Payments 3.0: Three Keys to Crypto Acceptance

When the enigmatic Satoshi Nakamoto launched Bitcoin in 2009, it seemed that the U.S. dollar and other currencies would have a new competitor. However, radical forecasts of digital currencies becoming the coin of the realm have not come to pass.

Will Bitcoin and other cryptocurrencies take their place alongside cash and the major card brands at merchant points of sale? The answer may vary from merchant to merchant, but it will depend on several factors, including consumer demand, connectivity, and consistency of value.

The first prerequisite, of course, is consumer demand. Will enough consumers want to use cryptocurrencies to motivate merchants to offer the option? In the big picture, adoption of cryptocurrencies remains low.

As Digital Transactions reported earlier this year, approximately 14% of U.S. adults own cryptocurrency, according to an estimate by crypto­currency exchange Gemini. Coinbase, a company that helps customers transact with cryptocurrencies, reports 68 million users worldwide, which is not a large number in the grand scheme of things.

A second limiter is how individuals view their cryptocurrencies. Descriptions have switched from “cryptocurrency” to “crypto asset.” Individuals have heard too many stories about the $10,000 pizza from people who used Bitcoin as a currency. A crypto journalist told me she views cryptocurrencies now as a store of value more than a way to spend.

Nonetheless, since cryptocurrency holders will want to use that value some day, merchants may want to offer ways for people to spend it. But they need to proceed with caution.

Connectivity is a crucial issue for merchants. As things stand now, merchants have three operational hurdles to clear before they can make any cryptocurrency a payment option. First, they need to set up a way to accept cryptocurrency at the point of sale and online. This requires a different procedure from accepting a card transaction.

Second, they need to set up the ability to store the revenue that they receive in this form. Third, they need to repeat this process for every cryptocurrency they want to accept, because cryptocurrency wallets generally are not interoperable.

Some retailers have already sorted out these issues. Online retailer Overstock.com announced in 2014 it would begin accepting Bitcoin. As Digital Transactions has reported, efforts by PayPal, Mastercard, and Visa may simplify this process for other merchants by adding the ability to accept crypto payments through their networks.

While that solves the problem of being able to accept crypto­currencies, merchants still need to be able to pay suppliers, vendors, and other providers for operational costs. If the landlord of the store or the utility company keeping the lights on does not accept crypto, then the opportunity costs of cryptocurrencies may dissuade some merchants from accepting them.

Finally, before cryptocurrencies become widely accepted, it seems they will need to demonstrate more consistency in their value. Merchants face an issue in accepting cryptocurrencies in that it introduces what is essentially foreign-exchange risk into every transaction.

When the price of the currencies can radically change with one tweet by Elon Musk, the merchant’s risk of accepting cryptocurrencies is high. No one wants to find that they have sold products at a loss because the markets have moved suddenly. Predictability of income is crucial for a business.

The future of crypto at the point of sale will be anything but a straight line. Companies or currencies that are able to resolve all of these issues—without pulling a slight of hand that converts the crypto into some other currency at the time of the transaction—will emerge as the winners of the race to broader acceptance.

—Ben Jackson, bjackson@ipa.org