Despite scattered successes, too many pitfalls dot the road to widespread merchant acceptance.
Bitcoin and other cryptocurrencies captured the public imagination over the past year, as Bitcoin shattered record after record, PayPal and Square Cash announced they would allow customers to buy cryptocurrency, and major financial institutions such as Bank of New York Mellon announced they would manage cryptocurrency holdings for their customers.
Recent regulatory guidance from the U.S. Office of the Comptroller of the Currency, which is the primary banking regulator in the U.S., has done a lot to resolve concerns about risk and regulation.
However, the “currency” part of cryptocurrency is not doing so well. Huge increases in the spot price of Bitcoin actually serve as a disincentive to use it for payments, because:
– Consumers want to hold onto it, expecting it to go higher; and
– Merchants do not want to accept it, fearing it will go lower.
The volatility of Bitcoin has made these fears more realistic. According to The Bitcoin Volatility Index, which compares the value of Bitcoin to the value of the U.S. dollar, over the 30 days leading up to March 9, the Index was 5.34%. Compare this to other currencies, which vary between 0.5% and 1.0%. Gold, to which Bitcoin is often compared, has a volatility of about 1.2%.
Compare that also to card-acceptance fees, which tend to be somewhere between 1% and 3%, depending on the card and the merchant. An average downside risk of 5% makes it more expensive to accept Bitcoin than cards. And, of course, that is just an average. On a bad day, you could have the value drop 10% or more. That is simply not something most merchants are prepared to deal with.
The Only Option
Volatility is far from the only problem. Cryptocurrencies are far better for merchants than consumers under the current card regime. Consider what consumers get with cards that they do not get with Bitcoin:
– Cash back rewards
– Zero liability for fraud
– The ability to spread payments over time
– Universal acceptance
– A payment guarantee, which allows the merchant to release the goods instantly
I have been switching between Bitcoin and the more general term “cryptocurrency” because Bitcoin is really the only crypto option for many payments. A few other cryptocurrencies, like Bitcoin Cash and Ethereum, commonly show up on checkout pages, but the vast majority do not.
This means that adherents of other cryptos need to exchange them into one of the commonly accepted currencies before they can spend them. This often involves an exchange rate, which can be as high as 60%, depending on the liquidity of the market for a particular cryptocurrency.
One might ask at this point why anyone would use or accept cryptocurrency for retail payments.
I had to use a Web site to find some stores that would accept crypto, mainly Bitcoin, and it was already out of date. (See Who Accepts Bitcoins in 2021? List of 20+ Major Companies, 99bitcoins.com). For example, Microsoft is listed as accepting Bitcoin, but I could not find it on their “Manage your payments” page. Steam and Reddit stopped accepting Bitcoin some years ago, due to “high fees and volatility.” Wikipedia, however, still accepts Bitcoin for donations, so that will have to serve as our case study.
BitPay Inc., based in Atlanta, is what we might consider a “crypto acquirer,” in that it enables merchants to accept cryptocurrency. For example, BitPay is used by Wikipedia to accept donations, and it accepts a wide list of wallets:
Note that BitPay is both a wallet and an acquirer. Once you select your wallet (in this case Coinbase), you get the following screen:
Assuming you have a sufficient balance in one of the supported currencies, you can then click on it to select it, and complete the payment.
Note that Bitcoin is not the only cryptocurrency accepted. You also have a choice of Ethereum and USD Coin. This last is significant, because it is a stablecoin without the volatility of Bitcoin. USD Coin is what is referred to as a “token,” in that its value is based on some other asset, in this case, U.S. dollars.
Dollars and other traditional currencies are often referred to as “fiat currencies,” because their own value is set by governments by “fiat.” Distrust of currency manipulation by central banks was a primary driver behind the development of Bitcoin in the first place.
Unfriendly And Confusing
Several merchants listed in the above article have already ceased to accept cryptocurrency as of the time of this writing, including Microsoft and Humble Bundle. Since we have already established that cryptocurrencies are better than cards in all other respects, this must be due to volatility and the expense of converting back to fiat currency.
Wikipedia continues to accept donations via Bitcoin, Bitcoin Cash, Ethereum, and USDCoin. Another use that has seen a lot of media coverage is the purchase of “non-fungible tokens,” credentials on the blockchain that link to digital and real-world assets.
One of the biggest events to influence the price of Bitcoin was the announcement by PayPal that it would allow users to buy Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. Unfortunately, this comes with a big condition. According to PayPal’s site, as of the time of this writing, “While you can’t currently use crypto as a way to pay or send money on PayPal, we like the way you think! Many people have big dreams for the future of crypto and so do we.”
With no timeframe for this policy to change, PayPal’s offering is limited to the legitimacy it bestows on Bitcoin.
Why would PayPal not be willing to allow payments to be made with Bitcoin? I suspect the volatility is an issue. If PayPal were to allow payments to be made with Bitcoin, it would bear the risk of price swings between the time the user confirmed the payment and the time it was settled with the merchant. Since most merchants do not want to hold Bitcoin, PayPal would have to reconvert its crypto into cash, incurring an exchange fee as well as the risk that the crypto’s value drops.
BitPay does allow you to order a debit card that is linked to your account and can be used to spend your cryptocurrency anywhere that Mastercard is accepted. Note that the merchants do not actually receive any crypto, but pure fiat currency. Instead, your crypto is converted in real time into U.S. dollars and used to settle the transaction.
I tried a BitPay card once, and before I could get it in the mail, the value of my Bitcoin had declined over 20%, and I decided to get out while I was ahead. Yes, that seems short-sighted now, but I would have had to wait a long time for the value to get back up, and in the meantime, I could not have used the card without locking in the losses.
I could have kept my assets in USDCoin, but that would have been no better than using my regular debit card. In fact, I would have been worse off. Check out the conversion rate for USDCoin for a load of $50 USD and for Bitcoin:
As you can see, had I used the USD stablecoin, I would have only gotten $36.82 worth for my $50. The difference between $50 and $36.82 is the exchange rate, because USDCoin is not a liquid currency. On the other hand, had I converted my fiat into Bitcoin, I would have gotten $59.34 worth via Wyre. The obvious conclusion is that Bitcoin is being subsidized at some point in the process.
The same kind of problem exists when converting from Bitcoin back to USDCoin. On Coinbase, there is a 99-cent fee for this, which makes it expensive to move money between Bitcoin or one of the other commonly accepted cryptocurrencies. This is an exceedingly unfriendly and confusing user experience. You would have to be really motivated (or a payments consultant) to get through it.
A Poor Showing
Having looked at the matter from all angles, I have to conclude that cryptocurrencies at present do not offer as good a purchase experience as cards, and in fact are much worse. Combine that with the low acceptance rate by merchants, and you would have to go quite a bit out of your way to use them at all.
Of course, there are merchants that have no choice but to accept cryptocurrencies, but these are the sorts of businesses that skirt the lines of legality, such as Pornhub, currently under fire for hosting sexually exploitative videos and pirated videos.
Still, that is a poor showing for a cryptocurrency that claims it will replace cash. For now, I would regard Bitcoin and other pure cryptocurrencies as assets to be invested in, rather than used as currencies.
The situation may change, however, as central banks and partnerships like Diem get into the space. That is by no means guaranteed. A central bank digital currency (CBDC) would face the same challenges as USDCoin, particularly in providing a better experience than cards.
—Aaron McPherson is founder and chief executive of Payments-101.com.