the merchant’s point of view the transaction is not actually made until the funds are placed in his account – which could be two or three days later in the card world.

In other ways, Bitcoin can be an attractive alternative (or supplement) to Visa, MasterCard or PayPal for merchants. … For starters, there are no acceptance fees (Bitcoin has an optional transaction fee for senders, usually the equivalent of a few cents, to expedite payments). And traders discouraged by the notoriously volatile exchange rate between bitcoins and dollars do not have to take currency risk. They can choose to hire a processor … who will take immediate possession of the bitcoins on behalf of the merchant and remit the equivalent in dollars or euros. The fee for this service is around 1%, which is still 2% to 3% for credit card payments. Thus, traders can reap the benefits of Bitcoin without worrying about the price of bitcoin….

Ah, to be so young again! A few years later, during the 2017 bull market, network traffic became congested, “a few cents” became a few dollars, the settlement could take hours instead of minutes, and I swallowed my words.

Today, it is another bull market, average confirmation times are skyrocketing and rates are in the double digits in terms of dollars. This latency has already undermined at least one bitcoin payment from the Tesla buyer:

Other blockchain developers tout their higher yield and lower rates, but none of them boast Bitcoin’s level of security, network effects or name recognition. Its closest competitor, Ethereum, faces its own scale challenges.

Above all, cryptography prices remain volatile, and in the US, the government treats digital currencies as property, which means that buying a can of dog food with dogecoin (DOGE, -0.17%) is a likely event report and tax.

None of this bodes well for the use of cryptography in daily trading in the short term, at least from the perspective of an Average Joe.

If you don’t know how much a coin is going to be worth from one minute to the next, and you may have to wait an hour and pay $ 20 to make the payment, and this will generate a tax liability, why the hell would you choose this method when buying diapers for your newborn at Walmart? Just swipe that credit card and get on with your life.

Winds of change?

So again, I’m speaking like a provincial American here. There is some evidence that cryptography is starting to become popular as a medium of exchange in other parts of the world where payment paths are not as developed.

In addition, network transfers are no longer the only way to move small amounts of digital money; “Second tier” systems, like Bitcoin’s Lightning Network, can do this quickly and cheaply as in the old days. One of the most promising entrepreneurs in the industry and heir to a Bitcoin dynasty, Jack Mallers is working with none other than Visa and using Lightning to clear dollar transactions.

And while the long-term bitcoin “HODLing” stoicism is admirable, there is a case where it must succeed as “electronic money” (words of its creator) if it wants to succeed as “digital gold” (the current value proposition ), at least as much as the other way around. As CoinDesk Research Director Noelle Acheson wrote a few weeks ago:

It can be argued that the value of bitcoin as a store of value depends on its usefulness. The more there is residual demand for bitcoin as a payment token, regardless of its price, the more investors will believe that demand for it will increase in a sustainable manner.

It can also be argued that it is essential for the health of the network that the use of bitcoin as a medium of exchange is encouraged. As successive halves reduce the block’s subsidy (where miners receive a new bitcoin as compensation for work spent on successfully processing transaction blocks), miners’ incentives will increasingly depend on transaction fees.

PayPal, to your credit, is lubricating the gears here. It does not charge its normal fee to sell cryptography when consumers use the Checkout with Crypto feature (and you have to sell it, since PayPal is not asking its merchants to accept anything other than fiat). PayPal customers don’t have to worry about network fees or confirmation times; this complicated business will be dealt with behind the scenes by the company and its partner Paxos. And PayPal will ease the headache of tax preparation for U.S. customers by providing them with a 1099 form documenting their cryptographic sales and reporting transactions to the IRS.

Will this be enough for consumers to overcome the indignity of paying taxes to buy a cup of coffee and the disincentive to spend a currency today that may be worth more tomorrow? Even with PayPal’s vast reach (29 million merchants worldwide), it is a difficult task. But I would like nothing more than to swallow my words again.

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