Wirecard, Paypal, And Stablecoin: The Banes and Strengths of Crypto Payment
Payment has always been cryptocurrency’s most potent use case. The possibility of enabling borderless and censorship-resistant transactions helped the technology secure a strong following, which has become the bedrock of the present crypto community. However, much of the attention has shifted from real applications to speculation. A growing percentage of crypto proponents now pay more attention to price trends rather than the core workings of crypto networks and their role in the establishment of crypto as a viable payment medium.
In this article, I will explore the current state of the crypto payment sector and how stakeholders can capitalize on the current drive for a cashless society.
The Crypto Payment Conundrum
One of the biggest news in recent weeks centers around developments in the payment industry. On the one hand, reports suggest that PayPal is planning on entering the crypto landscape by launching a service that allows the sale and purchase of crypto. On the other, the Wirecard scandal unsurprisingly disrupted the operations of some crypto debit card issuers and caused users to panic. Both developments cast the spotlight on the crypto payment sector and its affiliations with the centralized fintech space.
From what we have learned so far, it is almost impossible for crypto debit card companies to enable payment services without involving third-parties licensed to issue cards on behalf of MasterCard and Visa. The only exception is Coinbase, which became a principal member of Visa Card earlier this year and can now issue debit cards without relying on the services of third-parties. The strong presence of intermediaries in the crypto debit card sector means that disruptions in the traditional payment market will affect the yet established crypto counterpart.
One such disruption came in the form of a financial scandal that saw Germany-based Wirecard file for insolvency. Since crypto debit companies like Crypto.com and TenX rely on the services of a subsidiary of this fintech firm, they were bound to come under scrutiny. Fortunately for both companies, Wirecard Solution, the UK-based subsidiary, is financially self-sufficient and operates independently. As such, it comes as no surprise that the UK’s Financial Conduct Authority (FCA) has lifted the suspension of Wirecard Solution’s license imposed following Wirecard AG’s inability to account for a quarter of its cash reserves.
Now imagine the type of strain this unfortunate incident may have caused for affected crypto debit card issuers. It is one thing to earn the trust of customers. It is another to ensure that they do not lose faith after incidents beyond your control threaten the viability of your offerings. As expected, Crypto.com issued a statement reassuring its customers of the safety of their funds after FCA suspended its operations. The document reads:
“Following a notice regarding Wirecard UK by the FCA, we have just been requested to stop all activity on our card programs in the UK and Europe. Our customers in those two regions will not be able to top-up their cards or transact later today. Our customer funds are safe. Our team is working on processing credits to the crypto wallets equivalent to the fiat balances held on the cards. We expect this to be completed within 48 hours. Separately, we’re working on transferring the card program to a new provider, so that we can resume the issuing of cards in the UK and Europe and allow existing and new customers to benefit from our card program again. We apologize for the inconvenience this has caused you.”
Before this, the company’s CEO, Kris Marszalek, took to Twitter to dissipate fears that the insolvency of Wirecard AG could spell doom to the operations of Crypto.com. He tweeted:
“Wirecard AG filed for insolvency in Germany today. To all our card customers: your fiat funds are safe and guaranteed by http://Crypto.com — in case any of the services provided by Wirecard are disrupted, you will receive a fast 100% credit back to your crypto wallet. It is not clear at this stage which of the subsidiaries are going to be affected and if any of the services will be interrupted at all. We will keep everyone up to date as this develops, but I want to make it clear for all our SG and EU card customers that their funds are safe.”
As these statements explained, there is little to worry about. However, it remains to be seen if there will be long-term ramifications of these events. For one, customers may become wary of crypto cards’ involvement with intermediaries. Likewise, it puts pressure on these crypto cards to hunt for new third-party providers in an increasingly difficult landscape for crypto businesses. There are few card issuers interested in providing services to crypto card companies, and it is yet unclear if Coinbase will readily fill this gap. Recall that Coinbase is now a principal member of Visa Card, and there is no saying if it will or will not offer intermediary services to its major competitors.
And even if the likes of Crypto.com find new service providers, there is the logistics issue associated with switching card issuers. To protect themselves from such challenges, established card companies often use two or more intermediaries. Although this is too much to ask from crypto card providers, there are no feasible alternatives. Therefore, for crypto cards to evade issues like this in the future, they ought to opt for at least two principal members of MasterCard or Visa Card.
More Woes for Crypto Payment
A closer look at the broader implications of the Wirecard crisis indicates that there are lots of things stakeholders need to address for crypto as a payment method to become mainstream. The sheer incompetence of traditional systems has indirectly affected the push for the adoption of crypto payment gateways. The core selling points of crypto as a payment network is its capacity to enable borderless transactions detached from traditional financial hurdles. If this is the case, then it comes as a surprise that the customers could not access their funds for extended periods as a result of censorship of the operations of their card providers. It seems that the path to increased presence in the payment sector has demystified cryptocurrency’s perceived resistance to restrictions.
