The promise of crypto as an everyday currency has seemingly underdelivered, but recent developments suggest that crypto payments are poised for a breakout year in 2022. Visa and Block (formerly Square) are making big moves that could hugely accelerate mainstream user adoption.
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Solana Pay Connects Merchants and Consumers via Stablecoin Payments: “Solana has released a set of decentralized payment standards and protocols under a new product — dubbed Solana Pay — designed to cater to dollar-based stablecoin settlements, namely Circle’s USDC, for merchants and consumers… The point, Solana argues, lay in the product’s ability to facilitate immediate access to user funds while offering greater liability protection, no holding periods or bank transfer fees when compared to that of traditional financial institutions.” (Blockworks)
Visa says crypto-linked card usage hit $2.5 billion in its first quarter: “Visa said during its recent earnings call that customers made $2.5 billion in payments with its crypto-linked cards in its fiscal first quarter of 2022. That was 70% of the company’s crypto volume for all of fiscal 2021.” (CNBC)
Block’s Cash App Is Finally Integrating the Lightning Network: “Block, formerly known as Square, is integrating the Lightning Network into its popular Cash App, a move first promised in 2019. The company said the feature should be available to all U.S. Cash App users, except those in New York State, in the coming weeks… The integration of the network will allow Cash app customers in the U.S. to send bitcoin for free within seconds to anybody in the world.” (CoinDesk)
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Cryptogic is the show for crypto investors who are focused on long term results. Follow Scott Hawksworth and Andy Hagans as they explore the investable world of blockchain technology, NFTs, Bitcoin, Ethereum, and other cryptocurrencies.
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Scott: Hello, and welcome to another episode of Cryptogic. Scott with you once again. And I’m looking forward to this show because I’m going to be talking about something that I nerd out a bit with, and that’s payments. And joining me once again is Andy Hagans, co-founder of Cryptogic. Andy, thanks again for joining me here.
Andy: Thanks for having me, Scott. Always a pleasure to be with you and talking macro, talking crypto, talking payments, talking about credit cards. Everybody’s favorite subject.
Scott: Right. Everybody loves talking about credit cards, right?
Andy: Exactly. It’s a real passion of yours. You’re just so passionate about credit cards. You’re actually on the topic, unpaid plug here. I’m not being paid by BlockFi, but they have a rewards credit card and it’s pretty cool. Like they give like a six-month, I think it’s six months extra cashback. Pretty cool product, you know?
I think it’s…
Scott: Everybody loves rewards, man. Everybody loves rewards.
Andy: Exactly. And even for like my wife who is kind of a gateway into crypto because, you know, she trusts me about investible stuff, but she’s like, “I don’t really want to spend any of my own money on crypto or whatever.” But then I’m like, “Well, just use this rewards card and it’s like free money, the rewards.”
And then, you know, so now she’s building up Bitcoin balance but not actually spending any money. So just kind of a cool little on-ramp for some people, I think.
Scott: And then eventually she’s going to be looking at coin market cap every morning saying, “Andy, I don’t think so. Got to get more Eth.”
Andy: I don’t think so, but maybe. I guess there’s always a chance.
Scott: Well, so yeah, credit cards are big. Payments are big. The payments industry is quite large. And when we talk about crypto, cryptocurrency is in the name. So, Andy, I guess I want to ask you as we begin our discussion here cryptocurrency, has cryptocurrency really lived up to its name when it comes to payments?
Because really, there was this promise of, yes, not only are these, you know, new currencies outside of central banks and governments, but this is a whole new way of transacting. Has it really met that promise just yet in its history?
Andy: Right. So talking about a currency, you have that store of value component, but you also have that medium of exchange component. And I’m reminded, especially with Bitcoin, you know, some people have called it digital gold, and I’m reminded of actual gold, physical gold, which is a store of value.
It has significant volatility, but nevertheless, it’s arguably a fairly stable store of value. But gold isn’t really a medium of exchange unless you’re in like some unique situations or desperate circumstances, right?
