From Virtual to Reality : Where is crypto now?
Journey to become a mainstream payment method
TL;DR
Cryptocurrencies were created to address the challenges of centralized monetary systems, and Bitcoin was initially designed to be used as a real-world payment method.
Unfortunately, the technical and economic inconveniences of cryptocurrency (slow transaction speed, high transaction fees, etc.) and regulatory issues in each country have limited its use as a real-world payment method. However, the industry's efforts to overcome these limitations are continuing with technological advances such as the Lightning Network and the provision of on- and off-ramp services by various companies.
Increasing stability in cryptocurrencies and their burgeoning role as a monetary system, coupled with the institutional interest from payment giants such as Visa, Mastercard, and PayPal, suggests that cryptocurrencies will play an important role in the financial system of the future.
Bitcoin’s value as a monetary system
Traditional monetary systems have always operated under the supervision of a "central organization," such as a government or major financial institution. This centralized structure is vulnerable to the influence of any one entity. For example, the global financial crisis of 2008 was caused by the misjudgment of centralized financial institutions. Ironically, it was also resolved by the intervention of centralized institutions such as the U.S. Federal Reserve Board (FRB), demonstrating the dependence of the traditional monetary system on a few specific actors.
Consequently, there arose a need for a monetary system without centralized intervention. People were looking for ways to create a new system for individuals to take control of their own currency. Thus, Bitcoin was born. As a digital currency that operates without the constraints of centralized institutions such as countries and banks, it began to create a new financial paradigm.
The idea behind Bitcoin, the beginning of cryptocurrency, was to create a "monetary system" that is autonomous and transparently managed by all participants. This emphasizes its role as an actual payment method, and not just an investment asset. On May 22, the first pizza was ordered with Bitcoin, and the day is often celebrated as "Pizza Day" because it was the first instance of cryptocurrency working as a practical "monetary system".
Efforts to expand cryptocurrency payment methods
Since then, Bitcoin's ideology has continued to resonate with many people, and other cryptocurrencies and Web3 projects began to appear. While each has a slightly different purpose and form, they all share a common goal: to help cryptocurrencies achieve monetary value. Digital wallets were developed to facilitate payments and storage, and exchanges were built for the specific purpose of purchasing cryptocurrencies.
However, it was still difficult to use in actual stores. Although the price of Bitcoin surged after 'Pizza Day' and some stores started accepting cryptocurrency, it did not gain the status of a payment method due to 1) inconvenient structures compared to the card and cash system, 2) regulatory issues, and 3) unstable price volatility.
In particular, 1) long transaction times, 2) high transaction fees, and 3) low understanding of Bitcoin were the biggest problems. Lightning Network emerged to solve this problem. It takes care of Bitcoin's slow processing speed by processing individual transactions in a separate channel and only recording the results on the blockchain. In 2021, X (Twitter) announced a sponsorship feature using the Lightning Network, and there are many other examples of use cases of Lightning Network being developed.
Service expansion: on-off ramps
However, cryptocurrency is still not as convenient as traditional payment systems, and many countries have strong regulations regarding the use of cryptocurrency as a payment method. Thus, many companies are focusing on on- and off-ramp services. Their current focus is helping people buy digital assets such as NFTs under limited circumstances.
Improvements are continuing to be made, such as the creation of stablecoins to compensate for unstable prices and improving user-friendliness. With these continuous efforts, we believe cryptocurrencies will reach their ultimate vision of becoming a viable on- and offline payment method.
Companies such as MoonPay, Simplex, and Circle are focusing on on- and off-ramp services. MoonPay and Simplex both provide crypto payment infrastructure in more than 160 countries and have the advantage of being able to easily exchange fiat and crypto using a variety of payment methods, including Visa, Mastercard, Apple Pay, and Google Pay. They also offer payment solutions for digital asset marketplaces, which is considered to be practically the only viable way to effectively use cryptocurrency in the current restrictive regulatory environment.
Circle provides stable on- and off-ramp services through its stablecoins USDC and Euro Coin. Stablecoins are efficient for remittances, especially for cross-border transfers, as they can maintain a consistent price compared to volatile cryptocurrencies. The fees are also very low, as it only consists of transaction fees in the blockchain network.
Traditional payment companies join the foray
The growing acceptance of cryptocurrencies as a payment method by traditional payment companies such as Paypal reflects the expectation that cryptocurrencies will play a role in the real-world "monetary system". While the cryptocurrency market has faced a number of challenges, it is becoming increasingly stable and has the potential to become a pillar of the future financial system.
Shopify
Shopify is an e-commerce platform company founded in Canada in 2006. The company provides solutions to build and manage online stores for businesses ranging from small entrepreneurs to large enterprises, which is why they have the second largest global market share after Amazon.
Recently, Shopify announced a partnership with Solana Pay to support product purchases with cryptocurrencies such as SOL and BONK, with cost-effectiveness being the main reason. The cost of transactions through Solana is significantly lower compared to credit cards, which charge 1.5-2% in fees, so both buyers and sellers can benefit. Previously, Shopify worked with Strike to introduce the Lightning Network to reduce the complexity and cost of international money transfers. This has not come to fruition yet due to the lack of proof regarding its stability, so further results remains to be seen.
PayPal
PayPal is an online payment service that was founded in 1998 and gained immense popularity by enabling secure online payments and money transfers through email addresses. It is now one of the most widely used payment methods in the world. Building on this innovative experience, PayPal recently launched a new stablecoin called PayPalUSD (PYUSD). The stablecoin is pegged 1:1 to the US dollar and operates on the Ethereum network. The implementation of stablecoins is expected to bring greater benefits to all users in merchant-centric fee models such as Shopify. Additionally, the short-term U.S. Treasury bonds that serve as the PYUSD's backup asset offer a 5% yield, which will boost PayPal's bottom line.
VISA
Visa was founded in 1958 and offers credit, debit, and prepaid card services. Visa has made various attempts in the past to use cryptocurrency as a payment method. In October 2018, it launched the MCO Visa Card, a crypto-backed prepaid card in partnership with Crypto.com. In 2021, it ran a pilot program for cross-border payments for the purpose of testing the implementation of the Ethereum-based USDC. Currently, it will introduce USDC payments backed by Solana. Visa's decision is a testament to the chain's ability to securely process transactions comparable to the amount handled by conventional payment systems.
Conclusion
Various cryptocurrency projects until now have been an important step towards establishing their real utility value. We have seen the market mature further as traditional players have entered the market based on lessons learned from the failures of more radical Web3 projects.
Going forward, as the regulatory environment stabilizes and the use cases for cryptocurrencies increase, cryptocurrencies are likely to strengthen their role as a true "monetary system”. This could be an important turning point, as many countries are currently in the process of figuring out the appropriate approach to cryptocurrency regulation. Amidst these changes, on- and off-ramp service providers will need to reevaluate their business strategies and explore various opportunities to avoid losing out to traditional players.
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