Major players in the crypto card sector must directly or indirectly seek the validation of the two established global card service providers and regulators. At any point, either of these entities could decide to terminate the license of these companies and put a dent on their operations. Though this model is out to ensure that card issuers conform with best practices, there is, however, no doubt that it systemically subjects crypto cardholders to centralized challenges prevalent with traditional payment infrastructures.
Further highlighting the concerning state of the crypto payment sector is the rumor that PayPal is working on providing crypto services to its users. While some will applaud this development, there are reasons to doubt that it will impact the crypto space positively. For one, PayPal is notorious for blocking users it perceived to have flouted its policies from accessing their funds. In some cases, affected users have maintained that none of their activities were illegal and that PayPal had locked them out for no valid reasons. Hence, it is likely that PayPal will extend its business principles to its rumored crypto offerings.
As expected, a majority of crypto proponents have begun to applaud this development. Andrew Anastasiou, a fintech entrepreneur, told Finance Magnates that it made sense for PayPal to explore opportunities in the crypto landscape. He stated:
“With the adoption of the currency becoming more and more widely accepted, it would make sense for a payments giant such as PayPal to try and take a piece of the pie[…] with more and more people turning to cryptocurrency as a way of making payments online, it would make sense that a company predominantly providing fiat transactions would want to gain a foothold in such a fast-growing industry.”
Andrew Anastasiou further explained that the sheer size and influence of PayPal meant that there is the possibility that its entrance could positively affect crypto adoption. He added:
“We have to remember that PayPal is in no way a start-up and has access to a strong network, where fast integration of new products is always possible and with such a serious and trusted brand, a lot of people will take up the opportunity to purchase crypto via PayPal[…] There is also the added benefit that a large majority of PayPal users have already passed enhanced KYC to be able to use the platform, so from a practical sense, I imagine there will just need to be some implementation of limits and controls[…] With such a huge audience already available, it would be a very simple migration to add a product to the already vast fiat currency user base.”
In contrast, Decred co-founder, Jake Yocom-Piatt, remains skeptical about PayPal’s entrance into the crypto space. He noted that though the move will increase crypto’s availability, it is not, however, clear how crypto fits into the payment giant’s system. Yocom-Piatt believes that it is difficult to “say whether these are rumors or not regarding PayPal accepting cryptocurrencies soon.”
“PayPal, specifically, is notorious for depriving its users of access to legitimately-acquired funds on their platform with little to no justification. Users having their funds restricted in this fashion is something cryptocurrencies are designed to prevent, making this integration, if it is indeed in progress, an odd combination. PayPal, along with its subsidiary Venmo, uses a system that automatically flags keywords in the payment memo field that could indicate a violation of U.S. sanctions. A fiat payment platform notorious for depriving access to funds would be adding support for cryptocurrencies, which are notorious for have no restrictions on funds.”
How Stablecoin Can Propel Crypto Adoption
One of the core challenges for crypto in the payment sector is its inherent volatility. Merchants and customers have to factor in price fluctuations whenever they want to adopt crypto as a payment option. To mitigate this flaw, we are witnessing the increased demand for stablecoins and their capacity to establish stability in an inherently volatile financial landscape. Luckily, the push for cashless societies plays into the crypto narrative and presents an avenue to propel crypto’s viability as a payment option.
While reiterating this sentiment, Gregory Klumov, founder and CEO of Stasis, explained in an article published on Cointelegraph that traditional digital assets lack what it takes to lead the crypto payment narrative. He stated:
“The perfect method of payment has not yet been established because paying for products and services with cash and credit cards is still common. However, cryptocurrency is the next big thing that will be used globally as the newest payment method of the 21st century. All we need to do is to evaluate the proper digital assets that can be widely used by people in e-commerce. Among the more than 5,000 cryptocurrencies in existence, Bitcoin (BTC) and Ether (ETH) perennially stand out from the crowd, which makes them early favorites to usher in a new era of payment methods. However, such assets can’t be regarded as a measure of value due to their constant volatility.”
Klumov added that only stablecoins has successfully negated cryptocurrency’s shortcomings and established its viability as a payment tool. He explained:
“Stablecoins, created to take advantage of all digital decentralized approaches, have leapfrogged the imperfections of fiat currencies and the shortcomings of current financial systems; some of them have even been pegged to the dollar or euro to ease the volatility issues of traditional crypto[…] Unlike credit card payments, stablecoins aren’t hindered by geographical restrictions and the need to open a traditional bank account. Therefore, cryptocurrency transactions between the buyer and the seller can be carried out from anywhere in the world. In the foreseeable future, stablecoins might even change the role of national currencies into something that is regionally based but still internationally accessible. The financial ties among nations won’t simply be tethered to central banks but will eventually be in the hands of the general public.”
Closing Thoughts
It is somewhat clear that the Wirecard crisis highlights flaws in the existing frameworks of a majority of crypto card providers. This business model puts crypto card companies at the mercies of intermediaries and exposes them to risks that could gravely affect their operations. For them to mitigate these risks, it is imperative to review and replace current licensing systems. However, this is easier said than done. For now, though, we can take solace in the knowledge that stablecoins are on the horizon and the fact that there is an intensified effort to enact cashless policies.