Like it’s still is in terms of desperate circumstances. Like if I live in some country where there’s a communist revolution and my entire family is about to be killed or something, you say, “Quick. Grab the gold coins. We’re going to flee to the neighboring country.” And then, you know, you get there, you could barter those for, you know, you could like literally carry that with you.
And I think that’s kind of the idea maybe with crypto and some sense that, you know, it’s a store of value that you can keep outside of that traditional fiat financial system and then eventually it can be a medium of exchange. But similar to physical gold, there’s that friction of transactions, right? Like the high transaction costs or just like kind of the clunkiness factor where it’s not going to be the type of thing where you necessarily, “I’m going to go to Starbucks and bring this small amount of physical gold with me to purchase my Frappuccino.”
I would never drink a Frappuccino. You know what I mean. My black coffee,, my Cafe Americano. So I think that that’s kind of been the case with Bitcoin with some, you know exceptions. Now, we also have had some recent developments on chain where, you know, stable coins, they’re kind of a unique animal where, you know, people will transact in and out of these stable coins and they’re very, very liquid.
But, again, you know, I don’t know that I necessarily… There’s not a lot of people using stable coins to buy their coffee at Starbucks, right? So I think that crypto to date has not really lived up to that promise fully, certainly not fully. It’s not like this widely adopted medium of exchange on that like brick and mortar retail level. But, you know, you do see people purchasing things with Eth with Bitcoin higher-value things where like the friction of the transaction is not as big of a deal in the context of those higher ticket items.
So I guess, Scott, I don’t know. To sum it up, I’d say it’s sort of under-delivered on the medium of exchange promise. I think it’s over-delivered on the store of value promise, you know, depending when you entered your position. But, you know, some of these links that you brought up that we were talking about before the show, it feels like we’re at an inflection point where maybe that’s about the change.
Scott: Yeah. And I think you bring up so many great points there, and I’d add in general, especially, you know, I’ve spent a lot of time in the merchant services world working with payments and a lot of these traditional processors and folks, they also have this hesitation of like, “Well, yeah, but there’s the volatility aspect too of the crypto.”
Or, “Oh, you know, we have all these merchants, but none of their customers are really interested in paying for their services or goods in cryptocurrencies.” So there’s been traditionally, you know, as we’ve kind of gone along, it’s been slow to adopt, but, Andy, you make a great point.
And the articles we were talking about, it seems like there really are… The winds are changing and I think that there is just so much motivation, not only from large players in the space, you know, the whales, so to speak, but also for the technology itself and this idea of can we make payments better, faster?
Can we lower those transaction fees that are a headache for businesses? And this is where cryptocurrency does offer a lot of promise. And I want to kind of bring up just a few events here that we were talking about so we can all kind of be on the same page here. The first, and we were talking about able coins, so Solana, so they have created Solana Pay which is going to focus on providing online and point of sale via software development kit for merchants to use their network.
And here’s the quote. “Solana Pay gives merchants a framework to transact with their customers, enabling them to accept and settle funds directly with no intermediaries.” And that was their payments head that said that. So clearly going right after what I was just discussing, the idea of speed, and then the idea of those speeds.
Andy: Yeah. I mean, 2% or whatever the, you know, the all-in. I guess I don’t know what the exact all-in credit card processing fee is. I know it varies, but let’s just say it’s 200 basis points, 2%, just to kind of simplify things.
Andy: That might not sound like a lot, but you figure the velocity of money, 2% of every transaction, that is like so much fat that could be trimmed.
Andy: That’s so… I mean, it’s wasteful in a way. It’s been needed, right? But that kind of a bite out of every transaction is just insane, right? Like think about if you were trading stocks. I mean, I guess there actually are some investments where you pay a 2% load, but think about if, you know, the bid asks spread on a major stock, you know, ETF or whatever was 2% spread so that transaction costs in and out regardless of amount were 2%, I mean, this is so inefficient.
