Preface

Bitcoin, as the first cryptocurrency to emerge, was initially conceived as a decentralized payment system. However, due to its inherent characteristics, Bitcoin has not become a mainstream payment method. With innovations in cryptographic technology, cryptocurrencies and their infrastructure projects have experienced explosive growth over the past decade, leading to the emergence of many high-quality cryptocurrency projects focused on payment concepts. Cryptocurrencies are gradually transitioning from a "speculative digital asset" to an effective payment method.

Currently, crypto payments are still not widely used in the C2B commercial sector. Although the transaction volume for crypto merchant payments has reached $6 billion annually, this is a tiny fraction of the global C2B e-commerce market, which has a scale of $10 trillion. As the crypto infrastructure improves, more consumers and businesses are adopting crypto payments. Concepts such as NFTs, stablecoins, and central bank digital currencies (CBDCs) have emerged, driven by related payment systems like Visa and PayPal, further expanding the choices for merchants and consumers. Crypto payments bring a series of benefits, including convenience, fast transaction speeds, reasonable fees, and higher security, and the emergence of crypto payment providers has made this system even more robust.

Traditional Payment Methods

Current existing payment channels have a relatively mature and stable market and are very adept at serving most business forms today. At the same time, traditional payment methods have a well-established payment ecosystem that provides users with a good payment experience. Traditional payment methods, such as Visa and PayPal, have been iterating their payment systems and focusing on different payment processes.

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

Source: McKinsey 2022 Global Payments Report

The Development Path of Crypto Payments

Bitcoin Laid the Foundation for Crypto Payments

As the world's first cryptocurrency, Bitcoin's initial goal was to create a peer-to-peer (P2P) decentralized payment system that could operate without the involvement of central banks or financial intermediaries. However, due to the decentralization and anonymity provided by blockchain, Bitcoin's P2P payments quickly shifted from mainstream scenarios to informal uses. As a result, Bitcoin has long faced public criticism.

Limitations of Bitcoin in Crypto Payments

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

1. Depending on network congestion, Bitcoin transaction requests can take anywhere 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 extremely energy-intensive, with an average of 1,777.57 kilowatt-hours of energy consumed per Bitcoin transaction, equivalent to powering 1.2 million Visa transactions;
4. Throughout Bitcoin's development, the mainstream market has remained cautious about its acceptance and use due to a lack of regulation and transparency.

Emergence of New Crypto Payment Methods

Since 2017, the number of crypto projects has multiplied, with innovative projects increasing daily. As of November 14, 2023, the total market capitalization of cryptocurrencies reached $1.38 trillion, with Ethereum's market cap at $250 billion, accounting for 18% of the total cryptocurrency market cap, showing remarkable growth.

Source: https://www.feixiaohaozh.info/data/, 2023.11.14

Launched in 2015, Ethereum has become the most widely used blockchain platform in financial service applications. Ethereum is not just a medium of exchange or a store of value; it is also a medium for participating in governance within the Ethereum ecosystem. Currently, the two hottest technological innovations in the crypto space, DeFi and NFTs, are primarily built on the Ethereum network.

The innovations generated by the Ethereum ecosystem have laid a solid foundation for the construction of the crypto payment ecosystem. With the development of the next-generation blockchain ecosystem, platforms such as Ripple, Polkadot, and Solana have emerged to address cross-border and C2B payments.

Source: NUVEI, The Future of Crypto Payments

Crypto Payment Methods Based on Stablecoins and Central Bank Digital Currencies

Stablecoins are a type of cryptocurrency whose value can be pegged to fiat currencies or specific exchanges. Compared to other cryptocurrencies, stablecoins are more stable. Since their launch, stablecoins have primarily been used by users to store their cryptocurrency investment gains to avoid volatility risks, an advantage that traditional cryptocurrencies struggle to provide.

The number of stablecoins has continued to grow in recent years, with over 100 stablecoins currently existing globally, and a market capitalization exceeding $120 billion. Although most stablecoin transactions still occur on exchanges today, payment transaction volume accounts for less than 5% of trading activity. However, the acceptance of stablecoins in mainstream commerce is increasing, with Visa announcing support for USDC settlements on its network, which will gradually push stablecoins into the mainstream.

