Regulation
What’s holding back cryptocurrency payments? | PaymentsSource
According to estimates from Deutsche Bank Research, the use of cryptocurrencies as a retail payment instrument is still limited and will only account for 3% of total payments within any country between 2021 and 2023.
However, as a means to improve cross-border transfers, crypto payments use cases are gaining favor, particularly for stablecoins, which tie their value to that of a government-issued currency. However, the lack of regulation discourages banks from adopting crypto technology for this purpose or any other.
Wells Fargo, for example, is evaluating crypto technology for potential transactional, transparency and settlement innovations, but does not accept cryptocurrencies in vaults, custody or other accounts, said Arushi Joshi, head of Wells’ distributed ledger and digital asset center Fargo. of excellence.
“Before we get involved in a meaningful way, we need to see a clear and cohesive regulatory framework that defines cryptocurrencies as financial instruments,” Joshi said.
The United States currently does not have uniform nationwide licensing requirements for cryptocurrency exchanges, which are required to obtain money transfer licenses in any state in which they operate. The United States has no equivalent to the European Union’s electronic money institution licensing regime, which requires non-banks to safeguard funds they hold on behalf of customers. Currently, the state with the most stringent crypto regulations is New York, with the New York Department of Finance’s BitLicense regime.
“Banks are throwing open the door to the benefits cryptocurrencies could bring to the industry,” said Keith Raymond, principal insurance analyst at U.S.-based Celent. Examples include processing payments, providing escrow services, facilitating international cash transactions and providing cryptocurrency loans, he said.
“However, regulatory concerns, volatility and the evolving nature of the cryptocurrency market pose challenges,” he said.
The state of stablecoins
Stablecoins lead the way in adopting cryptocurrencies as payment methods. This is due to their instant settlement on the blockchain and their ability to be combined with smart contracts. They are also designed to avoid volatility by tying their value to that of a government currency.
Some law firms using US cryptocurrency exchange Coinbase choose to get paid in the USDC stablecoin (USD Coin), as they get paid instantly rather than in three days. “Using USDC is cheap and fast; no middlemen and no waiting,” said Paul Grewal, chief legal officer at Coinbase.
Another reason why stablecoins are attractive to B2B payments is that they can be integrated into smart contracts on a blockchain. A smart contract eliminates manual processes and allows payments to be automatically executed if certain terms and conditions are met.
Cross-border remittances using stablecoins are currently the main use case, said James Wester, research director for digital assets and cryptocurrencies at US-based Javelin Strategy and Research. They offer a lower-cost, faster and more transparent alternative to existing methods like Swift for cross-border transactions, and that’s driving adoption, he said.
However, counterparty risk with stablecoins is higher than with traditional bank transfers, and cryptocurrency companies need to think about how to reduce counterparty risk, said Dima Kats, CEO of UK-based payments company Clear Junction.
Cryptographic regulations
The main disadvantage of stablecoins is that their one-to-one peg to the US dollar is not sufficiently regulated and several stablecoin failures have occurred, including that of TerraUSD, resulting in investors losing the value of their holdings. Typically, stablecoins are backed by municipal or government bonds rather than cash in bank accounts.
A stablecoin bill, the Clarity for Payments Stablecoin Act, is making its way through the House of Representatives. Separately, the Lummis-Gillibrand Payment Stablecoin Act was introduced as a bill in the Senate to protect consumers by requiring stablecoin issuers to maintain one-to-one reserves and banning unbacked algorithmic stablecoins.
Both bills aim to bring stablecoins into the same regulatory frameworks that govern traditional financial institutions.
“Ultimately, we expect members of Congress to consolidate around a single proposal that can move forward,” said Ji Kim, chief legal and policy officer of the Washington, D.C.-based Crypto Council for Innovation, a global alliance for the cryptocurrency industry.
Until legislation is adopted to regulate stablecoin issuers, concerns about the underlying assets of stablecoins will likely hold back significant adoption of stablecoins.
“Congress must pass stablecoin regulation to provide the necessary risk mitigation controls,” said Robin Cook, U.S. legislative policy counsel at Coinbase. “Regulation is necessary to ensure that a stablecoin issuer with a one-to-one dollar-backed currency can demonstrate that it has real liquid assets backing its stablecoins.”
Banks will consider adopting stablecoins as stablecoin bills progress through Congress, said Simon Jones, chief commercial officer at UK-based crypto payments firm Baanx Group.
How consumers use cryptocurrencies
The primary use of cryptocurrencies for the 10-20% of Americans who have owned them is investing, and investors need to cash out. According to Martha Bennett, vice president and principal analyst at US-based Forrester Research, most cryptocurrency payments are made by people who want to realize the gains made by holding cryptocurrencies.
However, the entire point-of-sale payment experience was designed with cards in mind, not only for payments but also to address fraud and refunds. So it’s a challenge for cryptocurrencies to match this experience and allow consumers to access their money quickly and seamlessly, Javelin’s Wester said.
Various payment system participants have been working on how to allow consumers to use cryptocurrency for retail payments. Most are hybrid methods that use an exchange to exchange cryptocurrencies for government-issued currency for payment.
Mastercard does not process cryptocurrency payments directly, but has launched card programs with 60 crypto wallet providers, according to Raj Dhamodharan, executive vice president of blockchain and digital assets at Mastercard. When cards linked to consumers’ crypto wallets are used for purchases, the cryptocurrency is converted by the cryptocurrency exchange into dollars and the merchant gets paid that way, he said. “We haven’t seen demand from merchants to be paid in cryptocurrencies,” he said.
Last month, San Francisco-based Stripe said it would allow its merchants to accept payments with USDC stablecoin starting this summer.
“Stablecoin payments are automatically settled in fiat for Stripe users, meaning they have a consistent and seamless experience across their card, banking and cryptocurrency transactions,” said John Egan, head of cryptocurrency at Stripe.
Companies like San Jose-based PayPal are merging stablecoins with existing payment experiences, said Marion Laboure, senior strategist at Deutsche Bank Research. Last month, PayPal said its cross-border money transfer service Xoom now supports the company’s PYUSD stablecoin. PayPal’s initial purpose in offering its stablecoin was for P2P payments.
Consumers can also make cryptocurrency payments directly from crypto wallets held by companies like US-based BitPay or Coinbase at a small number of online and in-store merchants.
However, while cryptocurrency spending increased 20% from January 1, 2024 to March 31, 2024, due to the bitcoin bull run, direct cryptocurrency payments are still minuscule, according to the BitPay Spending Report 2024. “Cryptocurrency payments rarely exceeded 3% of overall payments within any country between 2021 and 2023,” said Deutsche Bank Research’s Laboure. “Overall, the use case for cryptocurrency as a means of payment has not yet been fully realized.”