Will Cryptocurrency make it into our daily payments?

The prospect of cryptocurrencies becoming a part of our daily financial transactions is becoming a more important question to ask. It’s not just the developments in tech that are making it possible, but that public perception is becoming more used to the idea of it.

Many major tech companies and financial institutions have begun embracing cryptocurrencies. The FCA has not only acknowledged its existence by regulating it but is having more involvement in legitimising it each year. 

Services that encompass direct cryptocurrency transactions and crypto-linked debit and credit card offerings are growing. Global entities such as PayPal and Mastercard have already implemented systems enabling customers to transact and convert various cryptocurrencies within their platforms. 

This article will look at whether this trend will continue until crypto becomes a normal way for people to pay for goods in their local corner shop, or if there is a limit to this acceptance.

Current State of Cryptocurrency in Payments

Below, we’ll take a look at how cryptocurrency is currently being used for payments. 

Cryptocurrency Payment Platforms and Integration

Companies such as PayPal and Square have played a big role so far in crypto payments. In 2020, PayPal announced that it would enable its users to purchase, sell, and hold cryptocurrencies directly from their PayPal accounts. In fact, many others did too, such as Revolut.

But in 2021, PayPal took an important step by introducing ‘Checkout with Crypto’, allowing consumers to use their digital holdings to pay at millions of online merchants worldwide. This service automatically converts the cryptocurrency into the relevant fiat currency, thereby streamlining the process for both merchants and consumers. So, it’s already possible to pay for most things using crypto, but there is an exchange involved during the process.

Crypto-linked Cards

Visa and Mastercard, which are the two most important companies within the payment industry, have expanded their crypto services. Visa reported in early 2021 that its cryptocurrency-enabled cards processed over $1 billion in total spending in the first half of the year alone. These services enable cryptocurrencies to be used directly for payments as seamlessly as traditional fiat currencies. 

While the Visa card does bridge the gap, converting crypto to fiat for every transaction is never going to be as efficient as no exchange at all. The fees for this exchange can range anywhere from 0.5% to 3%, which are borne by the consumer (not the merchant). This is something that the average consumer is not used to, because it’s usually the vendor that pays processing fees, and therefore has little willingness to do so. They may not want to convert their fiat to crypto in the first place, which also costs.

Mobile Wallets and Cryptocurrency Adoption

The rise of mobile wallets has also played a significant role. Mobile wallets such as Google Pay and Apple Pay are incorporating options to store and use cryptocurrencies. Apple are still in the development phase, but Google Pay has begun working with Coinbase and BitPay to make crypto transactions more seamless. 

Consumer Acceptance and Usage Trends

Consumer trends reflect this adoption. A survey conducted by the University of Chicago in 2021 revealed that 13% of Americans had bought or traded cryptocurrency in the past 12 months. Since then, crypto has been a discovery for many more, and this is in line with Europe too, not exclusively the US. 

And, with the inclusion of some coins in ETFs, they have become legitimised in the eyes of the SEC. This has undoubtedly boosted the perception of crypto among the masses, who can now see it becoming a part of the mainstream financial furniture.

Merchant Acceptance

On the merchant side, the adoption landscape is promising, but perhaps lagging behind the consumer side. Notable online platforms such as Shopify and Overstock have led the way in accepting crypto and integrating third-party payment processors that accept crypto, meaning merchants can accept multiple coins at their stores.

Breaking the Cycle

Such crypto-linked cards and wallets are mostly useful for crypto enthusiasts, but remain a problem for everyday people. It’s a self-feedback loop that is difficult for crypto to break through—most businesses rely on GBP to pay for tax, stock, and wages. Therefore, they need to exchange whatever they receive for GBP. Wages need to be in GBP because workers’ groceries are paid in GBP, and the grocery stores want GBP to pay their wages… 

It’s a difficult cycle to break, even if the newly proposed currency is superior. Usually, such a change in currency, like Croatia changing their currency to Euros in 2023, is coordinated in a top-down approach. Of course, the essence of crypto is that it’s decentralised, which is anything but top-down, making coordination efforts more difficult. 

