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.
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.