Cryptocurrency Payment Research

Preface

Bitcoin, as the first cryptocurrency to appear, was initially conceived as a decentralized payment system. However, due to its inherent characteristics, Bitcoin has not become a mainstream payment method. With the innovation in cryptographic technology, the past decade has seen explosive growth in cryptocurrency and its infrastructure projects, including many high-quality payment concept crypto projects. Cryptocurrency has begun to transition from a “speculative digital asset” to an effective means of payment.

Currently, cryptocurrency payment is still not widely used in the C2B (consumer-to-business) sector. Although the volume of crypto merchant payments has reached 6 billion USD annually, this is a tiny fraction of the global C2B e-commerce market, which is valued at 10 trillion USD. As crypto infrastructure improves, more consumers and businesses are adopting cryptocurrency payments. With the support of payment systems like Visa and PayPal, concepts such as NFTs, stablecoins, and Central Bank Digital Currencies (CBDCs) have emerged, further expanding the choices for merchants and consumers. Cryptocurrency payments offer a range of benefits including convenience, fast transaction speeds, reasonable fees, and higher security. The emergence of more cryptocurrency payment providers is also making the system more comprehensive.

Traditional Payment Methods

Current payment channels have a mature and stable market and are very adept at serving most of today’s commercial forms. Traditional payment methods, including Visa and PayPal, have well-developed payment ecosystems that provide a good user experience. They have been iterating their payment systems and focusing on different payment processes.

The payment industry has a vast scope for development. According to the 2022 McKinsey Global Payments Report, global payment industry revenue reached 2.1 trillion USD in 2021. Assuming an annual growth rate of 9%, the global payment industry revenue is expected to reach 3.3 trillion USD by 2026.

Source: Mckinsey 2022 Global Payments Report

The Development Path of Cryptocurrency Payment

Bitcoin Laid the Foundation for Cryptocurrency Payments

Bitcoin, as the world’s first cryptocurrency, was originally aimed at creating a peer-to-peer (P2P) decentralized payment system that could operate without the involvement of central banks or financial intermediaries. However, due to the decentralized and anonymous nature provided by blockchain, Bitcoin’s P2P payments quickly shifted from mainstream scenarios to more irregular uses. This has led to long-term public criticism of Bitcoin.

Limitations of Bitcoin in Cryptocurrency Payments

Over time, Bitcoin has still not made significant progress in mainstream commerce due to limitations such as speed and scalability:

1. Depending on network congestion, Bitcoin transaction requests can take from a few seconds to ten minutes.
2. Bitcoin processes less than 10 transactions per second, while Visa can handle up to 65,000 transactions per second.
3. The “mining process” of Bitcoin is an extremely power-consuming process, with each Bitcoin transaction averaging 1,777.57 kWh of energy, equivalent to powering 1.2 million Visa transactions.
4. Throughout Bitcoin’s development, due to a lack of regulation and transparency, the mainstream market has maintained a wait-and-see attitude towards its acceptance and use.

The Emergence of New Cryptocurrency Payment Methods

Since 2017, the number of crypto projects has multiplied several times, with innovative projects increasing daily. As of November 14, 2023, the total market value of cryptocurrencies reached 1.38 trillion USD, with Ethereum’s market value at 250 billion USD, accounting for 18% of the total cryptocurrency market value, showing astonishing growth.

Source: https://www.feixiaohaozh.info/data/ , 2013.11.14

Ethereum, launched in 2015, has now become the most widely used blockchain platform in financial services applications. Ethereum is not just a medium of exchange or a means of storing value, but also a medium for participating in the governance of the Ethereum ecosystem. Currently, the two hottest technological innovations in the crypto field, DeFi (Decentralized Finance) and NFTs (Non-Fungible Tokens), are primarily built on the Ethereum network.

The innovations emerging from the Ethereum ecosystem have laid a solid foundation for the construction of the cryptocurrency payment ecosystem. With the development of the new generation of blockchain ecosystems, platforms like Ripple, Polkadot, and Solana have emerged, addressing cross-border and C2B (consumer-to-business) payment solutions.

Source: NUVEI, The future of crypto payments

Cryptocurrency Payments Based on Stablecoins and Central Bank Digital Currencies (CBDCs)

Stablecoins are a type of cryptocurrency whose value is pegged to fiat currencies or specific assets. Compared to other cryptocurrencies, stablecoins offer more stability. Since their introduction, stablecoins have mainly been used by users to store their cryptocurrency investment earnings, to avoid volatility risks, a benefit that traditional cryptocurrencies struggle to provide.

The number of stablecoins has continuously grown in recent years, with over 100 different stablecoins globally, boasting a market value exceeding 120 billion USD. Although most stablecoin transactions still occur within exchanges, with payment transactions accounting for less than 5% of trade activity, the acceptance of stablecoins in mainstream commerce is increasing. Visa has announced support for USDC settlements on its network, which will gradually push stablecoins into the mainstream perspective.