Crypto Investment vs. Transactional Use Case 

Cryptocurrencies are currently in the news due to hitting record all-time highs, but is this a potential distraction? 

Cryptocurrencies serve a dual purpose within the financial ecosystem: as investment vehicles and as mediums for daily transactions. This presents a fundamental tension. As investment assets, cryptocurrencies such as Bitcoin and Ethereum attract a lot of speculation, resulting in price volatility. This volatility is frequently cited as an obstacle to the adoption of cryptocurrencies for everyday use, where stability is essential for consumer and business confidence.

The investment appeal of cryptocurrencies is driven by their potential for high returns. But high returns do not come without high risk. Many investors hold crypto assets for long-term gains, rather than using them for daily expenditures. This 'hold' mentality underscores the speculative nature of these assets and detracts from their practical use as currencies. 

It may be possible for this tension to resolve should, say Bitcoin, become the dominant form of currency. Then, price fluctuations wouldn’t matter so much as no exchanges need to take place. And, it’s not like fiat currency isn’t already subject to speculation either. However, should there be many coins that we use and exchanges are still required, then the speculative volatility remains an issue.

Challenges in Adoption 

Understanding the challenges in adoption can help us understand whether crypto can ever be accepted for everyday payments, because much of it will come down to whether these challenges can be resolved.

• Volatility: cryptocurrencies are highly volatile compared to traditional currencies, leading to significant fluctuations in value. This unpredictability hampers their reliability for daily transactions. However, while many say crypto is “inherently” volatile, this is not technically true, as volatility is a symptom of human behaviour towards it.
• Regulatory Challenges: the regulatory landscape for cryptocurrencies is inconsistent across different countries, creating a complex environment that can deter adoption due to varied legal requirements and potential costs. However, we have seen systems like SWIFT be born out of international coordination efforts. The question will be whether such coordination efforts compromise the integrity of cryptocurrency, and whether purists will end up hampering crypto's chances of success.
• Technological Hurdles: blockchain technology, while secure and transparent, has limitations such as slow transaction speeds and capacity issues, making it less efficient than traditional payment systems during high-demand periods. This is a technical hurdle that will be difficult to resolve, though many projects are getting more efficient over time.
• Lack of Understanding and Trust: many people are unfamiliar with how cryptocurrencies work, leading to mistrust and reluctance in their use. Misconceptions are further fueled by reports of high-profile hacks and the opaque nature of some crypto transactions. Crypto is complicated, but many apps have done well to make it very accessible. The issue, however, is that these apps are hot wallets where the customer doesn’t have the keys to their own wallet.

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Successful Integration Examples 

Across the globe, several successful implementations of cryptocurrency in daily transactions are paving the way for broader adoption.

Lugano, Switzerland

In Lugano, Switzerland, local government has partnered with payment platforms to accept Bitcoin, Tether, and Lugano's own LVGA token for municipal services, taxes, and even tuition fees. Over 200 local businesses have adopted this system, making it possible for residents and visitors to use cryptocurrencies for everyday transactions like buying groceries or cinema tickets. This initiative positions Lugano as a leading city in cryptocurrency integration, demonstrating the potential for widespread adoption, even at a municipal level. The success of this shows that a top-down approach can be taken, and the integrity of the crypto itself remains intact.

El Salvador

El Salvador made headlines by becoming the first country to adopt Bitcoin as legal tender. The introduction of the Chivo wallet, designed to facilitate fee-free transactions and cash withdrawals, targeted the unbanked population to boost inclusivity. 

However, this initiative has encountered significant setbacks. Technical issues with the Chivo wallet disrupted its initial rollout, and the inherent volatility of Bitcoin has raised concerns about its impact on the financial stability of everyday users. There have been widespread public protests against the policy, reflecting scepticism and resistance among the population. 

Dubai, UAE

In Dubai, United Arab Emirates, a crypto-friendly environment is being created by setting up a regulated zone free from direct taxation, with companies operating in the blockchain and cryptocurrency sectors. The Dubai Multi Commodities Centre (DMCC) Crypto Centre offers a hub for technological and business development in the cryptocurrency space, attracting startups and established companies looking to innovate within a legally sound framework. 