And this is actually one of the things that really pulled me in as an initial skeptic on crypto into a believer and an investor’s, is just that the Blockchain technology just inherently good technology to facilitate these sort of transactions. And I know that a lot of TradFi institutions, that’s why they ultimately have decided if we can’t beat them, join them, because it’s just the efficiency.
The utter brute efficiency of this technology is a freaking sleeping giant when it points its laser at TradFi.
Scott: It’s funny you mention that too because it’s a great segue because we’re talking about those transaction fees and who really benefits from those transaction fees. Well, a lot of different players, but at the end of the day, your visas, your MasterCards, they’re taking taken some tidy cash there every time merchants are processing. And they realize, I think, that cryptocurrency does represent a threat because if a merchant there, you know, and I’ve had many conversations with merchants, if their margins are getting just beat up, they’re going to look for something else.
If they’ve got really high ticket items and they’re saying, “Hey, that 2% or whatever it is,” it can be more, you know, “Hey, I can’t do this. I’m selling these high ticket items,” they’re going to look for something else, and crypto offers such promise and… – Yeah. And then, Scott, from the merchant perspective, couple of other things I’ll mention, one is, you know, depending on what it is as a merchant that you’re selling, lots of different transactions can be rejected.
Like, you know, if you’re a United States merchant, even someone from Canada tries to purchase something, their bank just might automatically…fraud prevention might just deny that transaction just automatically. Second of all, selling anything high ticket, chargebacks, right? You know, it’s a consumer protection but also from a merchant’s point of view, it’s something that’s used fraudulently by some consumers.
Andy: It’s abused. It is absolutely abused.
Scott: There’s no chargeback on Eth.
Scott: Or on Bitcoin. There’s no charge. And so I think from that perspective, if you’re a merchant, will you take Bitcoin and you go, “Well, very small transaction fees, depending, you know, how’s…possibly no transaction fees and then no chargeback risk whatsoever.” And then, yeah, there’s the volatility, but you can probably convert that Bitcoin into stable coin or into fiat if you want nearly instantaneously.
So you don’t even really have to deal with the volatility. And then I think the other issue that, you know, maybe left unspoken sometimes is that some people are, you know, earning Eth and then spending Eth and it’s kind of all off the record, which I… You know, I’m all above board with that kind of stuff.
And I mean, frankly, I think it’s a losing proposition to always try and stay one step ahead of the IRS. So, you know, that’s not… That to me doesn’t have as much appeal. To me, that’s like people are using crypto to dodge taxes. I think that that window is probably, you know, closing over time.
And I just… To me, that juice is not worth the squeeze.
Andy: No, no, no. But I think you bring up a really great point too when we’re talking about just the types of merchants out there and where maybe there are these gaps in TradFi and traditional payments where, you know, maybe they are selling a product or a service that not many banks really want to work with that some of them may be just completely SOL, but if you have a cryptocurrency option, that really opens up things for you.
And so kind of to get back to what we were talking about, I think that the visas and the MasterCards, these big, huge flares have realized this. And just earlier in 2021, Visa, you know, started allowing crypto-linked cards. And they said, and this is actually an article from January 28th.
“Crypto link card usage hit 2.5 billion in its first quarter.” And that’s from Visa. And this is what Visa’s CEO had to say…he had to say. “We will continue to lean into the crypto space and our strategy is to be a key partner to provide connectivity, scale, consumer value proposition, reliability, and security that is needed for crypto offerings.”
So, I mean, I think that right there, we’re talking… – If you can’t beat them, join them, Scott.
Scott: Yeah. Exactly. And when we’re talking about the future of cryptocurrency and payments, if the CEO of visa is saying that, it just feels to me like there is so much pressure to really solve it and the winds continue to blow this way. I can really see it blowing up.
