PayPal's big Bitcoin endorsement
A cryptocurrency once condemned for its use in cyber fraud, money laundering, terrorism financing and ransom demands is suddenly being embraced by one of the world's largest payment platforms.
AFR Chanticleer Oct 23, 2020
PayPal's decision to allow its users to buy, hold and sell select cryptocurrencies, including Bitcoin, is a significant milestone in the evolution of crypto-assets. It points the way to the broader regulatory acceptance of cryptocurrencies in global payment systems.
Also, it brings closer the moment when the bulk of consumers wanting to move money around the world will be able to avoid paying the excessive fees charged by banks and the traditional payment platforms built by Visa and Mastercard.
PayPal said this week that from early next year Bitcoin and other cryptocurrencies can be used as an instrument of exchange for those wanting to buy things from PayPal's 26 million merchants.
Regulators around the world will be watching this development closely because there are entrenched negative views of Bitcoin because of its use in cyber fraud, money laundering, terrorism financing and ransom demands.
Millennial demand
In a nutshell, Bitcoin is a blockchain with a specific random number (private key) which cannot be seen by anyone. It is "mined" by computers making massive block calculations. These blocks are rewarded with Bitcoin.
It has five unique features: it is decentralised because the computers mining the Bitcoin are not in one location; it is limited to 21 million Bitcoin; it is authenticated by machines that preserve the privacy of the owner; its consensus algorithm is synchronised; and each mined block contains information from the previous block, thus making it immutable.
A sixth feature of Bitcoin is that it is very much liked by Millennials as both an instrument of exchange and a store of value. It is currently worth $18,000, according to Independent Reserve, a Bitcoin and cryptocurrency exchange based in Sydney.
This Millennial demand for Bitcoin was recognised early by Jack Dorsey's payments company Square. The COVID-19 pandemic triggered a huge increase in use of Square's Cash App for the purchase of Bitcoin.
One in 10 central banks expect to issue their own digital currencies within the next three years.
Its use as the platform for buying Bitcoin now rivals the previously dominate source, the Grayscale Bitcoin Trust, which is listed on the New York Stock Exchange.
Analysts at JP Morgan have calculated that taking Square’s Cash App and the Grayscale Bitcoin Trust together, US Millennials purchased $US683 million ($963 million) of Bitcoin in Q1 and $US1.6 billion in the three months to June.
It is against this backdrop that PayPal opened the door for Bitcoin being used on its platform.
Analysts at Morgan Stanley said PayPal would have seen the fact that Square generated about $US17 million in fees from Bitcoin pass-through on its Cash App platform.
"PayPal’s acceptance of crypto as a funding mechanism should expand crypto acceptance online, which to-date has stalled at 1 per cent of the top 500 internet retailers," the Morgan Stanley analysts said in a note.
"However, it is unclear whether greater crypto acceptance would translate into greater volumes on the PayPal wallet. Nevertheless, this offering allows PayPal to remain competitive and could bring a new user base into the PayPal ecosystem."
Digital currency arms race
The fact that Bitcoin is gradually being accepted by regulators as a globally accepted instrument of exchange will help deflect some of the long held criticisms of crypto-assets.
Bitcoin and other cryptocurrencies pose a threat to the financial system, according to the Bank for International Settlements, which is the central bankers' central bank.
The BIS said in a discussion paper, published in December, that crypto-assets were highly volatile and presented risks for banks, including liquidity risk, credit risk, market risk, operational risk, money laundering and terrorist financing risk, and legal and reputation risks.
Central banks are under pressure to develop their own digital currencies to remain relevant and keep up with innovation in the financial system.
PayPal quoted the BIS in its cryptocurrency announcement. It said one in 10 central banks – representing about a fifth of the world's population – expect to issue their own digital currencies within the next three years.
Many close observers of payments systems and crypto-assets believe the United States and China are about to become involved in a digital currency arms race.
China made the first move this month when its central bank issued 10 million yuan ($2.1 million) of digital currency to 50,000 people in Shenzhen through a lottery. This is part of a trial for a new digital currency electronic payment.
Making this digital currency available across all of China's mobile apps such as WeChat and TikTok could give China a competitive advantage in building a global currency.
Innovation is in the eye of the beholder
In Australia, the preferred solution for the low-cost, real-time movement of money is the New Payments Platform, which is being built by 12 authorised deposit-taking institutions at an estimated cost of $1 billion.
Federal government confidence in NPP is unclear given that Treasurer Josh Frydenberg this week appointed lawyer Scott Farrell to review the regulatory architecture of the Australian payments system to ensure it remains fit for purpose.
Frydenberg says the regulatory architecture must "promote innovation and competition to ensure that costs to business are minimised, consumer experience is enhanced and there is confidence in the security of the system".
Innovation is often in the eye of the beholder. Buy now, pay later is held up as the shining light of innovation in payments even though it is simply riding off the back of infrastructure built by Visa and Mastercard and charging merchants hefty fees.
Afterpay charges merchants a 30￠ fixed transaction fee plus a commission on the sales value, ranging from 3 per cent to 7 per cent, which is much higher than the cost of taking payments from credit cards. Its rival, Zip, charges merchants an upfront fee of 4 per cent.
Nevertheless, the arrival of buy now, pay later has unleashed competitive forces, including forcing at least two banks to develop interest-free credit cards that charge a monthly fee.
Tony Boyd is the Chanticleer columnist. He has more than 35 years' experience as a finance journalist.