Cryptocurrency use as a retail payment instrument is still limited, accounting for just 3% of total payments within any country between 2021 and 2023, according to Deutsche Bank Research estimates.
However, as a means of improving cross-border transfers, crypto payments use cases are winning favor, particularly for stablecoins, which tie their value to that of a government-issued currency. However, a lack of regulation deters banks from adopting crypto technology for this purpose or any other.
Wells Fargo, for example, is evaluating crypto technology for potential transactional, transparency, and settlement innovations, but it doesn't accept crypto assets in deposit, custodial, or other accounts, said Arushi Joshi, Wells Fargo's head of distributed ledger and digital assets center of excellence.
"Before we get significantly involved, we need to see a clear, cohesive regulatory framework defining cryptocurrencies as financial instruments," Joshi said.
The U.S. currently lacks uniform nationwide licensing requirements for crypto exchanges, which are required to obtain money transmitter licenses in any state where they operate. The U.S. has no equivalent to the European Union's electronic money institution licensing regime, which requires nonbanks to safeguard funds they hold on behalf of customers. Currently, the state with the most stringent crypto regulations is New York, where the New York State Department of Financial Services operates the BitLicense regime.
"Banks are cracking open the door to the benefits that cryptocurrencies could bring to the industry," said Keith Raymond, principal analyst for insurance at U.S.-based Celent. Examples include processing payments, providing escrow services, facilitating international cash transactions, and making loans in cryptocurrency, he said.
"However, regulatory concerns, volatility, and the crypto market's evolving nature pose challenges," he said.
The state of stablecoins
Stablecoins are front-runners for the adoption of cryptocurrencies as payment methods. This is because of their instant settlement on the blockchain and their ability to be combined with smart contracts. They are also designed to avoid volatility by tying their value to that of a government currency.
Some law firms that use the U.S. crypto exchange Coinbase opt to get paid in the USDC (USD Coin) stablecoin, as they get paid instantly instead of in three days. "Using USDC is cheap and fast; no middlemen and no waiting," said Paul Grewal, Coinbase's chief legal officer.
Another reason why stablecoins have appeal for B2B payments is that they can be embedded into smart contracts on a blockchain. A smart contract eliminates manual processes and enables payments to be executed automatically if certain terms and conditions are met.
Cross-border remittances using stablecoins are currently the big use case, said James Wester, research director for digital assets and crypto at U.S.-based Javelin Strategy & Research. They offer a lower-cost, faster and more transparent alternative to existing methods such as Swift for cross-border transactions, and this is driving their adoption, he said.
However, there is more counterparty risk with stablecoins than with traditional bank transfers, and crypto firms need to think how to reduce counterparty risk, said Dima Kats, CEO of U.K.-based payments company Clear Junction.
Crypto regulations
Stablecoins' main drawback is that their one-to-one peg to the U.S. dollar is not regulated sufficiently, and there have been several stablecoin failures, including that of TerraUSD, resulting in investors losing the value of their holdings. Typically, stablecoins are backed by municipal or government bonds rather than cash in bank accounts.
A stablecoin bill, the Clarity for Payments Stablecoin Act, is working its way through the U.S. House of Representatives. Separately, the
Both bills aim to bring stablecoins into the same regulatory frameworks governing traditional financial institutions.
"Ultimately, we expect members of Congress will consolidate around a single proposal that can move forward," said Ji Kim, chief legal and policy officer for the Washington D.C.-based Crypto Council for Innovation, a global alliance for the crypto industry.
Until legislation is put in place to regulate stablecoin issuers, concerns about underlying stablecoin assets will likely hold back significant adoption of stablecoins.
"Congress needs to pass stablecoin regulation to provide the risk mitigation controls that are required," said Robin Cook, Coinbase's U.S. policy legislative counsel. "Regulation is needed to ensure a stablecoin issuer with a coin that is one-to-one backed by the dollar can prove they have real liquid assets backing their stablecoins."
Banks will consider adopting stablecoins as the stablecoin bills progress through Congress, said Simon Jones, the U.K.-based crypto payment firm Baanx Group's chief commercial officer.
How consumers use crypto
The main use of cryptocurrencies for the 10%-20% of Americans who have owned them is investing, and investors need to cash out. According to Martha Bennett, vice president and principal analyst at U.S.-based Forrester Research, most cryptocurrency payments are made by people wanting to realize gains they made from holding cryptocurrencies.
However, the entire point-of-sale payment experience was designed with cards in mind, not just for payments but also for addressing fraud and refunds. So it is a challenge for cryptocurrencies to match that experience and enable consumers to access their money quickly and seamlessly, Javelin's Wester said.
Various payment system participants have been working on ways to allow consumers to use cryptocurrency for retail payments. Most are hybrid methods that use an exchange to change crypto into government-issued currency for payment.
Mastercard does not directly process cryptocurrency payments but has launched card programs with 60 crypto wallet providers, according to Raj Dhamodharan, Mastercard's executive vice president of blockchain and digital assets. When cards linked to consumers' crypto wallets are used for purchases, the cryptocurrency is converted by the crypto exchange into dollars and the merchant gets paid that way, he said. "We haven't seen demand from merchants to be paid in cryptocurrencies," he said.
Last month, San Francisco-based Stripe said that starting this summer, it will allow its merchants to accept USDC stablecoin payments.
"Stablecoin payments automatically settle to fiat for Stripe users, which means they have a consistent seamless experience across their card, bank, and crypto transactions," said John Egan, Stripe's head of crypto.
Companies such as San Jose, California-based PayPal Holdings are merging stablecoins with existing payment experiences, said Marion Laboure, a senior strategist at Deutsche Bank Research. Last month, PayPal said its Xoom cross-border money transfer service could use the company's PYUSD stablecoin as a funding mechanism for certain transfers (Xoom does not otherwise directly support PYUSD). PayPal's initial purpose for offering its stablecoin was for P2P payments.
Consumers can also make cryptocurrency payments directly from crypto wallets held with companies such as U.S.-based BitPay or Coinbase at a small number of online and in-store merchants.
However, while crypto spending rose by 20% from January 1, 2024, to March 31, 2024, due to the bitcoin bull run, according to the 2024 BitPay Spending Report, direct crypto payments are still miniscule.
"Cryptocurrency payments rarely exceeded 3% of overall payments within any country between 2021 and 2023," said Deutsche Bank Research's Laboure. "Overall, cryptocurrency's use case as a means of payment is not yet fully realized."
