[Here's an article I wrote for CoinDesk's recent Payments Week series.]
Why We Need Crypto Payments to Work
Crypto has always held out the promise of a payments revolution. But that revolution never happened.
We're 13 years into the Bitcoin age, and there’s only one store in my neighborhood in downtown Montreal that advertises that it accepts bitcoin. I was passing by that store the other day and noticed that a vandal had crossed out the bright orange ₿ written on the storefront, adding a "non" in protest.
Why? The vandal didn't provide us with more information. But if I had to guess it probably had to do with their opinions on the environmental implications of bitcoin's security method, proof-of-work. Proof-of-work requires huge amounts of electricity, and in an age of global warming there's no place for such an awesome display of energy consumption.
This small example is illustrative of the crypto payments challenge. It's tough enough for crypto to gain acceptance as a payments network. The medium’s inherent volatility and novelty are huge hurdles. Add to that concerns about crypto’s effect on the environment, and getting the payments ball rolling becomes even more of a challenge.
But even normies who don't care about crypto should want it to succeed as a payments medium.
Cash is rapidly disappearing as a payment medium. The big winners are the Visa and MasterCard card oligopolies. Every time someone deserts cash, the card networks get a little more powerful. As consumers we don't often notice the few cents that the card networks extract from us when we pay with our debit or credit cards, but it leads to fantastic profits for them. Visa and MasterCard's returns on equity – 40% and 120% respectively – give testament to their wide oligopolistic moats. (The average company's return is a meager 10-15%).
There are a number of solutions to oligopolies, one of them being competition. If there are more payment networks fighting for market share, we consumers (and the retailers we frequent) can at least choose the cheapest one.
And that's why it would be nice if crypto worked for payments.
Alas, crypto usage has been mostly confined to the relatively small confines of the speculative crypto economy, only leaking out once in a while to serve as a normie payments medium. These leaks may be slowly plugging up, too. Over the last year or so, activists have been trying to push the small advance that crypto has achieved in the payments realm into retreat.
My neighborhood store is just one example. The storekeeper's internal dialogue might have gone after seeing their store window vandalized: "Why bother accepting the odd bitcoin payment when it attracts such negative attention?"
Last month, hundreds of long-time Wikipedia editors asked the Wikimedia Foundation to stop accepting cryptocurrency, the most popular reason put forth being its environmental sustainability. A few months before, Discord – a popular messaging platform – quashed rumors of a cryptocurrency integration after pushback from users concerned over energy use.
The Wikipedia editors' vehemence stands in contrast to the tiny amount of crypto that Wikimedia has collected. According to Wikimedia, just 0.08% of its donations have been in crypto, mostly bitcoin. The Wikimedia Foundation has little reason to say no to the activists. At 0.08%, crypto isn't proving to be very useful for accepting payments. Why bother pushing back?
Had the activists campaigned for Wikimedia to stop accepting Visa, for instance, it'd be a complete non-starter. Visa has an advantage over crypto. It’s already big, likely accounting for a decisive percentage of Wikimedia donations.
That you can’t say no to Visa, but you can say no to crypto, illustrates the crypto payments dilemma. Retail payments networks are notoriously difficult to bootstrap. It's the classic chicken-and-egg problem. For an individual to adopt it, a new payment option needs to be already useful (by being widely available and spendable at shops), but it can't be already useful if no one wants to try it in the first place.
Making this paradox worse is that the card networks already have firm footholds. People have grown used to their plastic, and the incumbents use dirty tricks to enforce lock-in, like card reward points and no-surcharge policies. The nut is made even harder to break by crypto's incredible volatility. Risk-averse new users are reluctant to try it.
But the crypto world has evolved a response to volatility. Stablecoins are a type of cryptocurrency that is pegged to traditional fiat money, which makes them less intimidating for people to use. And so where regular crypto comes short, stablecoins at least stand a fighting chance against the MasterCard and Visa oligopolies.
Unfortunately, stablecoins are built on energy-intensive proof-of-work blockchains, which opens them up to the growing environmental critique. Given the already difficult chicken-egg payments problem being faced by stablecoin issuers, the last thing they need is for card users to come up with one more excuse not to give stablecoins a try.
Mozilla's recent reappraisal of its crypto acceptance policy provides a good example of how I hope the debate evolves. In January, Mozilla – the nonprofit organization that makes the Firefox web browser – decided to temporarily pause cryptocurrency donations to see how crypto "fits with our climate goals."
This month Mozilla announced its new policy. Rather than closing the door on crypto, it came up with a more nuanced solution. Mozilla won’t accept proof-of-work coins, but it'll accept proof-of-stake cryptocurrencies it sees as "less energy intensive."
If Mozilla's more welcoming policy is emulated, and one hopes it is, it offers stablecoin issuers a window. But this window comes at a price. If stablecoins are ever going to compete in a meaningful way with the card networks, they need to dissociate themselves from proof-of-work. That may mean avoiding expansion to proof-of-work blockchains. At the worst, it means helplessly waiting while the proof-of-work chains on which they already exist, like Ethereum, switch over to less energy intensive security methods.
Removing as much ammunition as possible from critics will make the already difficult chicken-and-egg payments problem a little easier for stablecoins to solve. We need them to win, though. Visa and MasterCard aren't getting any less dominant.
