Cryptocurrency as a means of mainstream payment for e-commerce has long been predicted, but has been slow to materialise despite the apparent benefits. Now that picture is changing, giving some insights into what factors will truly play a role in crypto adoption.
Back in 2014, cryptocurrencies were first starting to come mainstream attention. The bitcoin bubble that occurred at the end of 2013 — small by 2017’s standards though it was — resulted in a wave of new awareness. A lengthy correction ensued, but many of the initiatives gaining traction today have their roots in the community of enthusiasts that arose at that time. Bitcoin dropped out of the public eye until 2017, but the seeds had been sown.
E-commerce as a driver of adoption
The expectation among much of that community was that web commerce would be one of the chief drivers of cryptocurrency adoption. The narrative was that retailers — particularly smaller online merchants — would be the first to integrate it into their websites, due to the range of benefits it offered them and their customers. That assumption was not unreasonable: for certain, there are some major advantages to cryptocurrency payments, at least in theory. Small e-commerce businesses frequently struggle with chargebacks, when a customer has their credit card company reverse a payment for one reason or another. Perhaps they are dissatisfied with the product, legitimately or otherwise; perhaps their card details have been stolen and someone else made the purchase; perhaps the customer is only claiming such a theft occurred in order to fraudulently acquire the product for free themselves. Whichever is the case, the merchant is the one to foot the bill at the expense of their bottom line.
Cryptocurrency payments, as irreversible ‘push’ transactions, solve this problem outright. For the buyer, there’s no problem of malicious third parties skimming their card details, either. And, as far as international purchases go, cryptocurrency stands head and shoulders above the legacy payments system. It doesn’t matter if you are sending money across the street or to the other side of the world: the fees are fixed and typically low, and receipt is almost instant.
Unfortunately, what works in principle doesn’t necessarily cash out in the real world. As the saying goes, ‘In theory, theory and practice are the same. In practice, they’re not.’ Bitcoin as a payment method didn’t take off as expected; hordes of new consumers weren’t converted to the benefits of cryptocurrency thanks to its superiority over credit cards. A few forward-looking businesses like Dell and Expedia started accepting crypto payments, but they never gained much traction among their customers. Others dabbled with the idea and subsequently dropped it. When the debate around bitcoin scaling escalated, along with its transaction fees (up to $20 was common), it became uneconomical to purchase anything worth less than $100 anyway.
Ramen
Crypto’s worldwide adoption will take a while, but crypto payments are here to stay.
Cryptocurrency held out so much promise for e-commerce. So what went wrong? Here, a lesson from the US penitentiary system may be unexpectedly informative.
Back in 2016, a study found that ramen noodles had overtaken tobacco to become the most valuable commodity in US prisons. That might not seem a big deal, but it’s illustrative of a major underlying shift in the prison economy. Tobacco is just about the perfect form of money for inmates. It satisfies all of the requirements it’s important for a currency to have. It’s highly portable and divisible. It’s hard to counterfeit and instantly recognisable. It’s fungible — except to the most discriminating smoker, one strand of tobacco is much like another. It’s limited in supply and relatively durable. In long-term use as prison cash across the US and the world, it has immense network effect: it makes sense to use tobacco as money because that’s what everyone else uses as money.
Changing your monetary system isn’t something that just happens on a whim or overnight. It takes a major disruption to overthrow the network effect of an existing currency. History is littered with instances of a superior product being consigned to the dustbin because an inferior one was able to build a better network effect, Betamax being the most commonly-cited example. In the case of ramen vs tobacco, decades of underinvestment in the US prison system were to blame. The low quality and quantity of food prompted recognition that there was something qualitatively different noodles had to offer that tobacco couldn’t: calories.
Herein lies a lesson for the crypto world. It takes something big — perhaps as fundamental as hunger, or at least as significant as the economic benefits of borderless trade between 11 states — to prompt a change of currency. Bitcoin simply didn’t offer enough advantages to replace the incumbent solution as a medium of e-commerce. It has advantages, but not enough advantages. There are also barriers to adoption that dissuaded many retailers from integrating it. The perceived complexity of cryptocurrency, the technical and security overheads involved, and bitcoin’s infamous volatility, were enough to convince most merchants to adopt a ‘wait and see’ stance at best.
The tail does not wag the dog
With hindsight, expecting retailers to drive adoption made little sense. The existing system worked well enough. Unless there was a fundamental reason to use bitcoin (as on the darkweb’s markets), there was no cause to rock the boat by setting up additional hoops for customers to jump through.
But now, the picture is finally starting to change. We are starting to witness significant real-world adoption of cryptocurrencies in e-commerce. Japan and South Korea, despite the wider scepticism that surrounded the fall in price at the beginning of this year, have seen the integration of cryptocurrency payments into a number of major retail outlets. Whilst the rest of the world has yet to follow suit in a meaningful way, it does show that sentiment is shifting towards using bitcoin as a medium of transfer as well as an investment or speculative play.
The difference to 2014 is that these countries had already demonstrated their openness to cryptocurrencies, with a thriving trading scene and active cryptocurrency communities. We might therefore conclude that the existing popularity of cryptocurrency in Japan and Korea paved the way for merchant adoption, rather than the other way round: simply, until the network effect and infrastructure is in place, it makes little sense for retailers to adopt a payment mechanism that no one uses.
Thus the increasing popularity of crypto as a form of payment in Asia follows wider popularity and normalisation. To put it plainly: if you own crypto as a speculative or long-term investment anyway, you might spend some of it on consumer goods; if you don’t hold crypto, you’re unlikely to buy it for the purpose of making online payments.
What crypto needs
Volatility is a main obstacle for the adoption of crypto for payments. Stable coins are probably going to solve this problem in a near future.
The popularity of cryptocurrency as an alternative investment has brought strong enough network effect and a large enough pool of traders who have crypto to spend for retailers to start taking the plunge. For the wider public who are not interested in trading, there’s still the barrier of price stability. Cryptocurrency has achieved some momentum, but most people aren’t prepared to risk double-digit daily swings in value.
As a result, cryptocurrency is unlikely to become a truly commonplace medium of transfer until a viable ‘pegged’ currency arises: a cryptoDollar or cryptoYen that will be immune to market volatility. A fit-for-purpose stablecoin would be truly transformational, but we’re some ways off that for both regulatory and technical reasons. No decentralised method of pegging a freely-traded coin to the value of a real-world currency has won the market’s confidence, and a trustworthy fiat-backed coin would need support from central and commercial banks. Moreover, that approach re-introduces the centralisation of fiat currencies, and at least some of their downsides. As the quote (attributed or mis-attributed to Einstein) goes, you don’t solve a problem using the same thinking that got you into it.
An alternative might be decentralised currencies that are backed by networks of retailers: distributed systems supported by collective economic activity and a growing userbase — a little like the wildcat money of mid-19th century America, without the single points of failure. Greater stability of value among decentralised currencies will in any case come with time, greater liquidity and orderbook depth, however that is achieved. But it won’t happen overnight, only with organic adoption: a currency needs to grow with the people, not past them. Whichever option wins, stability of value is a sine qua non for widespread crypto commerce. Or option_s_, plural: as currencies that trade freely against each other, this is not Betamax vs VHS. Stablecoins will continue to exist alongside original cryptocurrencies, with each remaining popular in certain situations — just as bitcoin remains king over many altcoins, or cigarettes continue to play silver to ramen’s gold.
But make no mistake: widespread crypto commerce is coming. The groundwork has been laid and progress never rests. And if there’s one thing the history of the internet teaches us, it’s that technology can move faster than any of us expected.