Central Bank Digital Currencies (CBDCs) as an Alternative 

As countries explore the viability of Central Bank Digital Currencies (CBDCs), these government-issued digital currencies represent a strategic response to the growing influence of decentralised cryptocurrencies. It’s unclear whether they are being developed to combat decentralised money by bringing in a centrally controlled alternative. Or, if they were a natural development from the technology available. 

CBDCs aim to modernise the financial system by enhancing payment efficiency and increasing financial inclusion without the volatility associated with cryptocurrencies. Unlike crypto, CBDCs are issued and regulated by a country's central bank, which provides them with legal tender status, ensuring they are accepted for all debts and monetary transactions. They can be used as a part of quantitative easing, which will be much faster to see results in, along with a place to store money for people without needing to rely on private banks.

Bank of England

The Bank of England is actively exploring a digital pound, focusing on stability and efficiency in transactions. The proposed CBDC could provide a safer and more regulated alternative to cryptocurrencies, but an important step to modernising payments. Interestingly, they are subject to pushback from the public and conspiracy theorists, claiming a cashless society is one with less privacy and more totalitarianism—two things that many crypto projects try to combat. Therefore, it couldn’t be any further from decentralised crypto in many ways, despite it appearing as a replacement for it.

Environmental Impact of Cryptocurrencies 

The environmental impact of cryptocurrency, particularly concerning its energy consumption, continues to be a contentious issue. The traditional 'proof of work' (PoW) systems, such as those used by Bitcoin, require substantial amounts of electricity. This energy demand largely stems from the computational power needed to solve complex mathematical problems, which secures the network and processes transactions. So, as it scales up, the issue becomes even bigger.

In response to environmental concerns, newer cryptocurrencies and projects are adopting 'proof of stake' (PoS) mechanisms, which significantly reduce energy consumption. Ethereum, for example, has transitioned from PoW to PoS with its upgrade to Ethereum 2.0. This shift not only decreases the environmental impact but also increases transaction processing speeds and the overall scalability of the network.

Despite these advancements, the debate over cryptocurrency's environmental impact persists. Many argue that even with more energy-efficient technologies like PoS, the overall energy consumption of digital currencies remains substantial, far greater than a CBDC, especially as the number of transactions and activities continues to grow. 

In 2023, it is estimated that the electricity used to mine Bitcoin was up to 0.9% of the global demand for electricity. This is of course just one coin, and it’s a coin that is hardly integrated into global payment systems. 

Trends That May Help Progress Crypto Payments 

A notable development is the advent of biometric payment systems. Companies like Visa and Mastercard are now incorporating biometric technologies—such as fingerprint scanners and facial recognition—into their payment processes. This integration enhances security and convenience, reducing the risk of fraud while streamlining the transaction process for users.

This can exist independently of crypto. However, it is arguably more secure to store such biometric information on the blockchain. There have also been interesting projects such as Worldcoin, which is co-founded by Sam Altman. This uses a physical Orb to scan one’s eye, which then acts as an ID to access a crypto wallet. However, the project has been involved in a lot of scepticism and controversy so far.

Automating transactions and ensuring compliance through smart contracts is also helping push crypto payments forward. For example, Propy Inc. uses smart contracts to streamline the home-buying process. Title & Escrow closing services are offered, and this technology automatically executes agreements upon meeting pre-defined conditions, significantly reducing the time and cost associated with traditional property transactions. 

Conclusion 

Unfortunately, the success of Cryptocurrency within mainstream payments is not just down to whether it’s the best solution. The libertarian ideal of a decentralised currency, private and excluded from the government’s control, appears unrealistic. However, this isn’t to say the governments will not embrace crypto themselves, much like Switzerland has, and this will likely be needed for crypto to become a part of daily payments.

If you have a crypto project and are looking to push crypto payments into the mainstream, reach out to a member of our Englebert team to ensure you are compliant along the way. FCA’s involvement in cryptoasset projects is increasing each year and therefore remains yet another sticking point in the mainstream adoption of crypto.