U always speak to the strawman points. How about considering Bitcoin solely as a large value settlement system among nations and large institutions?ReplyDelete
It's not a strawman. Satoshi referred to bitcoin as an electronic cash system. It would allow for "small casual transaction" and "on-reversible payments for non-reversible services." That's the same retail payments space as Visa and MasterCard.Delete
As for stablecoins, the other big topic of my article, they're should be no ambiguity here: they are targeting retail payments.
Well I would say regardless of what you quote Satoshi as saying, its the strawman. Bitcoin serves perfectly as a high value settlement medium for large value transactors with no limitations. You are speaking to the mainstream view/want/understanding and I agree with you bitcoin is limited in that regardDelete
All my points transfer over to the Lightning network, too, which is supposed to be for retail payments. Lightning faces huge hurdles to adoption but when you add the PoW criticism it's going to have even more troubles getting traction.Delete
You are still speaking to small value transactions rather than the type that might be settlement between nations. Bitcoin isn't limited in this regard except that its market cap needs to mature.Delete
"Why? The vandal didn't provide us with more information. But if I had to guess it probably had to do with their opinions on the environmental implications of bitcoin's security method, proof-of-work."ReplyDelete
Uh - ever think for a second that MAYBE it had to do with the extremely divisive Canada Trucker protest and it's connection with bitcoin? Far more likely it's politically motivated than anything.
Sure, that could be the case.Delete
But my argument still stands. If bitcoin accounts for such a tiny proportion of a store's payments flow, then if activists target that store's bitcoin policy [because of environmental reasons and/or association with truckers] the store won't bother to push back. And so crypto can't get kickstarted as a broadly-accepted payments option.
Also, Crypto is a PITA. I have to first figure out how to buy it...open account, go through tons of two-factor every single time I want to try to manage it. Then there is the issue of it not being safely held. Who is the custodian, dang, better get me a crypto wallet. Ok, great, that took a week to figure out; did I have to buy hardware, is an app ok? Etc etc. Now, the moment of truth - how do I spent it? Let me spend another week figuring that out, then dig around for a single point of sale that I usually frequent that actually accepts it. So, yeah, make me suffer huge transaction costs and anxiety, for a "currency" I can barely use, that might get stolen, and even if not stolen, might end up losing half the value of the actual $ I needed to spend to buy it. And also make me feel bad about the environment. The world really doesnt need this. If the tech ever makes sense, it will be co-opted as a Fed digital currency. In its current state, the Fed will destroy it as it drains liquidity. The casino is on fire.ReplyDelete
Yes, crypto payments faces huge UX hurdles. I think over time it may be able to reduce them, but only by compromising on decentralization.Delete
I had previously had more hope for the crypto space at large, but ultimately the conclusion I've come to is that ultimately algorithms are not a suitable replacement for functional institutions based on the fundamental building blocks of person to person relationships, and unfortunately there's no way to make that as totally decentralized as crypto-idealists would hope for.ReplyDelete
If we were to see a visa/mastercard competitor emerge from the crypto space, rather than some shiny new technology making it viable, I'd expect to see a "social technology" of some kind in the form of a more formalized institution to emerge from one of the crypto foundations/developer juntas, perhaps akin to how the Linux Foundation emerged.
I largely agree. Decentralization is not compatible with mass adoption. To get more users, tools will have to compromise on decentralization, but then it's not really crypto anymore. Just regular finance.Delete
I don't know if I'd go so far as to say that its doomed to be identical to traditional finance. Even if the dreams of totally decentralized currency operations are infeasible, remnants of the culture could still remain and help influence the formation of a financial culture that's more democratic in how it manages fiscal policy. You already see elements of emergent institutionalization in some of the communities that have been focusing more on real world usage. Perhaps I'm being hopelessly romantic, but I'd like to believe that something better comes out of a few of these at some point.Delete
hey, thanks for the blog which I found very interesting. Whilst i can see why it would be great for crypto and the world if it crypto somehow made a breakthrough in retail payments , I am actually curious as to why you think it is capable of doing this.. From my perspective, the structural problems facing any cryptocurrency for widespread retail adoption are just too overwhelming.ReplyDelete
You list many of these reasons in the blog post - but there are others - blockchains cannot handle nearly enough payments per second as as would be required, people who invest in stable coins probably only do this to either day trade or lend via protocols, there are multiple on/off ramps that make small scale payments v expensive, lack of privacy for merchants if their wallet address is exposed. etc.
You bring up a lot of good points.Delete
If a stablecoin was going to go make a push into retail payments, it would have to use some sort of level 2 option built on top of Ethereum in order to scale. Because as you point out, in their base state blockchains can't handle much throughput. And the issuer would have to figure out how to provide this speed in a customer friendly way, because most people don't want to fiddle around with moving their funds from one level to another.
Yes, the privacy problems is huge. No one wants their transactions to be traceable. I wrote about this problem here (http://jpkoning.blogspot.com/2022/01/defi-needs-more-secrecy-but-not-too.html) but in short, blockchains need native privacy. Mixing won't do.
The credit card oligopoly is a clear case for government investment. Like streets and highways, a government payment card (not allowing carried balances, which would be left for private industry cards), possibly connected to digital currency, would be a boon to every retail business. Developments in society of course reveal new needs and dangers that should be addressed by the people (gov,t) instead of being controlled by monopolistic barons.ReplyDelete