Who’s Afraid of Cryptocurrencies?

Can any of the largest crypto coins evolve into an everyday payment instrument? Here’s what it will take to make that happen.

One year ago, there were two digital currencies whose total coins in circulation were worth more than $1 billion. They were Bitcoin, at $19 billion, and Ethereum, at $2 billion. One year later, there are 21.

Back then, there were 682 coins with a total market capitalization of $23.3 billion, according to Coinmarketcap.com, the online tracker from which these stats are taken. Today, the site tracks more than 1,500 cryptos with a total worth exceeding $306 billion.

Is it any wonder we are living through a season of cryptomania?

But the craze has brought with it a strong dose of fraud, triggering more intense scrutiny from federal authorities. Some exchanges have been a little too lax about securing the private keys holders use to access their currency, leaving them vulnerable to hackers, say security experts like Al Pascual, senior vice president and research director at Javelin Strategy & Research, a Pleasanton, Calif.-based firm.

And some thugs haven’t bothered with online finesse. “There’s so much money now in cryptocurrency, we’ve seen some cases where people were beaten on the street for access to their crypto,” Pascual says.

Fears of abetting such shenanigans led Twitter last month to ban cryptocurrency advertising, a move two other massive digital properties, Facebook and Google, had already taken.

‘True Believers’

The runup of the past year has also bred a new type of user—the so-called hodler, a name derived from a typo of “holder” and denoting anyone who buys crypto as a speculative investment. “These are true believers. They want to buy and hold,” says Pascual. “Their mentality is, if they buy 100 [different coins], they only need one to turn out.”

So with whiffs of fraud and speculation clinging to them, which of the major cryptocurrencies will become everyday payment instruments you and I might spend at the local hardware store or diner? Some payments experts are unequivocal on that point.

“None of the above,” says George Warfel, general manager for fintech and payments strategy at Haddon Hill Group, a San Francisco-based consultancy, and author of Digital Transactions’ Payments 3.0 column. “Either the bubble will burst, or they will be regulated and become another way to denominate dollars.”

Others are a little more optimistic, but also tough realists. Here’s what they say must happen if any of the major cryptos are to become widely accepted retail payment methods:

Reduced volatility. Digital currency must be “approachable” by ordinary consumers, says Pascual. Part of achieving that is coming to a price that doesn’t fluctuate thousands of dollars in mere weeks. The most notorious example of that is Bitcoin, which started out 2017 at $963 and finished the year brushing against $20,000.

Merchants, especially, have a hard time reconciling payments that are worth significantly more or less than when they were settled. “Fluctuating value is a bad thing,” says Laura Townsend, vice president of operations at the Merchants Advisory Group, an advocacy organization in payments, and a former treasury executive at McDonald’s Corp. “That’s a barrier.”

Scalability. This is closely related to reduced volatility. The idea is to render cryptocurrency in an easily accessible and reproducible package. For observers like Pascual, that means the ability to load coins into a well-known, well-understood, branded wallet. “It makes it seem more approachable if I could load my coins into my Mastercard wallet,” he says, “or load them through my bank app,” rather than through wallets offered by exchanges, which often seem aimed at specialist audiences.

This is as important for merchants as it is for consumers, says Townsend. “Over time, what [cryptocurrency] can do for retailers is going to depend on scalability,” she notes.

Fast, cheap transactions. For a while late last year, the only thing fast about Bitcoin payments was the rate at which its transaction fee was rising. Things have cooled off since then, but the network is still struggling with traffic congestion. Even Litecoin, a Bitcoin offshoot considered by some more suitable for retail payment, saw a runup in cost early this year.

Unlike the case with credit and debit card transactions, these crypto transaction fees aren’t paid by merchants. Consumers pay them when they buy things. As you might expect, higher fees suppress usage.

Tighter security. Consumers and merchants have been scared off by reports of hacks in which unauthorized parties gain access to crypto holdings by swiping what’s known as the private key, the piece of cryptography that protects the coin holdings and gives cryptocurrency its name. That perception has to change, experts say.

“It’s not the cryptocurrency that holds the weak link, it’s the exchange or the individual holding the cryptocurrency,” says Tim Sloane, vice president for payments innovation at Mercator Advisory Group, Maynard, Mass.

One prescription from both Sloane and Pascual: More bank involvement. “What would really give [cryptocurrency wallets] a boost is if banks bought into them,” says Pascual. This, as he admits, will likely be “a long road,” citing the example of PayPal Holdings Inc., once a nonbank scourge that only recently, nearly 20 years after its launch, has been embraced by financial institutions.

‘Kind of Crazy’

Some parties aren’t willing to wait that long. At least one independent sales organization is doubling—make that tripling—down on crypto for merchant acceptance.

Fort Lauderdale, Fla.-based Aliant Payment Systems Inc. last month launched programs for Ether and Litecoin to go along with one for Bitcoin that it introduced late last summer (“When the Music Stops,” October).

Pricing has been set and the company has begun talking to merchants, says Eric Brown, founder and chief executive. “We now call it cryptocoin processing, no longer just Bitcoin processing,” he says.