Source: https://www.theblock.co/data/decentralized-finance/stablecoins/total-stablecoin-supply, 2023.11.14, Total Market Capitalization of Stablecoins

Central Bank Digital Currencies (CBDCs) are another innovation inspired by blockchain technology. CBDCs are a new form of digital currency issued directly by central banks to their citizens and can be seen as a digital version of fiat currency, circulating on a regulated blockchain. 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 begun developing CBDCs, with about 60% still in the concept validation phase and 14% already in pilot programs. Some markets, such as China and Sweden, have already launched initial versions of CBDCs in pilot programs.

Use Cases for Cryptocurrency Payments

There are currently many use cases for crypto payments in the market, 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, with one USDT equivalent to one dollar. USDT is issued on multiple blockchains, including Tron, Ethereum, and Solana. Today, USDT is used in most global crypto payment scenarios, such as cryptocurrency virtual cards like Hyperpay, One Key, and Gate Card, becoming an indispensable medium of stable value for crypto payments.

Cryptocurrency Virtual Cards

Currently, several crypto payment companies are involved in the cryptocurrency virtual card space, such as Gate and One Key, and many DeFi applications are also emerging. Typically, cryptocurrency virtual credit cards launched by cryptocurrency exchanges only require the corresponding assets to be in the funding account. Cryptocurrency virtual credit cards issued by independent crypto payment companies require account top-ups to activate. When making purchases or payments using card swipes or electronic payments in different consumption scenarios, exchanges will charge varying degrees of service 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 processes or add it as a payment option to their e-commerce platforms. They can also integrate this solution with their stores through supported e-commerce platforms like Shopify and WooCommerce.

BitPay

BitPay enables merchants to accept payments from customers in 229 countries and regions using 16 different cryptocurrencies. Merchants can accept payments directly on their websites and send invoices embedded with cryptocurrency payment links 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 payments globally, including payroll, customer refunds, rewards, and vendor payments. Since its establishment in 2011, BitPay has processed over 10 million transactions worth more than $5 billion as of October 2022.

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 in Web 3.0. This dynamic platform allows for flexible sending and receiving of payments globally, supporting transactions in over 30 major cryptocurrencies. Gate Pay can achieve real-time conversions between over 1,700 cryptocurrencies, ensuring seamless and efficient transactions.

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

Challenges Facing Crypto Payments

Portable Payment Wallets

Some crypto payment providers have launched MPC wallets and AA wallets for users to choose from, each suitable for different scenarios and needs. However, both have their advantages and limitations, and currently, there is no unified solution.

MPC Wallets

MPC wallets are off-chain solutions that achieve keyless operation without involving changes to the Ethereum consensus layer or contract layer, making them more feasible in the short term.

AA Wallets

AA wallets are on-chain solutions that rely on the development of Ethereum upgrades and the EIP-4337 proposal, requiring a longer time frame.

High Volatility

Due to their high volatility, most cryptocurrencies are not suitable as payment mediums, and few people are willing to use unstable exchange mediums for payments.

Unsatisfactory User Experience

Consumers often face more operational steps when making payments with cryptocurrencies compared to traditional payment methods, with a single transaction potentially taking several minutes to complete. Paying for goods by entering addresses is also not a great experience.

Single Use Case

Currently, most crypto payment companies primarily focus on the commercial sector, and cryptocurrencies do not have advantages compared to traditional payment methods.

Unclear Regulation

As a relatively new field, crypto payments operate in a decentralized ecosystem where the lack of regulatory clarity is a major reason why merchants are cautious about accepting crypto payments.

Privacy and Security Issues

Since user transaction information is recorded on public blockchains, sensitive data and transaction information can be exposed to malicious actors. Moreover, crypto institutions often have large pools of funds, making exchanges, wallets, and other crypto platforms targets for hackers. Incidents of exchanges, wallets, and other crypto platforms being hacked have occurred repeatedly in the past, and security issues are one of the main reasons hindering the development of crypto payments.

Conclusion

Since the launch of Bitcoin, cryptocurrencies have been seen as potential rule changers in mainstream payment forms. However, as of today, crypto payments still occupy a relatively niche position. Although there are many optimistic expectations, there remains significant uncertainty regarding the growth rate of the acceptance and use of crypto payments. Of course, many positive developments are currently happening in the realm of crypto payments, and with the entry and innovation of traditional payment giants, crypto payments will also enter the mainstream more rapidly.

Author: Snow

Translator: Sonia

Article Review: Edward, Wayne, Elisa, Ashley He, Joyce

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