Crypto Payments: Hype v. Reality

Mark Lurie:

Welcome to WTF, Crypto, where we peel back the layers of the onion of the crypto universe to understand what's really going on and how it affects you and your portfolio. I'm your host, Mark Lurie. And as a caveat, nothing in this podcast is legal or investing advice. And to the listener, if you like this podcast, or even if you hated it, I want to hear from you. Our team works hard every week to find the topics you care about most, so please leave a review on Apple Podcasts to let me know what you think of the show. We read every single one. Thanks for listening.

Mark Lurie:

Today, we're talking about payments in crypto with Jessica Houlgrave of checkout.com. Welcome Jessica, thank you for joining us.

Jessica Houlgrave:

Hi Mark. Thanks for having me. I'm really excited to be here.

Mark Lurie:

So at the core of the crypto narrative has always been payments. Payments, payments, payments. Crypto and Bitcoin and other cryptocurrencies are the future of how we'll pay for things. That's a big part of the nature of money. And yet the reality is that very few people actually pay for things in crypto, and crypto isn't really used for payments very often, and this seems surprising given the promise and the hype. And it also seems really relevant for traders because for crypto to take the next leap forward into penetrating the mainstream of finance, presumably, it should be used for payments. And so it's really important to understand how it is used for payments and whether it will be used more, and when that might happen? So I'm really excited to talk about that with you today. I'd love to start by just understanding a little bit about what makes you such a credible expert and guide on this subject.

Jessica Houlgrave:

So I started life in investment banking and finance, have always been deeply invested in that. And going before that, my undergraduate thesis was about the history of monetary system. So I've been a total payment money geek for a very long time, been in crypto then since 2015-16. And I've spent the last two years at checkout.com, which is a leading payments provider to both Web2 and Web3 in the Web2 space. So we talk a lot about payments on both the crypto and the FIAT side.

Jessica Houlgrave:

I used the word a minute ago, money, and I think money is really interesting here because what a lot of people think about money is it's like a physical thing or even a virtual thing that can be used to pay for things. But what people sometimes don't think about is that it's actually a two sided acceptance. It's the willingness of somebody to pay with something and at the same time, the willingness of somebody to accept something. When we think about the history of money, we started with shells, we started with pieces of gold, and many of these things don't actually have an inherent value. They have a value that's subscribed to them by virtue of the fact that there is a two-sided transaction taking place where somebody has something and wants to pay with it, and then somebody wants to accept that in exchange for other goods and services.

Jessica Houlgrave:

And so at the core of everything that I think about around payments, it's like, how do we generate these two sided systems where something can be used as money? And I think when we think about cryptocurrencies and crypto assets being used in a payment ecosystem as money, that's just kind of what we have to think about at the root of those conversation.

Mark Lurie:

Okay. So why don't we start at the beginning, which is, to your point, payments require someone to want to pay in a specific medium and receive payment in a specific medium. Why do you think crypto has struggled thus far to be accepted? Because presumably there are at least some people who would like to use it.

Jessica Houlgrave:

When we think about the origin of Bitcoin, the immaculate consumption of cryptocurrency, and we read about its origins, what we can see is that underlying that was this belief that Bitcoin could be used as a payment mechanism that didn't rely on any centralized party. And I think that is what has sort of retained at its core this desire for crypto to be used as payments. When it comes to Bitcoin, and indeed most of the other cryptocurrencies that we see today, there are several challenges with their use as a payment method.

Jessica Houlgrave:

First and foremost, and I think we saw this from the very start is around the technological scalability of those networks. And there are a couple of payment processes who from very early, we're starting to think about embedding Bitcoin as a form of payment method, but for whom the confirmation times, the block times, the scalability of the network just meant that this wasn't feasible.

Jessica Houlgrave:

When you think about VISA and MasterCard, two of the biggest payment networks in the world, they're processing millions of transactions per second. Whilst we're making great progress on the blockchain that we operate on today, we're really only just beginning to see the possibility that those can scale to the size of payment networks that global companies need to operate on.