Andy: Yeah. I mean, it, you know, if you’re the CEO of Visa, do you want to be standing on the train tracks as this freight train is, you know, coming towards you or do you want to hit your eye on the freight train? Right? If you can, right? And it kind of remains to be seen how successfully some of these more, you know, these TradFi companies or even just some of these technology companies can leverage Blockchain and crypto.
You know, I’ve sort of swiped and poked fun at Meta in previous episodes and I think I’ll continue to do that, you know? So I don’t know that it’s always going to work out for this TradFi company. It might sometimes and sometimes it may not, right? Because anything that inherently makes the transacting more efficient just means there’s going to be a shrinking pie of fees to go around, right?
That’s going to become less efficient. It’s just going to be fewer… That stack, that 200 basis point stack that gets split up among, you know, several companies and service providers, that stack just gets shorter. Now, ultimately, I think any financial system that has consumer protections and that, you know, any kind of regulation that’s on the up and up, there are going to be certain costs associated with it with just maintaining that infrastructure.
So I think, you know, the idea that just because it’s some days on the Blockchain, it’s going to be like “free” and that all of all these fees are going to go to zero. You know, you’re going to buy and sell your house. There’s going to be an NFT, you know, or some sort of, you know, token that represents ownership of your house so there won’t be any chain. No. That isn’t happening. There’s always going to be transaction fees, you know, because there’s always going to need to be services provided outside of just this mathematical ledger that’s only part of the service that’s being provided by the merchant services company, you know, or ultimately, you know, by the bank that lets consumers do chargebacks and so on and so forth.
So I think… I’m not an absolute, you know, absolutist where I think that this is just going to be all on-chain and that these traditional service providers are going to go away, but I do see that stack of fees hopefully shrinking over time.
Scott: Yeah. And I mean, I think it’s kind of both end and I think Square or Block is a good example of this because, you know, when Square came on to the scene in payments, they really kind of turned things on its head because they were coming in with such lower fees and such an easy setup for merchants and all of this, “Oh, hey, just contact Square and you can get your little dongle and plug it into your phone and now you’re processing.”
Andy: It is easy to use, right? But then are their fees actually any lower than anybody else’s fees these days?
Scott: These days it depends, but they can be lower depending on the industry. And I guess what I’m saying is, is that they then put a lot of pressure on the whole payments industry itself and that didn’t kill the payments industry. It just, you know, made them adapt and change kind of how they were doing things and, “Okay. Let’s try to get more efficient. Let’s match what Square is doing.”
And then it’s funny to me because Square’s continuing to push things forward or Block now, I guess. Block’s cash app actually is integrating the Lightning Network. And that was promised back in 2019 and now they’re doing that. And that was again in January where… – Is this related to Jack hating on… – Absolutely related to Jack finally saying, “Okay. I’m out Twitter. I’m doing this Block thing full time.”
Andy: No, no. Where he was tweeting about how Eth was overrated, wasn’t he? Isn’t he a Bitcoin maximalist?
Scott: Yeah. Oh, yeah. That’s also… And which was funny because then Twitter, you know, has an NFT. So, you know, I think it’s one of those things where you again see all of this pressure. And so, yeah, there’s this motivation to lower the fees. Are the fees going to go away? Absolutely not.
But the motivation for the technology, for the speed of the transactions, for, you know, all of these different cryptocurrencies that people are holding that some of them do want to transact with. And they do want to have that kind of seamless experience and maybe they want to have it when they do go and buy that Frappuccino or black coffee or whatever they’re getting. And so I think that… – Yeah.
Exactly. And you figure how many merchants are already using Square. I’m going to call it Square. They still have the Square logo, I think, in all their… – There you go. Got that.
Andy: All their little processing doodads, but so that’s going to be that last mile of getting it into these retail shops and into the consume… I mean, these companies have massive reach. So, you know, when Block decides that they’re going to do this, like they’re going to do it. It’s going to reach the consumer.
So it feels like this is the year, Scott.
