Using digital assets to make a purchase isn’t nearly as marginal as it was just a couple of years ago, putting PayPal’s Jose Fernandez da Ponto right at the forefront of a new age of payment innovation.
“A significant volume of transactions will shift to major cryptocurrencies,” said Fernandez da Ponte, PayPal’s senior vice president of blockchain, crypto and digital currencies. “Whether it’s crypto, fiat-backed stablecoins or [central bank digital currencies]it’s speed.”
PayPal is considering building its own stablecoin to take advantage of the growing interest in cryptocurrency payments. While the market fluctuates in the valuation of cryptocurrency in 2022 and the high-profile failure of the Terra stablecoin has cooled some of the buzz, companies like PayPal and the card networks, and traditional financial institutions like Silvergate Bank, are moving forward with payment projects and seeking the right mix of technology, partners and size .
The focus on stablecoins, which attempt to tie their value to a government-issued currency, is intended to calm fears about the volatility associated with the valuation of Bitcoin and similar coins. But the collapse of Terra has shaken confidence in the stablecoin model, making it even more challenging for the payments industry to move forward with its own crypto projects.
“While we cannot ignore the recent decline in confidence around cryptocurrency, there is still a growing interest in crypto and a strong potential for the technology to contribute positively to the future of financial services,” said Frank Hinek, Chief Innovation Officer at NCR , working on cross-border and point-of-sale crypto payment use cases, with fast conversions to local traditional currency for consumers and merchants.
“Crypto has taken longer to mature in terms of offering a widely adopted alternative to the traditional payment system, but there is still a significant opportunity there,” Hinek said.
Although sharp drops in value have hit the cryptocurrency market in 2022, cryptocurrency usage is actually increasing. About 3.6 million US adults will use cryptocurrency to make a purchase in 2022, up from about 2.2 million in 2021, according to Insider intelligencewhich also reports that the number of US adults who own at least one cryptocurrency by the end of 2022 will approach 38 million, up from around 25 million in 2021. Insider Intelligence also reports that payments made using cryptocurrency will pass $10 billion for the first time in 2022, up from about $3 billion in 2021. And in a recent Deloitte surveynearly 75% of black merchants said they plan to accept cryptocurrency for payments in the next 24 months.
“The biggest payment companies are already integrating cryptocurrencies into their business,” said Sherhii Zhdanov, CEO of EXMO, a London-based cryptocurrency company.
Tipping the scales
PayPal’s approach to stablecoins is to create a system large enough to handle a large volume of transactions. PayPal has researched protocols and the necessary scale required for a stablecoin to have ubiquitous access, and it has not found such a protocol, according to Fernandez da Ponte.
The need is for a large volume of small transactions – 10,000 transactions for $10 moving on a blockchain over a few hours, as opposed to 10 transactions for $10,000, which is closer to the volume designs of most blockchain-backed networks, PayPal claims.
“We want to make crypto more accessible to regular users, to provide an experience that works well for them,” Fernandez da Ponte said.
PayPal and the Venmo app support cryptocurrency buy, sell, and hold services, and PayPal also offers one payment function which supports payments from cryptocurrencies in PayPal wallets, including Bitcoin, Litecoin, Ethereum and Bitcoin Cash.
PayPal also recently added support for deposits and withdrawals for cryptocurrency and other digital assets. PayPal executives have talked several times over the past two years about building one great app, or use the company’s core payments function and Venmo as an enrollment portal to a growing menu of financial products. PayPal is in competition with Block (formerly Square), which also builds financial services available through the Cash App, which supports Square’s cryptocurrency trading.
A super app will make use of open banking or embedded banking, or technology that allows payment apps to connect to financial services from other providers. PayPal and Venmo’s crypto services can help create the user base for this larger financial mix.
“It wouldn’t just be PayPal. We see other banks interested in cryptocurrency payments and seeking support from mainstream banks around the world,” Fernandez da Ponte said.
What Happened to Facebook’s Coin?
Meta’s infamous stablecoin project, Diem, still exists, although it is now under umbrella of Silvergate Banka financial institution that specializes in cryptocurrency.
Silvergate had then been one of the partners in the original Diem stablecoin project bought Diem’s technology earlier this year. Meta’s engineers developed much of Diem’s technology, which was part of the original Libra stablecoin project back when the company was still called Facebook. That project changed several times, including its structure and branding, before Silvergate took control.
We don’t think this is going to be a winner-take-all network where you have one stable coin to rule the world.
Alan Lane, Managing Director of Silvergate Bank.
Much of Silvergate’s current work involves building scale through the underlying technology and building a network of partners, including banks.
“We are interested in the technology, which was purpose-built for payments,” said Alan Lane, chief executive of Silvergate Bank.