Jessica Houlgrave:

That aside, and even assuming that was there, you need this desire. And I think on the consumer side, we need to make the distinction about what kinds of crypto assets are suitable for payment? A lot of crypto holders perceive crypto to be more suitable as a form of store of value than necessarily payment. And so I think that we've often seen these sort of swings and roundabouts in consumer appetite to pay for things with crypto based on its value. When it's going up, people want to hold onto it when it's going down people also don't want to be selling on a down moment. So we find these kind of unique periods of time where consumers think, "Yeah, actually this is going to be useful as a payment mechanism.

Jessica Houlgrave:

And in fact Checkout, we did a big consumer survey about 30,000 consumers, mostly under the age of 45, so relatively young survey base, where about 40% of them said that they thought cryptocurrency should be used as payments. And that was done in February this year, I would so love for us to be able to do that again right now just in terms of what's happened over the last few weeks. But if you can trust that to when we did it at the beginning of 2021, that number was only 30%. So we are seeing this kind of desire from consumers to be able to pay for things with cryptocurrency.

Jessica Houlgrave:

And when you then ask them about what kinds of cryptocurrency, they want to be able to pay at the top of the list, Bitcoin and Eth as you might expect. But also things like Dogecoin. And so that kind of makes me also question how deeply people are really thinking about this as a form of payment method versus just the sort of general desire that crypto is an option for them to pay with. I think what we have seen on the consumer side, and I'll come back to the merchant side in a second, but I think what we have seen on the consumer side in the first quarter of VISA's fiscal year, about two and a half billion dollars of cryptocurrency backed transactions went through VISA issued cards. So that's the setup is where you hold crypto at the back end in your wallet, often an exchange wallet, and they issue you with a debit card. And the conversion is done back into FIAT at the point that the transaction occurs. But when you are shopping, it might be online or with a point of sale, you're just using a VISA issued debit card.

Jessica Houlgrave:

And that's a huge number, two and a half billion in a quarter there's about 70% up on the full year for 2020. So we are seeing consumers actually begin to use cryptocurrency, but maybe not in the way that we thought we would. And I think that it's really interesting that the card backed experience, just from a user experience perspective, is so much nicer because you have the optionality, you can pay at any store that accepts VISA versus needing to find merchants that specifically say that they accept cryptocurrency.

Jessica Houlgrave:

And then on the merchant side, I think we still have the issue of merchant's appetite to accept cryptocurrency. In the same report that I mentioned earlier, we surveyed about 3,000 merchants at primarily digital online kind of progressive merchant. And a lot of them said that they would like to be able to accept cryptocurrency but didn't know how. Their number one reason cited why people don't and don't have plans to is because of regulatory uncertainty. Other reasons include uncertainty over how to account for crypto assets, the tax implications of holding and accepting crypto assets. And merchants who already accept cryptocurrency directly as a form of payment method, about 60% of them do so indirectly, which means that they actually use a third party who transfers the cryptocurrency back into FIAT in order to settle the merchant. So the merchant doesn't hold or actually really accept cryptocurrency, they just use a third party to be able to offer consumers that choice.

Mark Lurie:

I guess what's interesting in listening to you is that all of these are using the traditional payment rails to facilitate the use of cryptocurrency for payment, but rarely is crypto actually used independent of the traditional financial system for payments. And I don't know if that's because we just haven't hit this critical mass threshold yet or if actually the future probably isn't going to be just using crypto for payments. And so I wonder if you could opine a bit on how you actually think crypto will be used for payments in the future? Let's say we get this critical mass over time, maybe you think we'll never get there, which is fine, maybe you think it'll be some hybrid situation. Maybe you think it'll CBDCs or maybe you think it'll be all crypto all the time. I wonder how you think it will play out?

