The future of payments: a guide to Crypto Payment Apps
Weekly stories are first featured in our Newsletter. Subscribe here to receive it directly in your mailbox every Monday
Crypto’s potential as means of payment
Bitcoin adoption is growing, but there’s an impression that so far most people have been using it only as a store of value: out of estimated 300m+ Bitcoin users, only 250k-300k have transacted daily in 2022 (source: Glassnode).
This on-chain data, however, misses a very important part of Bitcoin – its layer-2 solution called Lightning Network. LN enables easy, cheap and fast transactions, and is perfect for everyday use as means of payment. It is difficult to estimate the exact number of transactions on it: when bitcoin leaves the main chain, the record-keeping is taken on by the entities that run LN channels.
What can be seen though is the number of LN channels and their capacity (the amount of bitcoin locked within the channels and therefore capable of being transacted) – and these numbers are rising, currently allowing almost 5’000 BTC volume.
As to the cryptocurrencies like Ethereum (414k daily active addresses), their primary goal is to be used within the web3 ecosystem developed on their respective blockchains. However, their use beyond the crypto industry is growing as well, with many IRL retail outlets starting to accept them.
A Deloitte survey conducted in the end of December 2021 among 2’000 senior executives at retail organizations across the United States showed remarkable expectations of crypto as means of payment, both from customers and suppliers.
Of course, the general mood in December was much more optimistic than in today’s bear market, but the merchants’ reasoning stays valid: crypto is a way to improve customer experience, increase customer base and boost the merchant’s image.
The last reason has been thoroughly exploited by fashion and luxury brands: Gucci, Balenciaga, Tag Heuer, retail platform Farfetch… In the light of their increasing use of NFTs accepting crypto payments is only natural.
Some regions, like the Swiss city of Lugano, are consciously deploying considerable efforts to encourage crypto payments among its merchants.
Crypto payments are still a tiny part of global payments volume: only 0.2%, or $0.5 trillion, according to the 2021 data complied by VISA and Flagship, a consultancy. However, this number is expected to grow fast, especially thanks to the emerging merchant acceptance (C2B), rising popularity of crypto cards (C2B) and crypto remittances (C2C).
Why do we need payment apps?
Simple crypto wallets are an easy way to send casual transactions between peers, but they are not enough to fuel crypto payments’ mass adoption.
? This is the task of crypto payment apps, which would enable merchant tools like creating specific invoices, Point of Sale interface, tipping buttons or shopping cart plugins on websites, sending payment links, converting crypto like Bitcoin into stablecoins or fiat to avoid volatility traps… and especially – keeping comprehensible records of their activity for accounting purposes ?
The last point is becoming increasingly important not only for merchants, but also for their clients: in the context of tightening crypto regulation in most countries, users might need to keep good records of their crypto payments for taxation purposes, including fiat value of crypto at the time of payment (many countries tax capital gains on crypto upon its conversion to fiat, to which buying goods or services is likened).
Crypto volatility is another issue, which payment apps help tackle by regularly updating crypto prices according to the current exchange rates.
Custodial crypto payment apps
Crypto payment apps are a lucrative market with a high growth potential: Research and Markets estimated its value at $626 million in August 2022, with a potential to reach $2.15 trillion by 2030. It is no surprise then that the competition is fierce, and everyone wants a piece of this rapidly growing pie.
Traditional online payment firms are including crypto in their proposal: Cash App, used by over 40 million people in the US, enables Bitcoin and Lightning Network payments. PayPal, with over 300 million users and 20 million merchant accounts, allows to pay in Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. Crypto-native Strike (available in the US and El Salvador) also uses LN.
Neobanks like Revolut and Wirex issue credit and debit cards allowing users to spend their crypto by converting it to fiat at the time of payment. CeFi lender Nexo also proposes a crypto-backed card linked to its services.
CeFi payment apps like BitPay or CoinPayments allow merchants to accept crypto on their online stores, in person, or via email, facilitating related accounting procedures. BitPay also enables LN payments. ?️ Shopify has made these services even more popular by integrated them into its proposal, making it easy for everyone setting up their e-commerce to start accepting crypto.
Another CeFi category – crypto exchanges – often propose all crypto payment options one can think of: crypto cards, online payments, 0-fees remittances, merchant apps, cashbacks… Some of the biggest ones include Binance Pay, Coinbase Commerce, Crypto.com, and most recently – FTX.
Even stock exchanges dabble with crypto payments, like the Swiss SIX, which offers a merchant solution automatically converting crypto into Swiss Francs.
? Crypto cards for all these firms are issued by VISA and Mastercard, two giants who have been trying to outsmart and outpace each other in the crypto direction for almost two years. VISA seems at an advantage so far, having cumulated over 70 partnerships with crypto companies.
Mastercard also nurtures crypto plans of their own, such as “bring certain Mastercard-approved digital assets onto our networks”, a plan outlined by the company’s exec this week. In the meantime, it develops its crypto compliance and security services.
Non-custodial crypto payment apps
There’s a major downside to custodial crypto payment apps – they are not censorship-resistant.
The world doesn’t lack bad examples of centralized control over people’s money, but it was PayPal that provided us with two stunning cases in a matter of 10 days.
First, its newly updated terms and conditions included a $2’500 fine for “spreading misinformation”. Yes, a payments company decided to police people because they could. The outrage that spiked on social medias and the crashing PYPL stocks have prompted the company to backpedal and said this clause was inserted “in error” ?
Last week, PayPal HK halted services for the League of Social Democrats – one of the last remaining active pro-democracy groups in Hong Kong. The official reason was “excessive risks”, which looks a lot like a lawyer-say for “We don’t want any problems with Chinese (or any other) state and therefore choose to participate in stifling free speech”.
Luckily, crypto is a solution to these problems, and non-custodial payment solutions do exist. Sure, they do not allow fiat-crypto conversions, as anything related to banks is by definition centralized, but they enable some very practical features within the crypto ecosystem.
Non-custodial solutions like BTCPay or Nowpayments offer self-hosted payment processors with a set of related services, such as PoS app, invoice generation, clean bookkeeping etc. They also can be integrated into website-creating services like Shopify or WordPress.
Lightning Network wallets like Muun or Wallet of Satoshi are at their core more payment apps than wallets, as they basically reroute BTC from the main chain to the LN. They also allow creating specific invoices, which comes in handy for accepting Bitcoin at points of sales.
We are still very early in crypto adoption, and centralized services that are managing people’s cryptoassets are still necessary: people still need crypto-fiat conversions, and many just aren’t ready to take the responsibility of managing their own wallets.
However, over time – and with a good amount of crypto education – self-hosted crypto payment solutions might gain much bigger importance ✨