Source: https://www.theblock.co/data/decentralized-finance/stablecoins/total-stablecoin-supply

Central Bank Digital Currencies (CBDCs) represent another innovation inspired by blockchain technology. CBDCs are a new form of digital currency, issued directly to citizens by central banks, and can be seen as a digital version of fiat currency, circulating on regulated blockchains. Although CBDCs are a relatively new concept, several countries are already planning or implementing them. According to a 2021 survey by the Bank for International Settlements, 86% of central banks worldwide have started developing CBDCs. About 60% are still in the concept verification stage, while 14% are conducting pilots. Markets like China and Sweden have already launched initial versions of CBDCs in their pilots.

Cryptocurrency Payment Use Cases

The market already features many cryptocurrency payment use cases, including crypto-native payment providers and traditional payment companies. Next, we will discuss some cryptocurrency payment use cases and providers.

USDT

USDT is a stablecoin issued by Tether, where one USDT is equivalent to one US dollar. USDT is issued on multiple blockchains, including Tron, Ethereum, Solana, etc. Today, USDT is used in most global cryptocurrency payment scenarios, such as cryptocurrency virtual cards like Hyperpay, One Key, Gate Card, etc., becoming an indispensable medium of stable value in crypto payments.

Cryptocurrency Virtual Cards

Several crypto payment companies are involved in the field of cryptocurrency virtual cards, such as Gate, One Key, and many DeFi applications are also showing interest. Typically, cryptocurrency virtual credit cards launched by crypto exchanges can be used as long as there are corresponding assets in the fund account. Independent crypto payment companies’ virtual credit cards require account top-ups before activation. In different consumption scenarios, such as card swiping or electronic payments, the exchanges charge varying degrees of transaction fees.

Coinbase

Coinbase Commerce, launched in February 2018, is Coinbase’s digital payment service. This service enables merchants to accept cryptocurrency payments directly in their crypto wallets. Merchants can integrate this solution into their checkout process or add it as a payment option on their e-commerce platforms. They can also integrate this solution with their stores through supported e-commerce platforms such as Shopify and WooCommerce.

BitPay

BitPay enables merchants to accept payments in 16 different cryptocurrencies from customers in 229 countries and territories. Merchants can accept payments directly on their websites and send invoices embedded with cryptocurrency payments to customers via email. BitPay also allows merchants to accept face-to-face payments in physical stores using smartphones and tablets. With the BitPay Send service, merchants can make global payments, including payroll, customer refunds, rewards, and supplier payments. Since its inception in 2011, as of October 2022, BitPay has processed over 10 million transactions, totaling more than 5 billion USD.

CoinsBank

CoinsBank is an integrated crypto service provider, offering crypto exchange services, wallet services, crypto credit cards, and merchant gateways. It supports four cryptocurrencies: BTC, LTC, ETH, and XRP.

Gate Pay

Gate Pay is an advanced cryptocurrency payment solution designed to meet the needs of merchants and individual users for Web 3.0. This dynamic platform facilitates flexible sending and receiving of payments worldwide, supporting transactions in over 30 major cryptocurrencies. Gate Pay enables real-time conversions among more than 1,700 cryptocurrencies, ensuring seamless and efficient transactions.

Source: www.blockdata.tech, Cryptocurrency Payment Providers as of November 2022

Challenges Faced by Cryptocurrency Payments

Portable Payment Wallets

Currently, some cryptocurrency payment providers have introduced MPC wallets and AA wallets for users to choose from. They are suitable for different scenarios and needs, but both have their advantages and limitations, and there is no unified solution at present.

MPC Wallets

MPC wallets are off-chain solutions and achieve keyless operations. They do not involve changes to Ethereum’s consensus layer or contract layer, making them more feasible in the short term.

AA Wallets

AA wallets are on-chain solutions that depend on Ethereum upgrades and the development of the EIP-4337 proposal, requiring a longer period to implement.

High Volatility

Cryptocurrencies are often unsuitable as a medium of payment due to their excessive volatility, and no one wants to use an unstable medium of exchange for payments.

Subpar User Experience

When consumers make payments with cryptocurrencies, compared to traditional payment methods, they often require more steps, and a transaction may take several minutes to complete. Paying for goods by entering an address is also not a great user experience.

Limited Use Cases

Currently, most cryptocurrency payment companies mainly focus on the commercial sector, where cryptocurrencies do not have an advantage over traditional payment methods.

Unclear Regulation

Cryptocurrency payments, as a relatively new field, mostly operate in decentralized ecosystems. The lack of clear regulation is a primary reason why merchants are hesitant to accept cryptocurrency payments.

Privacy and Security Issues

Since user transaction information is recorded on public blockchains, sensitive data and transaction information are exposed to potential criminals. Also, cryptocurrency institutions often have large pools of funds, making exchanges, wallets, and other crypto platforms attractive targets for hackers. Incidents of theft involving exchanges, wallets, and other crypto platforms have occurred repeatedly in the past, and security issues are one of the main factors hindering the development of cryptocurrency payments.

Conclusion

Since the launch of Bitcoin, cryptocurrencies have always been viewed as potential game-changers in the realm of mainstream payment forms. However, as of today, crypto payments still occupy a relatively niche position. Despite many optimistic expectations, there is still significant uncertainty regarding the pace of growth in the acceptance and use of crypto payments. Of course, there are many positive aspects of crypto payments that are currently unfolding. With the involvement and innovation of traditional payment giants, crypto payments are likely to enter the mainstream view more rapidly.