Jessica Houlgrave:

So I think just like today, we see a range of payment methods being used globally. Crypto will become a part of that. And what we know as a business and why businesses like Checkout exist is that consumers want choice. If consumers were happy to use whatever single payment method that merchant offered, that merchant would just be able to offer, "Hey, I only accept shells," and consumers would be okay with that. We know that's not true. When you're a consumer, you want to be able to go to a merchant, whether that's online or in a physical location or in the metaverse and say, "This is my preferred payment method of choice and I want to be able to use it. By the way, if you as a merchant don't offer me my payment method of choice, I'll probably go somewhere else. I'm very unlikely to change my consumer habit in order to meet what you can offer, I'll just find a different provider."

Jessica Houlgrave:

And so merchants at the core and where they choose me to work with other providers like Checkout, is because we can open up that choice to their consumers. And I think cryptocurrency is going to be part of that choice and merchants are going to want to offer it. And I think when we get that clarity, there is going to make sense for this direct peer to peer cryptocurrency as a payment method. Because if you as a merchant can get comfortable with how you price, how you do the exchange, how you hold that, how you manage that in your treasury and the implications from a regulatory tax and accounting perspective. There's a lot, but if you can get your head around that, then it makes a lot of sense for you to be able to accept cryptocurrency directly.

Jessica Houlgrave:

And we're already starting to see that in some spaces. And the areas that I think are particularly interesting for that are luxury goods, where there's a lot of cross border transaction, high transaction amounts, where you want to lower the fees and lower sort of volumes. And also maybe where you have some more sophisticated buyers who own cryptocurrency want to be able to pay with it and are okay with the user experience that provides today. So luxury is already a really big space for crypto payments. And I think there's others that are gaming, creator economy, gig economy, we'll start to see these things really, really build up in traction.

Mark Lurie:

Okay. So the places that you see crypto most are luxury where there's high value consumer goods. And I guess you want settlement to be final and they're often bearer assets, right? Like a Rolex watch or something. Gig economy, gaming, why are those places where you see crypto most? Is that just because they're digitally focused or are there other elements that make crypto especially good for payments in that context?

Jessica Houlgrave:

When it comes to gaming and the gig economy, I think we can kind of separate those two out. Gaming is online, it's digital, the demographics of gamers tend to be young, they tend to be male, they tend to probably be more digitally native and crypto native than other consumer segments. And so there is a natural overlap there we've often had in game coins and in game assets, we've just never been able to take them out before. And so being able to transact, move those assets around and be able to transact in a gaming environment with cryptocurrency is just a very kind of, I think, natural progression.

Jessica Houlgrave:

On the gig economy side, this is something I'm particularly interested in. And we know that gig economy, creator economy is growing enormously, has been for many years now. There are still a lot of gig economy workers and creatives who don't necessarily get all the value that they are creating. So they might go onto a platform, bid for doing $100 of work for somebody, they do that $100 of work. Getting that $100 into their bank account can be incredibly painful. And I think a lot of people don't appreciate that if you're trying to move $100 into a bank account in maybe a less economically developed country, the chances of you getting anywhere near that $100 at the end of the day is zero. You're probably going to end up between like $60 and $70. By the time you've paid for wire fees, you've done all these conversions, you probably waited a week for it to go through the system. There might be up a block on it because one bank doesn't recognize it, super, super painful. And that's really harming, really, really damaging for them.

Jessica Houlgrave:

And so I think in a world where you can say, "Let's make that payment in cryptocurrency," and over the long run, maybe you never have to change it back into FIAT and you can then pay for your goods and services in crypto. That's the ideal state with minimal fees. But even if we could only have the last mile done locally to get it back into FIAT you're probably still saving a huge amount versus trying to move FIAT money of small value across the world.

