In the ever-evolving landscape of finance, cryptocurrencies have emerged as a tantalizing prospect, promising a decentralized alternative to the way we transact value. However, despite their existence for several years now, the vision of cryptocurrencies as a ubiquitous payment method remains elusive.
This was made clear in the latest FIS Global Payments Report, which highlighted that only 18% of merchants and consumers said they used cryptocurrencies for person-to-business payments.
Despite the potential benefits of cryptocurrencies, such as lower transaction fees, faster processing times, and greater financial privacy, they are yet to be the payment method of choice.
Barriers to widespread adoption of crypto payments
While the potential of cryptocurrencies as an alternative payment method is promising, the road to mainstream adoption faces several challenges.
The volatility of cryptocurrency assets
The cryptocurrency sector is still in its early stages, so it is prone to speculative investing where any latest developments — both positive and negative — could result in major price swings. 2022 was especially a tough year after the sector experienced major collapses and bankruptcies. Coins like Bitcoin (BTC), Litecoin (LTC), and Ripple (XRP) were supposed to be methods of transferring value, but they are currently more than 50% down from their all-time highs. Merchants may not be keen on owning an asset that fluctuates wildly in price, and they may still consider fiat currency to be a safer haven.
Moreover, while stablecoins are the supposed bridge between traditional finance and cryptocurrencies, they are not free of risks either. The greatest concern is that a stablecoin could depeg from its reference asset — usually, the US dollar — with algorithmic stablecoin Terra USD being a tragic example where 1 UST is now worth less than 2 cents. Asset-backed stablecoins like USDC and USDT have experienced depegs amidst periods of extreme market conditions or low liquidity.
Lack of user-friendly tools and interfaces
Web3 was designed by developers, and it seems that it was made for developers, and not the average user. Metamask is the most widely used Web3 wallet, yet there have been numerous complaints about its cluttered interface and poor design.
Moreover, the significance of the seed phrase, which serves as a master password for securing a user’s wallet, is frequently not effectively communicated by cryptocurrency wallet providers. Due to the poor user experience that they have in Web3, they may ask for help on forums or other social media channels. Scammers who impersonate support staff may contact these users and offer to solve their problems by asking for their seed phrase. These users may freely give away this phrase, as they do not equate it to giving away the password to your account.
While decentralization is empowering as it gives you full control over your assets, you are unable to seek help from a centralized entity if anything goes wrong. Every transaction on the blockchain is irreversible, so it is not possible to recover your funds if you fall prey to a scam or transfer your funds to the wrong wallet.
Education could be one possible solution to help consumers and merchants be aware of the risks involved when using cryptocurrencies for payments. However, a more effective approach would be to redesign the current interfaces to make them more user-friendly for Web2 users.
Crypto transfers can be expensive
If you’re used to paying close to zero fees when transferring money via bank transfers or digital wallets, you could be in for a rude awakening when you make a transfer on the blockchain.
Decentralized networks have yet to solve the “scalability trilemma,” a term first coined by Ethereum’s co-founder Vitalik Buterin. The trilemma describes the ability for a blockchain network to achieve only two out of these three properties: decentralization, scalability, and security. No crypto network has been able to achieve all three properties, with Ethereum sacrificing scalability to attain a high degree of security and decentralization. As a result, the network is only able to process 15 transactions per second (tps) and this pales in comparison compared to Visa’s speed of 24,000 tps.
Imagine a busy highway during rush hour. When there are more cars than the road can handle, traffic slows down, and it takes longer for each car to reach its destination. Similarly, when the Ethereum network experiences high congestion due to a large number of transactions being processed, the network becomes slower. Consequently, transaction fees increase as users compete to have their transactions included in the next block, as validators are financially incentivized to include transactions that come with a higher fee. Based on the current gas prices on the Ethereum network, a simple transfer of the USDT stablecoin between two wallets could cost around USD 8 worth of Ethereum or even more, which can be extremely expensive if a customer is only sending over a small amount.
While other crypto networks like Solana and the NEAR protocol boast faster speeds and lower transaction fees, the number of validators on both networks — 1,769 and 100 respectively — are much lower than Ethereum’s 564,000. If a crypto network is not decentralized enough, a single entity or group could take over the network and manipulate transactions or even steal assets on the network, making it less secure.
In their current state, crypto networks are far from being able to provide the fast and secure transactions that their centralized counterparts are capable of, so merchants and customers may not be enticed to switch over to use these networks.
Lack of interoperability between cryptocurrencies and traditional financial systems
Consumers and merchants still primarily rely on traditional financial services to carry out their daily transactions, so they would demand a seamless process to convert between fiat currencies and cryptocurrencies.
However, this is not the case as crypto networks operate in isolated silos, and this poses a challenge when integrating these networks with traditional finance infrastructure. For example, consumers and merchants need to go through multiple intermediaries when they are converting between cryptocurrencies and fiat, which could result in additional fees and delays.
Due to this, merchants may face additional technical challenges when investing in infrastructure to accept crypto payments. The costs involved may not be worth it if only a fraction of consumers choose to pay with cryptocurrencies.
Regulations are still unclear
As cryptocurrencies are still a very new technology, insufficient regulatory oversight may discourage more merchants from accepting them as payments. More than 50% of 2,000 senior executives at US retail organizations in a 2021 survey by Deloitte believed that clearer regulations need to be established, including tax implications of receiving crypto payments, accounting policies for crypto-based transactions, and guidance on the custody of digital assets by businesses.
Countries like the US, Hong Kong, and Singapore are in the midst of drafting stablecoin bills, which could provide greater clarity once they are passed. These regulations aim to ensure that all issued stablecoins are backed by sufficient reserves, with the US bill even proposing to ban the issuance of algorithmic stablecoins— those that are not backed by tangible assets — for the first two years.
Initiatives aimed at boosting cryptocurrency payment acceptance
Despite the challenges, many businesses are still optimistic about the potential of crypto. Almost 75% of the same respondents surveyed by Deloitte stated that they planned to accept either cryptocurrency or stablecoin payments within the next 24 months. Given recent advancements, this goal may well be achievable.
Visa has led the way by announcing its intention to leverage account abstraction to improve the user experience when transacting on the blockchain. One such method is to implement recurring payments which are deducted from a customer’s non-custodial wallet. Stripe recently launched its embeddable fiat to crypto checkout widget, while Mastercard has partnered with crypto wallet providers and blockchain networks like Polygon and Solana to instantly verify wallet addresses to instill greater trust in the blockchain ecosystem.
Vitalik Buterin previously emphasized the importance of cheap crypto transactions and believes that Layer 2 solutions will help to improve Ethereum’s scalability. These solutions, which rely on Ethereum’s security, operate by moving transactions off the main network and processing them on Layer 2 networks before updating the final outcomes on Ethereum.. A new upgrade to the Ethereum network is set to be released by the end of the year, making it even cheaper for Layer 2s to post transactions to Ethereum.
While recent advancements have been promising, the widespread adoption of crypto payments still requires significant effort. Enhanced regulatory clarity would empower merchants by providing them with a better understanding of the government’s position on digital assets. Only through such comprehensive measures can we pave the way for a future where crypto payments become mainstream.