Has Bitcoin arrived in the payment mainstream?
POSTED ON 17. MAY 2021 BY Tim Danker
Everyone is talking about Bitcoin. Does anyone own and use them?
For some time now, it has been hard to avoid the topic of cryptocurrencies in general and Bitcoin in particular. Everyone is talking about it. The press regularly reports the latest peaks or record plummets. A few days ago, I read an article about investment advice for crypto millionaires, as if this is what the average Handelsblatt reader is interested in. So, what will I do with my money if suddenly I become a crypto millionaire?
Unfortunately, I am not (yet) a crypto-millionaire. So far, I have come into contact with the topic of crypto-currencies and the mathematical and technical background mainly through my professional background and because I studied business informatics. I wanted to know a bit more about this topic and went on my personal discovery expedition and dared to do the self-test à la Jenke von Wilmsdorff. In addition, I wanted to dig a little deeper into this subject. Everyone talks about it, but is it really relevant in our daily lives and in the everyday life of payment service providers?
How mainstream is crypto by now? My personal experience report as introduction to the topic.
In 2017, I was at the first blockchain conference in Hamburg. At that time, the topic of Bitcoin and Blockchain was still a real nerd topic. My computer science degree made it easy for me to understand the cryptographic background. At that time, however, you needed quite a bit of expert knowledge to actually participate in this system or even to purchase coins like Bitcoin yourself. Despite my deep understanding of the matter and my background as a payment consultant, it would take until the beginning of 2021 before I actually dared to try it out for myself. I wanted to know it exactly. How easy is it to buy Bitcoins and how is the experience to store them? To cut a long story short – it is extremely easy to purchase Bitcoin.
Buying bitcoins via a bank
For my experiment, I use Bitwala. I first heard about Bitwala at the blockchain conference in Hamburg I just mentioned above. If I remember correctly, Bitwala wanted to build some kind of Transferwise or WesternUnion on a blockchain basis, i.e., make foreign transfers easy by converting the amounts for the transfer from various fiat currencies to Bitcoin and back. This is an interesting approach that other players are also trying to pursue today. At the time, Bitwala was still a very young, small start-up and has since changed significantly. Today, Bitwala is more comparable to an N26 with an attached Bitcoin & Ethereum wallet, a real neo-bank with a unique selling point.
Bitwala works together with Solarisbank as a BaaS provider and offers a real German current account, protected by the Germandeposit protection fund, Bafin-monitored and with its own IBAN and Visa debit card, so really serious. For me, this means that I don’t have to move somewhere through the darknet or on some dubious coin wallets with a very unclear sense of security. So, I downloaded the app, went through the fully digital onboarding process including video-ident. In less than 30 minutes, I had opened an account with Bitwala. The next step was to activate the wallet for both Bitcoin and Ethereum in order to actually use it. This process was also as simple as can be, all I had to do was write down a lengthy list of words with pen and paper that would allow me to recover my wallet for the worst-case scenario. I credited the account with a standard SEPA transfer from my house bank with a manageable 3-digit euro amount to give the whole thing a try. This process actually took the longest, over a day. My bank doesn’t seem to support instant payment yet. At the beginning of January 2021, the time had finally come: when the money arrived in the account, I was alerted by a push message and immediately got to work – within a few seconds, I had invested half of the money in Bitcoin and half in Etherum. Out of curiosity, I’ve been checking the app very regularly since then and watching the development of my experiment. The value of my coins extremely fluctuates every day and not infrequently amounts to around +/- 10 %. As a normally very passive and long-term investor, this is a very unusual experience. You should therefore have strong nerves or, even better, have written off the money directly in your head. However, as we all know, the four months since the beginning of 2021 have been a very strong period for crypto investments and so I can currently look forward to a plus of around 100%. But I would not be surprised if this were to change dramatically at any time.
So what is my conclusion to this little crypto self-experiment?
It is extremely easy to invest in crypto coins, especially the very well-known Bitcoin and Ethereum, and there are now ways to do this via very reputable, supervised providers. However, such an investment, if you want to call it that, remains adventurous, very speculative and risky. The chances of profit seem considerable, but so are the risks of loss. For my little experiment, I have decided to wait for at least the first year of the holding period, so that I don’t have to pay tax on any profits. In addition, I am of course annoyed that I did not started this experiment, albeit with a small amount, in 2017 or earlier. As is well known, the last few years have brought extreme increases in value and my hope is that it is perhaps not completely too late to have jumped on this bandwagon. We will see what success this gimmick will bring. In any case, it feels much more like a lottery than an investment.
Paying with bitcoin in 2021?