Mark Lurie:

Okay, cool. So I think what I'm hearing is that payments are about consumer choice. The future of payments is not going to be one thing, it's going to be a bunch of different options that work for different people. And actually crypto is starting to be used for payments for specific niches. And it might just be a false premise that we expect crypto to be used for all payments. And so we look at it and say, "Well, why isn't it used for all payments?" And really the answer is, "Well, it was never going to be used for all payments, it was going to be used for certain payments." And actually it is being used for certain payments and it's on a steady march. So I think that sounds like what I'm hearing.

Jessica Houlgrave:

It does. And I think that we're going to start to see that growth escalate and we'll start to see payments in all of those places accelerate. I think we'll also start to see new use cases for crypto within the payments ecosystem that we just haven't before. You mentioned CBDCs earlier, we see every government around the world right now really starting to think about CBDCs.

Mark Lurie:

Yeah. So I'd love to dig into that next because I guess, I think I have a decent way to think about the progression of payments of crypto and payments thus far. And also there's this big wild card, which is CBDC, Central Bank Digital Currencies and how that might change everything with respect to payments. It's also possible that CBDC could crowd out the use of other cryptocurrencies for payments. Because CBDCs are somewhat unique, right? Merchants are required by law to accept US dollar in the US, right? In each country that's part of the nature of legal tender. And I don't know if that means they have to accept it as a CBDC, right? I guess there's different payment methods. But it strikes me that might change a lot of things and even a government sponsored payment real. And so I wonder how you think CBCDs factor in here?

Jessica Houlgrave:

So CBDCs are really kind of like an offshoot of stablecoin, which came from the desire for people to be able to move in and out of crypto assets without going all the way back into FIAT, right? So the stablecoin, as a trader, you can hold your assets in USD backed stablecoin so that you can move in and out of more volatile assets, but you never have to go back into FIAT. What that did around the world is have all these, ears pricking up, because suddenly you had a USD or a GBP or any other currency backed asset that was being issued by potentially not a regulated player, denominated in that national currency, but that suddenly regulated central banks didn't have any kind of control over, especially outside of the US. And I've noticed this phenomenon in the UK. 15 years ago, nobody would've been able to tell you what the USD-GBP exchange rate was very easily.

Jessica Houlgrave:

And people would say, there'd be some people who would, but a lot of people just would have really no idea. Now, everybody in the UK can tell you what the USD exchange rate is. And I think that's because more and more people refer to, and USD has always been kind of the reserve currency of the world. But on a day to day basis now, more and more people are interacting with USD denomination. And so for people around for central bankers, for policy makers, sat in the UK or elsewhere thinking, "Okay, our crypto traders, all our consumers are going back into USD then they're not even touching GDP." And so like, "How am I going to retain monetary policy control if people are basing their kind of their reserve currency, their personal reserve currency is not even denominated in my national currency?" So everyone's been thinking about this for a really long time. To your point on legal tender, legal tender is actually like a really interesting [inaudible 00:20:00].

Mark Lurie:

So people in the UK are actually often thinking about USD as their reserve currency?

Jessica Houlgrave:

Increasingly yes. And I think that it definitely started in the crypto space where people, BTC to USD is your conversion rate, but the prevalence of tech companies employing people over here where people kind of do a conversion of my salary into US dollars. Amongst a younger tech savvy consumer base, they think about things in USD often now, I think particularly also with the rise of cross border commerce, people go to USD as a reference price. And so all of this is adding up to people thinking, "Okay, how does GDP?" And I don't think that's just in the UK, I think that's more broadly, how do we make sure that we retain kind of monetary policy can control? I do think though, and coming back to the legal tender point, it's a really interesting one because, and I don't know the specifics in the US, but in the UK, legal tender, it isn't necessarily about whether merchants have to accept that as a currency, it's specifically about the repayment or debt and wiping a liability.