Scott: Yeah. And I mean, I tend to agree that like it is… Whether it’s this year, I don’t know. I don’t have my crystal ball right here. It’s… – Well, look, the numbers that you cited, those numbers from Visa… – Certainly, there seems to be a critical mass that we’re approaching here where the floodgates are going to open.
And I think another piece to that too is as we’ve seen general interest in cryptocurrency on just general consumers continuing to grow, the first time, you know, a merchant’s there and they have several customers say, “Well, I want to pay you in Eth,” the first time that happens… – For me, Scott, I think there’s a mental thing going on, okay, which is this.
I think a lot of folks with crypto, especially those that have bought it, you know, in the last couple of years are buying it with their savings, right? At the consumer level, investment represents your savings, whatever you save at, you know, you earn your income, then you spend it on, you know, rent, and food, and etc., whatever’s left over is your savings and you invest that.
You typically don’t take your investment cash to Starbucks to buy your coffee with, right?
Scott: But I think you hear about it and it’s, you know, it’s still kind of here and there, but you hear about some of these sports stars taking their salary in crypto. Well, now that’s my take-home pay, is in crypto. Well, yeah, I’m going to spend that. So am I going to convert it all to fiat and spend fiat or potentially just look for service providers and merchants where I can transact directly in crypto?
That is still in its very early stages, but nevertheless, like the more people that own crypto, and I don’t have the latest and greatest stat, but if you look at the percentage of people in the United States who own any crypto right now, the number’s higher, I think, than you would think. You’re just going to start to see 1%, or 2%, or 3% of consumers transacting in crypto, and then it’s going to like waterfall.
So when I say I think this is the year, I’m really talking about the beachhead, you know, the tip of the spear where it starts to actually happen. I’m not talking about mass adoption overnight, but, you know, I think the CEOs of these major companies, I think they see the freight train coming, right. And you’d rather probably be a year or two early than a year or too late.
Andy: Yeah. I think so. And, you know, one thing I’ll add to that, because I love how you sort of broke down, you know… Yeah. A lot of people, they’re buying crypto with their savings, but then I think the sort of merchant side of things, when we were just talking about those fees, well, how long till you see merchants say, “Well, if you just pay with, you know, your normal credit card, I’m getting hit with 2% fee. But if you pay with Eth or something else, I actually don’t have. The fee is lower.”
Or whatever it means.
Scott: I’ll give you a 1% discount.
Andy: Exactly. I’ll say… – Yeah. And, Scott, I think back to the big-ticket items because you were talking about merchant services for big-ticket items, I think that is an area out where your average consumer will say over this big-ticket item for down payment on a house for an automobile or, you know, those types of purchases, that is the type of thing you dip into your savings for.
And so if your savings are in Bitcoin or in Eth, then suddenly it’s not so farfetched to say, “Yeah. I’ll transact in Eth. And oh, you’ll give me a 1% discount?”
Scott: Because I’m not using a credit card? Great.
Andy: Exactly. Exactly. I mean, frankly, you almost need that because you know, depending on the purchase, if you can put it on a card, you can get that 1% or 1.05% cashback anyway. So it’ll be kind of interesting. I feel like that gamification aspect of rewards points and things like that which is big in crypto anyway, I could definitely see that kind of greasing the groove and facilitating user adoption.
Scott: A hundred percent. A hundred percent. So I guess to sum all up, Andy, when we look at it, no, cryptocurrency hasn’t quite lived up to the payment side of things just yet. But when you look at the interest in big players and making it happen, you look at the interests that there is in developing the technology to make these transactions faster, more efficient, you know, all of the things happening on, you know, L2s, that is where it kind of all comes together for me and makes me confident that payments are really going to drive career, go forward and we’re going to see this mass adoption sooner as opposed to later.
Andy: Yeah. And, again, I don’t think 2022 will be the year necessary of mass adoption, but I think it will be the inflection point and you heard it here first.
Scott: There it is. Thanks again, Andy.
Andy: Thanks, Scott.