By now, you have almost certainly heard about Bitcoin, blockchain technology, and the concept of cryptocurrency. At the same time, you may be left wondering if these topics hold any practical applications for your business. The goal of this post is to better clarify these core concepts and highlight an actionable scenario: accepting cryptocurrency as payment on a digital storefront.
THE DISTRIBUTED LEDGER
Almost a decade ago, the distributed ledger technical architecture was born. The distributed ledger is a kind of database maintained via voluntary cooperation of a decentralized network of computers. Compared to a centrally controlled service, this model ensures group consensus and trust through the use of cryptography.
The Bitcoin blockchain is the first, and most famous, implementation, however, the architecture is continually evolving and now includes not only different kinds of blockchain solutions but also new alternatives like Hashgraph. A core concept of the ledger is that any participant can view and verify it, but thanks to cryptography, only authorized users can issue transactions, and transactions cannot be altered.
WHAT IS CRYPTOCURRENCY? WHAT IS A COIN?
What we call cryptocurrency, or Crypto for short, is simply one or more data records on a given public ledger instance. A record contains a numeric value of a coin or perhaps additional data.
For example, Bob’s account has a total of 1.318 coins on the Bitcoin ledger. Fundamentally, this is not so different from a government-issued currency – fiat – since much of that supply is already “just numbers in a computer.” The main difference between crypto and fiat currencies, though, is that trust – ensuring accurate records – is only present in crypto’s open source software and algorithms.
DOES CRYPTOCURRENCY HAVE REAL VALUE?
There is undoubtedly a demand for Distributed Ledger technology, though there is a healthy debate as to whether cryptocurrency is actual currency. Regardless, crypto is a new asset class. A coin usually falls into two main categories that define its worth.
Store of Value
A coin is tradable between parties, and convertible to other crypto coins, or fiat. It can be stored for future use, secured by the ledger. People trust this technology and attribute market value to the coin. Furthermore, a coin will typically have a fixed supply. Bitcoin is the original example.
Next generation ledgers provide the capability to run custom computer code, commonly called a Smart Contract, which can read and write complex ledger data, applying rules and logic. Running a contract takes computing resources, and a coin’s value comes from the fact that users must pay the network in cryptocurrency for resource usage. The most well-known example is Ethereum.
ARE CONSUMERS USING CRYPTOCURRENCY?
After years of being relegated to tech-savvy power users, cryptocurrencies are now increasingly accessible to everyday consumers thanks to intuitive mobile wallet applications. Younger consumers have latched on to cryptocurrency thanks to their trust in technology and propensity for being on the leading edge. Worldwide crypto adoption isn’t quite here yet, but it really is only a matter of time.
Here are some of the popular wallet applications that consumers use to store their coins:
- Cash App from Square — Square recently launched crypto support for its digital wallet app.
- Coinbase Exchange and App — The old guard: Coinbase was one of the first easy-to-use crypto marketplaces and is probably the most well known.
- Abra — The new kid on the block: Features easy access to 20 top coins.
- Robinhood (Coming soon) — Robinhood continues its mission to make investing approachable to everyone, and will soon include no-fee crypto transactions.
DO MERCHANTS EVEN ACCEPT CRYPTOCURRENCY?
Some eCommerce pioneers have been accepting crypto payments for years, and there are many others that are just now jumping aboard. Here are some examples:
- Overstock.com — One of the first and largest crypto merchants. CEO Patrick M. Byrne is a true believer.
- Expedia – Shoppers can pay for hotel rooms with cryptocurrency.
- Shopify — This hub for small business merchants has them covered with support for crypto payments.
- Egifter – Shoppers can turn their coins into gift certificates for use with top brands.
As cryptocurrency becomes more ubiquitous, merchants should get out in front of the payment method and look into supporting crypto transactions. There are a number of reasons to do so:
Crypto transactions are irreversible, due to the write-once nature of the ledger, so a customer cannot initiate a chargeback. Legitimate refunds can still be issued as a new transaction back to the consumer.
Cryptocurrencies are accessible wherever the unrestricted Internet is available. Accepting payments internationally is no different than regional payments.
No PCI Concerns
Unlike credit card numbers, cryptocurrency account addresses are public by nature. A transaction cannot be issued without a private key that only the account owner (or custodian) holds. The merchant provides a receiving address and the consumer issues a payment to it from their account.
A small fraction of each crypto transaction is paid back to the network, however, this is generally minimal, and paid by the sender. Merchants would similarly pay only when moving funds that have been received. Commerce-ready, custodial payment providers, such as those mentioned further below, do charge their own fees for services. These are notably less than credit card payment processing fees, and as crypto becomes more widespread, these fees will lower to create competition in the processing marketplace.
With the General Data Protection Regulation (GDPR) in the EU and the recent fallout from Facebook in the US, consumers are more sensitive about their privacy then arguably ever before. While Bitcoin is not truly anonymous, there are other cryptocurrencies, such as Monero, which aim to fill the demand.
WHAT ARE THE OBSTACLES?
Despite crypto’s growing user base and hype, most distributed ledger networks are still very young. Right now, this is very much a fast-changing and experimental technology.
For example, even the top Cryptocurrencies today can only reasonably handle a handful of transactions per second. This is a far cry from Visa services, which tackle 2,000+ transactions per second on a slow day. That said, scaling solutions for blockchain-based ledgers are in progress, and alternate ledger designs are built for speed.
Earlier, we determined that cryptocurrencies have value, yet given how these are a new asset class with a growing user base, their true, fair market value may not be understood for some time. Combine this with a largely unregulated, sometimes easy to manipulate, 24-hour-a-day marketplace full of novice investors, and the result is significant volatility with sometimes double-digit percentage swings in a day.
To play it safe in such a market, a business may want to convert crypto into fiat relatively quickly. The good news is that regulation is being actively discussed, and once implemented, will bring more safety and larger institutional investors to help settle markets.
Supporting an additional payment option in checkout, one that still has some way to go before widespread adoption, can create customer questions and confusion. Educational material may be needed, both directly to consumers and to service agents.
Depending on your target audience and risk tolerance, now may be a good time to become familiar with cryptocurrency, take the technology for a test run, and gauge consumer participation. There are commerce-ready solutions available to help ease into this brave, new world. Crypto payment processors include services such as custodial wallets, storefront checkout integrations, and sometimes direct to fiat conversion and bank deposits to sidestep price volatility. Here are some top providers to get in touch with serving the US and Western Europe:
- Coinbase Commerce — The most prominent name for cryptocurrency in the US, which has relationships with Expedia and Shopify stores, recently launched this new service. It supports several cryptocurrencies.
- BitPay Payments — Another provider in the US with plug-in integrations for Magento and other platforms. Includes conversion to Fiat and direct bank deposits. Accepts only Bitcoin and Bitcoin Cash.
- GoCoin — Locations in US and Singapore. Used by the likes of Remax and Shopify. Integrates with Magento and other platforms. Supports multiple cryptocurrencies, and wire transfers to banks.
- BitcoinPay — A UK based provider serving the Eurozone. Convert to local Fiat and deposit to banks.
- CoinsBank — Another UK provider.
Not quite ready to take the plunge? That’s okay. This won’t necessarily turn off your crypto-loving customers: the tech is still very new and consumers understand that. Ironically, there are several solutions on the market allowing consumers to spend their coin via traditional pre-paid debit cards. While these options run counter to the decentralization tenants and benefits of cryptocurrency, they do provide a convenient stopgap.