Meta spent years and hired dozens of engineers to build a technology platform to power payments for its two billion users around the world, Lane said. “We agree that the protocol built for payments can handle tokenized dollars at scale with billions of users,” Lane said
Silvergate is rebuilding the relationships that will be needed to launch the stablecoin, and it “has a different view of who those parties might be,” Lane said.
More of these new partners may be banks than the technology companies that dominated the Diem project when it was associated with Meta. Meta did not comment on its own stablecoin plans for this story.
“We don’t think this is going to be a ‘winner take all’ type of network where you have one stablecoin to rule the world,” Lane said, adding blockchains and APIs will help support interoperability for different stablecoins in different markets.
There are different types of stablecoins with different levels of risk, and this will inform the model that will most likely be used for payments, according to Silvergate’s Lane.
A stablecoin backed by a traditional currency stored in a bank like the US dollar, then tokenized on the internet, is the future of payments, he said. “You can have smart contracts that can handle the conversions to pounds, euros, yen or other currencies,” Lane said.
Other types of stablecoins include asset-backed stablecoins, which are backed by dollars but can also be backed by investments such as commercial paper or loans.
These types of stablecoins have been subject of controversy due to the use of unsecured claims. Tether, for example, was fined in 2021 for falsely claiming that the stablecoin was fully backed by US dollars and euros. Tether earlier in 2022 issued a statement says its stablecoin was fully backed by collateral, and has said it has reduced the amount of commercial paper it uses to back the stablecoin.
“These types of stablecoins have trended toward adding more dollars and treasuries,” Lane said.
Another variant, algorithmic stablecoins, uses an additional cryptocurrency to back the stablecoin; an algorithm and smart contracts determine how the stablecoin is supported by either increasing or decreasing the supply to maintain the 1:1 dollar-to-stablecoin ratio.
Terra, an algorithmically stable coin, crashed in May after withdrawals and panic selling that followed challenges in maintaining the relationship.
A model that backs each stablecoin with currency already in a bank is the safest, Lane claims.
“Circle’s USDC is included in that,” Lane said, adding that Silvergate supports the USDC stablecoin. “Circle sends some of the dollars to other banks, but the stablecoin is still backed by dollars or US Treasuries.” Circle did not comment for this story.
Coinbase, another cryptocurrency company working on a broader financial service activitiesoffers payment products included Coinbase Paywhich was recently upgraded to allow Web3 developers and businesses to integrate with the payment function.
Consumers can use existing cryptocurrency balances or purchase new cryptocurrency using information sent to their Coinbase accounts, such as debit card and bank account information, to facilitate the conversion between cryptocurrencies and traditional money.
While Coinbase’s shares have fallen more than 50% in 2022, the company has remained aggressive in building out its financial services business, including acquiring a banking license in Italy.
Despite the growth in crypto payments, there are persistent challenges in technology and regulation, according to Rick Fletcher, CEO of CorPay Payables, a payment technology company and consultant.
Regulators in several different countries have pushed tighter regulations for cryptocurrencies, although there are still no detailed international standards or rules governing cross-border cryptocurrency payments. And US regulation or congressional guidance for stable coinswhich can set rules for assets backing stablecoins, is still in development and months behind schedule.
“Cryptocurrencies still do not have the necessary regulatory frameworks in place,” Fletcher said. “Their untraceable nature, volatility and lack of widespread acceptance are major challenges that must be overcome before we see mainstream enterprise adoption.”
“Lots of variety”
Regulatory and market fluctuations aside, payment companies and merchants continue to expand acceptance of cryptocurrency payments and build infrastructure for new digital assets.
AMC theaters in May began accepting cryptocurrency for payments on the movie chain’s mobile app, while Whole Foods and Nordstromamong other things, also accepts cryptocurrency for payments. And increasingly high-profile companies such as e.g sports team allows employees to invest a portion of their salary in cryptocurrency.
“There has been a downward movement in the prices of crypto, and that may make people more hesitant,” said Ben Seiss, CEO of CoinFlip, a cryptocurrency ATM company. “But people are still seeing the technology progress, and more companies are getting into crypto.”
Central bank digital currencies, which are tokenized representations of traditional government currencies, are also on the rise. Visa and Mastercard have pitched roles for themselves as support the central bank’s digital currencies. CBDCs are under development in dozens of countries, although a standard format is not in place.
Many CBDCs will likely involve a role for banks, as governments look for partners to process CBDC transactions. Visa and Mastercard have presented their networks and international scale as a way to support cross-border transactions denominated in CBDCs.
Mastercard and Visa has additionally expressed an intention to support cryptocurrency payments, although the card brands have used language consistent with stablecoins instead of Bitcoin or Ether.
“Crypto is moving from an asset to a tool,” Weiss said. “Stablecoins may be attractive for payments now, given the volatility of other crypto, but that’s the good thing about blockchain technology: There’s a lot of variety.”