As of mid-March, more than 80 merchants had signed up for the triple play, all with “little to no marketing,” Brown says. All of them currently accept credit cards. With interest building, Brown adds, “it’s been kind of crazy all over the board.”

Aliant processes crypto as well as card transactions on smart terminals from Poynt Co. that it installs in clients’ stores. The digital-currency transactions at the point of sale are priced at 0.89% plus a nickel, according to information posted last month on Aliant’s Web site. Merchants that opt for a monthly plan for the Poynt device pay $29.95 per month.

To handle the back-end processing, including conversion to fiat currency, Aliant relies on NetCents Systems Ltd., a 5-year-old Vancouver, British Columbia-based exchange.

Aliant added Litecoin, Brown says, because transactions process faster than with Bitcoin. In contrast with Bitcoin, whose surging price last year fed an investing mania that many experts called a bubble, “nobody’s talking about Litecoin as an investment,” says Brown. “What’s going to work in the payments space? It’s going to be Litecoin.”

Litecoin, which emerged in 2011 and now ranks as the fifth-largest cryptocurrency by market capitalization, also boasts more reasonable user fees than Bitcoin, Brown points out. The median transaction fee stood at 4 cents on March 1, compared to 67 cents for Bitcoin, according to Bitinfocharts.com.

Ether’s blockchain, on the other hand, is useful in high-value transactions where chain of ownership might come into play, Brown says. “Ether brings value to the table with smart contracts in titling a boat or a car,” he says.

Aliant, which has been in business 15 years, processes credit card, debit card, and automated clearing house transactions for 6,700 merchants, with annual card volume alone totaling $435 million. Its specialty is e-commerce and high-risk sellers, a category in which, Brown argues, low-cost, fast transactions that can’t be repudiated will be attractive.

‘A Floodgate-Type Surge’

Old Road Harley Davidson is neither an e-commerce merchant nor a high-risk specialist. Nor is the Santa Clarita, Calif.-based motorcycle dealer an Aliant merchant. But it is a convinced crypto enthusiast, and slow sales haven’t dampened its attachment to the notion of digital currency.

Old Road, which started taking Bitcoin last year through Bitpay, an Atlanta-based exchange, had sold exactly one bike for the currency as of late March. It was almost two, but the second buyer backed out when the bike couldn’t be modified to fit her needs, owner Mike Moffett says.

Moffett remains far from discouraged. Wide usage will take time, he says, adding, “We’ll see how the crypto space grows. We’ll be involved in it.”

Some have no doubts how it will grow, despite its severe growing pains. “There is a floodgate-type surge that is coming,” Brown says. “Crypto is here to stay. It just makes sense.”

 

Making a Ripple in Payments

Interest among mainstream financial institutions and payments providers in the potential for cryptocurrency is heating up just as the top U.S financial regulator is reportedly eyeing a crackdown on so-called initial coin offerings, or token sales used by digital-currency startups to raise capital.

In the latest sign that processors, banks, and major corporations are taking crypto more seriously, Fleetcor Technologies Inc. in March said it was launching a pilot that will use XRP, the cryptocurrency offered by San Francisco-based blockchain provider Ripple Labs.

In the pilot, Fleetcor’s Cambridge Global Payments unit will harness Ripple’s XRapid service to provide so-called on-demand liquidity to international trading partners. With instant liquidity, international firms can free up funds they would otherwise tie up in foreign accounts to back real-time payments.

Cambridge processes more than $20 billion in cross-border business-to-business payments annually for 13,000 clients, according to Norcross, Ga.-based Fleetcor, whose main business is handling fuel, tolling, lodging and other related payments for trucking fleets.

“We are excited for the insights this pilot program is expected to deliver, and we will use that information to help both Cambridge and Fleetcor develop our use cases for blockchain in international payments,” said Mark Frey, chief operating officer at Cambridge, in a statement. “We look forward to exploring how Ripple can help us continue to improve the customer experience using new technology.”

Added Danny Aranda, director of business development for Ripple, in a statement: “We’re focused on working with partners like Cambridge that understand the benefits of digital assets and are serious about using XRP to overcome the inefficiencies in the global payment system.”

Cambridge had already been piloting XCurrent, a separate technology for international messaging and transaction settlement. Both XRapid and XCurrent are part of RippleNet, Ripple’s blockchain system.

Ripple’s technology appears to be adding momentum. It announced last fall that its client list had exceeded 100, and now includes major money transmitters Western Union and MoneyGram, which is also piloting XRapid. Its XRP token is the third-largest cryptocurrency after Bitcoin and Ether, with $30.9 billion in value outstanding as of March 14, according to Coinmarketcap.com. Its price, at 79 cents, has soared in the past year after trading for less than a penny in March 2017.

But the Securities and Exchange Commission cast a shadow over the cryptocurrency scene last month with “dozens” of subpoenas and requests for information issued to companies and advisory firms. The SEC is concerned about the potential for fraud in the growing, and largely unregulated, market created by initial coin offerings, news reports said.

ICOs have raised about $1.66 billion so far this year after generating $6.5 billion in 2017, according to data cited by The Wall Street Journal.