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Major payment systems are racing to cryptocurrencies as a payment option for everyday purchases.

PayPal Holdings Inc. said on March 30 it would allow U.S. users to pay for goods and services using cryptocurrencies they hold in their PayPal accounts. That news followed a Visa Inc. announcement a day earlier, when the card network announced it would allow the use of the cryptocurrency USD Coin to settle transactions on its payments network and earlier news from Morgan Stanley that it would provide certain investors with access to funds invested in bitcoin.

With PayPal’s product, branded "Checkout with Crypto" users can pay with Bitcoin, Ethereum, Litecoin, or Bitcoin Cash if they hold those cryptocurrencies in their wallets. PayPal will not settle transactions with merchants using cryptocurrency; rather, PayPal will convert the user’s cryptocurrency into fiat and will settle the transaction conventionally. PayPal will charge the user a fee to convert the cryptocurrency into fiat.

Visa's initiative is a pilot with Crypto.com, which issues Visa-branded debit cards for users who hold cryptocurrency in their account at Crypto.com. Unlike PayPal’s product, Visa may settle transactions with merchants using USD Coin. Until now, when a user paid a merchant using their Crypto.com card, Crypto.com had to convert cryptocurrency to fiat for settlement through Visa. The new arrangement permits crypto-native settlement by Visa.

The developments come after Tesla CEO Elon Musk previously announced that users can buy its cars with Bitcoin. Other major financial firms have also embraced some digital coins, such as BNY Mellon, BlackRock Inc., and Mastercard Inc.

LEGAL TOKENS

PayPal’s new product promises to offer users relatively seamless conversion of cryptocurrency for the purchase of goods and services over a widely accepted, conventional payments platform. The settlement itself will continue to be affected in fiat. This means the legal issues are no different than one would expect in any PayPal transaction.

However, Visa’s initiative involves crypto-native settlement, which is an innovation for one of the “gold standard” card networks. The legal issues may be equally unconventional. For example, it is unclear how the parties will deal with error resolutions under the Electronic Fund Transfer Act. Who ultimately will bear the risk of card fraud? There are also complicated tax issues. Exchanging cryptocurrency for a good or service is a taxable event that must be tracked by the account-holding institution. It remains to be seen whether consumers, card issuers, or merchants will be able to recognize any efficiency gains with crypto-native settlements.

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Author's Assets

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Casey Jennings | Associate

A member of Seward & Kissel’s Financial Services Regulatory Group and Blockchain and Cryptocurrency Group, Casey advises financial services companies – including banks, broker-dealers, investment funds, service providers, and financial technology companies – on federal and state banking and securities law issues and the structuring of new financial products, including anti-money laundering, deposit issues, token offerings, custody of traditional and crypto assets, transfer and liquidity issues, Volcker Rule issues, and investments in crypto assets by funds and other investors. Before joining the firm, Casey served as counsel to the Consumer Financial Protection Bureau, where he developed and implemented financial regulatory policy, including the first CFPB rulemaking to rely on unfair, deceptive, and abusive acts and practices (UDAAPs) authority. Since then, he has:

  • Represented e-retailer APMEX Inc. and alternative asset manager Sprott Inc. in connection with the launch of the online marketplace, OneGold.com.

“The whole notion of crypto is that there are no gatekeepers and the BSA requires that there be gatekeepers. Those two notions are very much at odds with one another. But the BSA is the best system that we’ve got right now.”

Casey’s perspective on crypto AML regulations as published in Cointelegraph article “How U.S. authorities are using old AML tools to crack down on crypto”