In this self-test, I don’t perceive Bitcoin as a “cash substitute” at all, because I do have a wallet address to which I can have Bitcoin or Etherum sent and, in theory, I could also use my Bitcoin and Ehtereum for payment transactions. In practice, however, I have not yet come across the opportunity of using Bitcoin in any checkout in the real world, e.g., at amazon, PayPal (German version), Apple Pay and others. The only option I happen to know about from a speech is Lieferando. However, since I have pre-set Apple Pay as the payment method here, I am not even tempted to change this. In a thought experiment, it also seems very unnatural and impractical to pay BTC 0.0003089010442636215 for the next pizza.
After my personal experiences, I would now like to take a somewhat broader look at the relevant major players, who are also approaching this complex matter in steadily increasing numbers and trying out new things as well as questioning what exactly it is all about.
The big players get involved – an overview of approaches and backgrounds
Tesla, headed by Elon Musk from the so-called “PayPal Mafia”, recently announced in a very public way that it would invest the considerable sum of up to $1.5 billion in Bitcoin and hold cash reserves in Bitcoin accordingly. In addition, Tesla has announced that in the near future, customers will also be able to pay for their new Tesla with Bitcoins. Recently, it was revealed that Tesla made around $100 million in profit from its crypto investments in the first quarter of 2021 alone (around ¼ of total profit). This initially makes this measure look quite successful, but at the same time, one has to wonder whether Tesla is not unnecessarily adding large risks to its balance sheet due to Bitcoin’s extreme volatility. Musk is a self-confessed crypto fan and connoisseur of the matter and has recently repeatedly attracted attention with enthusiastic tweets about the “Doge Coin”, which was intended as a fun currency and has developed even more rapidly than Bitcoin in recent months. Elon Musk alone already seems to have enormous market power through tweets. His tweets regularly fire up the prices or even cause them to plummet drastically at times. One may well ask whether an investment of a company like Tesla in such a volatile financial instrument, with the simultaneously very high responsibility for the meanwhile huge car company and its thousands of employees, is not to be classified as grossly negligent or as a brilliant move. At the very least, it is extremely risky. However, if we look at it more objectively, there are logical reasons, e.g. for cash management in foreign payment transactions, which is a challenge for any global company, such as Tesla. Wire transfers and conversions to other currencies, supplier payments across the globe, and the need for a global network of accounts and banks – Bitcoin doesn’t need all that. With Bitcoin, low-cost, direct payments of any amount are possible across countries, without the need for correspondent banks and clearing cycles. This can lead to significant speed advantages and cost savings. The only question is whether these savings can really outweigh the extreme risks to the balance sheet? Especially for a company like Tesla, which is committed to environmental protection, Bitcoin is a tricky choice, as the network is known to be extremely energy-hungry. Elon Musk seems to have realized this and was forced to pull the ripcord a few days ago and suspend the acceptance of Bitcoins as a means of payment until the mining of Bitcoins has been converted to sustainable energy sources on a large scale. These days, this happens mainly in countries with low energy costs, such as China or Kazakhstan, and there typically with energy from non-renewable sources. However, the Bitcoins acquired by Tesla are not to be sold. This news was followed by a general price drop for Bitcoin and many other cryptocurrencies.
As the first of the major credit card organisations, Visa announced in February 2021 that it will directly support cryptocurrencies in the future. It wants to provide banks with a software interface through which payments with cryptocurrencies can be integrated into its own offering. The offer is to be launched within this year. Visa is relatively slow in approaching the topic. Basically, Bitcoin or cryptocurrencies in general could also mean significant cost savings and speed gains for Visa, especially in foreign payments. With Bitcoin, there would no longer be a need for clearing cycles, which could enormously speed up processing in one’s own network. To be honest, however, cryptocurrencies also mean above all that payment networks such as Visa would, in extreme cases, no longer be needed at all. In this respect, the approach to cryptocurrencies also means, above all, a confrontation with the greatest threat to one’s own existence. At present, it is primarily the lack of distribution and relative complexity for normal end users and merchants that protect Visa and other payment providers from the new digital challengers.
After Visa, Mastercard has now also announced that it will open its network for cryptocurrencies in 2021. The prerequisite is that all cryptocurrencies approved by Mastercard must comply with the laws applicable in the respective area of use. Mastercard expects stablecoins to gain acceptance among end customers. As with Visa, cryptocurrencies are generally both an opportunity and a risk for Mastercard. They are an opportunity because they can improve processing costs and speed enormously. They are a risk because they have the potential to push Mastercard into irrelevance or to eliminate the man-in-the-middle. It is understandable that Mastercard is focusing primarily on stablecoins (and this will also include the already much discussed and expected digital euro), as this means security for Mastercard as well as for merchants and consumers, and the enormous fluctuation risks as with Bitcoin do not pose a threat here. Stablecoins with a central trust centre (i.e., no distributed ledger technology) also mean above all continued control over the payment network for central banks and payment processors and clear speed advantages, i.e., also better scaling.
PayPal first started in the US by enabling its customers to hold cryptocurrencies in a crypto wallet within their PayPal account. Recently, it was announced that PayPal will also enable payment with Bitcoin as a checkout option for merchants and end customers (again, initially only within the US).