Jessica Houlgrave:

And when we think about CBDC, I think that the average consumer understanding of how money works in general, is not enough for them to be able to also then discern whether something is just a digital pound issued by an electronic money institution, regulated entity versus a CBDC. And I actually think that that's okay because I think that what this will force us to do is to create ways of distributing and utilizing CBDCs in a way that holds the same benefits to consumers that exist today around digital money and that can bring more benefits.

Mark Lurie:

Okay. That was super interesting, there's actually a lot there to unpack. So let me first make sure that I understand the difference between cash bank deposits and I guess central bank records, but the types of cash you mentioned. So cash is the bank note, literally the coins and the paper that you might use to pay in cash. Okay, I get that. Commercial deposits are when you have, I don't know, $50,000 in your bank account and that doesn't actually mean that $50,000 in coins is sitting at the bank. It actually just means that in the bank's database, they've said you have $50,000 but they've actually issued that. It's not like they have that money and they only have to keep a fraction of that on hand so that's like the kind of commercial paper thing. And then there's a third type, right, which is the central bank doesn't actually hold any, well, very little coins. They actually have an entry on the central bank's database, which says they have X dollars. And that's the kind of wholesale. Am I articulating that correctly?

Jessica Houlgrave:

Yes. So firstly, you have FIAT money that's issued by a central bank. That in the UK is your 10 pound notes, your 20 pound notes, in the US issued by the fed. And that's the kind of checkable bank deposits, it's travelers checks. And we call that M1. When we then expand into what's called M2, then you are talking about like savings accounts, time based deposits. What banks can do with those deposits is they can create debt based upon them. And that's when you get into commercial money.

Jessica Houlgrave:

And so commercial money is where, here in the UK, it's an electronic money institution, in the US, it's a bank. They can take those client deposits in a saving count and they can loan a portion of that to other clients, they have a reserve ratio around that. But they are effectively creating money and issuing that from the bank and so then you're talking about the whole money supply, which is both those deposits sit within accounts and that FIAT, that physical money that you might hold plus all the other money that can be created commercially and distributed.

Mark Lurie:

And so if we draw the parallel, the USDC, the stablecoins, what would you compare that to in the framework you just described?

Jessica Houlgrave:

So stablecoins, and then the current new cycle, we've seen that there are multiple different kinds of stablecoins. I think in the payment ecosystem, what we typically refer to as stablecoins is of fully collateralized stablecoins. USDC is a great example of that. That's most like a straight deposit. What it is that you put $1 into the USDC part and they mint one USDC back. At any point, you can go and claim that US dollar back, so fully redeemable. A USDC issuer, circle or otherwise, cannot issue more than the amount of dollars that sit in its point. So they are redeemable one to one, they cannot do what a commercial bank does and say, I have $100, but I can use a reserve ratio, and I can actually create another $400, $500 to lend out to other people on the back of that.

Mark Lurie:

Okay. Got it. And so when you have CBDC, how does this change everything? Because it strikes me that with a CBDC, I guess if it's issued by the central bank then it's essentially just cash. It is M1, right? And so why do you need this other stuff? We have this framework we've developed of money, but once an individual can hold a claim from the fed digitally, it seems like it would change things. Right now, as an individual, the only way I can hold digital money is through a commercial deposit, right? I can't actually hold digital M1. But with the CBDC I could. And that seems like a big deal to me so I'm kind of trying to figure out how CBDCs might change the payments and the money holding that [inaudible 00:26:40].

Jessica Houlgrave:

So I don't think it's going to reduce the need for commercial money first of all. Commercial money has a huge amount of value in terms of creating growth within an economy. That's why we are able to have business loans, it's why people are able to take out loans, it's why we are able to earn supposedly interest on a FIAT deposit within a bank account. Sort of the commercial money ecosystem has existed for a very long time and I think will persist. I think what is exciting about a CBDC is that you can start to use it in a programmable way that doesn't depend on an intermediary.