PayPal is thus experimenting with cryptocurrencies the most and can be considered as one of a few heavyweights of payment traffic. For PayPal, too, the use of e.g., Bitcoin means significant cost and speed advantages in international payment transactions. PayPal could achieve significant advantages if it manages to keep the coins as long as as possible in its own network, e.g., via sidechain technology, i.e. in such cases PayPal would no longer incur any network fees at all and could keep the monetary values permanently in a self-controlled network and would also be largely independent of banks and other payment providers such as the large credit card organisations. However, this is certainly a very extreme vision for the time being, and one that is still a long way off. However, since PayPal’s biggest cost item is the fees for banks and payment networks, it is absolutely logical to look for and find ways to reduce or, ideally, even eliminate these costs.
The rollout of software solutions for the acceptance of cryptocurrencies at classic POS terminals was recently announced by Nets/Concardis in cooperation with the Austrian software provider Salamantex. Experience has already been gained there in pilot projects in recent months and the solution is now to be rolled out throughout Austria for all merchants. The prerequisites are a corresponding contract and a crypto-capable terminal equipped with the appropriate software for this purpose.
Initially, payments using Bitcoin, Ether and Ripple will be enabled. The addition of other currencies, especially sovereign ones such as the anticipated Digital Euro are being considered. According to Nets’ press release, traders can choose whether settlement will be in euros (at prevailing conversion rates) or the cryptocurrency in question. The press release states that the trader can receive his transaction amount immediately without the risk of fluctuations in the conversion rate. In the case of settlement in cryptocurrency, it would actually be theoretically possible for the respective payment to be made directly to a wallet of the trader. In the case of a conversion into euros, a collecting by Nets would presumably have to take place with subsequent settlement. On the subject of costs, there is talk of “standard market” fees in the amount of credit card fees.
It will be interesting to see how such solutions, where a direct transfer of value between customers and merchants would actually be possible, will be monetized for payment service providers in the middle. If the payment service provider is not involved in the direct flow of money, it would also have no corresponding financial risks and thus a corresponding remuneration (such as for credit card payments) would not actually be appropriate. In such cases, the purely technical service of enabling the transaction would have to be priced. In cases where the payment service provider performs a collection and corresponding conversion into fiat currency for the merchant, on the other hand, a corresponding fee would be justified. The only question here is whether this is in the interest of the inventors of decentralized cryptocurrencies, who would like to make precisely these intermediaries superfluous. It will be interesting to see how these use cases and pricing models develop and are presented in real life.
Instant Payment, EPI and CDBC (Digital Euro)
The major players on the market are also facing increasing headwind from the growing number of European government and private initiatives. The most important of these are Instant Payment, which is intended to accelerate payment transactions in Europe, EPI, which has set itself the goal of creating a new payment procedure at European level as a counterpart to the major credit card schemes and wallet providers, and, closely related to this, the planning of the digital euro, as a digital version of the euro analogous to a centrally managed cryptocurrency. The competitive pressure in the market surrounding the dominant payment methods in Europe is therefore constantly increasing. On the one hand, it is important for the European players to create a counterweight to the dominant American corporations, and on the other hand, to counter private or even anonymous decentralized payment networks such as Bitcoin. At its core, it is about maintaining control over payments and strengthening trust in European institutions and payment providers in Europe. Each of the parties involved, whether at the private or state level, is pursuing its own particular interests here to assert itself. The keyword MiCA (Markets in Crypto-Assets), for example, conceals the idea of a European regulation of the crypto market. A corresponding regulation is expected to come into force at the end of 2022.
A look into the future
There are now several thousand cryptocurrencies and a multitude of other private and state initiatives. The market is really confusing and is constantly becoming more complex. At the same time, the barriers to entry are falling in many places, making it increasingly easy for ordinary citizens to come into contact with cryptocurrencies and to experiment. A look into the crystal ball suggests that the topic will continue to grow in relevance. Is the topic already so mainstream that my grandparents would deal with it? I would say no. Nor would my parents. Neither would most of my acquaintances. But I think the time will come soon. The topic will become more relevant and the more providers and solutions come onto the market, the more relevant the reduction of complexity for end customers will become. The big market players are watching the topic very seriously and are experimenting with the first solutions. This is understandable since they are in serious danger of becoming increasingly irrelevant due to technological advances and the progress of making intermediaries redundant. We will see a much stronger lobby that will fight against the disempowerment of state and central bodies in payment traffic. Because in a world in which payment transactions are completely decentralised and function without central trust providers, nobody needs them anymore. This dystopia of the payment traffic world may still be some time in the future, but perhaps less far away than some people would like. The topic is not yet mainstream. But a few years ago, only real nerds had a Nokia Communicator in their pocket (or better, in their backpack). Today, everyone has their e-mails in their pocket.
I am curious…also when I will finally be a crypto-millionaire.
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