Jessica Houlgrave:

Again, this is very theoretical because we haven't yet seen a CBDC that is going to be able to be issued directly to consumers. At the moment, everybody still talks about it in the way that we can issue commercial money. But I think theoretically, you could have a central bank that issues CBDC in the way that they issue FIAT money today, but digitally. And that can be the basis upon which people will build economies. But I still think that we are a long way from doing that. And we're still going to be very reliant on third parties facilitating that acceptance and payment between consumers and merchants.

Mark Lurie:

Okay. All right, so let's say we have CBDCs and we already have a reflection of this in stablecoins like USDCs, USDGN. You talked about programability and this seems like a capability is materially different in crypto being used for payments as opposed to traditional payment methods. And so it does seem like that could potentially drive forward the use of crypto for payments. So can you talk a bit more about how you think or see crypto will be used for commercial purposes? We talk about programability a lot, but I wonder how much it's actually being done at scale? Like at Checkout, do you actually program stablecoins a bunch, or is it still theory?

Jessica Houlgrave:

So sat Checkout, because we're primarily FIAT oriented, we certainly don't do much in the programability space today. Where I do think we're likely to first see it is in commercial cases like micropayments. So today you could imagine use cases like an artist being paid to every time somebody listens to their song. How that happens in practice today is that those artists accumulate an amount of royalty with whoever is going to pay that royalty and then it's paid out in a lump sum. But it doesn't make any sense from a financial perspective to pay them one cent every four or five seconds nor is it possible to pay them half a cent. It can only make sense to sort of batch pay. And to the point that I made earlier about gig economy workers, often then intermediaries take a big chunk of that payment.

Jessica Houlgrave:

And so I think that these micropayments where artists kind of get streamed money, where an employee gets paid every day, every hour, every minute, instead of at the end of the month, these are use cases where I think that there is real demand and where this technology can actually open up options that we haven't seen before. The sort of supplier B2B contracting and procurement systems that we see today for B2B payments are very, very antiquated.

Jessica Houlgrave:

And so I think that there's a lot of room for disruption for crypto payments in that area too, which is to say that once a contract is fulfilled, the payment is automatically made. Or once we observe a particular action taking place, then the payment can automatically be made, rather than how businesses work today, which is on a PO and then an invoice and then a payment with 30 day terms. And I think what we'll start to see is this really speed up the way that people can be paid.

Mark Lurie:

I guess the practical implication of speeding up the way you're paid is that if you get cash sooner, then businesses can grow faster and they don't have to borrow as much and that basically unlocks the pace of growth. So the faster that businesses get paid essentially, the more they can grow and the more they save in their cost of capital.

Jessica Houlgrave:

Yeah, I mean, I think what constrains a lot of businesses today is working capital, right? It's their ability to buy goods before they're sold, it's their ability to have a sufficient balance sheet that they can deal with the fact that they can't get paid every second or they have to wait for Monday to get all the funds that they should have collected Saturday and Sunday because it has to go through the FIAT rail. And so I do think that this unlocks growth for businesses and it unlocks new types of business model that they can build for consumers too.

Mark Lurie:

I mean, if I were a business and working capital where my constraint, I feel like I'd be clawing down the doors to try to settle this way. Do you think that B2B or B2C will use crypto more first?

Jessica Houlgrave:

I expect to see higher volumes in B2B because what we're talking about is millions or hundreds of millions of dollars in single transactions being moved. So I think from a pure volume perspective, we're likely to see use cases in B2B faster than in consumer. The same probably holds across just actual numbers of transactions too. On the basis, and I think that this is particularly true over the coming months and years is that we're in a vasty different economic world than we were even six months ago where cost and efficiency is going to be more important for businesses than ever before and they will really be looking for how to find every penny that they can and this can bring material benefits to them. So I can actually see business adoption growing pretty quickly over the next little while.

Jessica Houlgrave:

Having said that, I think that over the long run, consumer payments will rapidly kind of grow too. I just don't think that we are there yet on some of the consumer experience that's needed in order to make crypto payments from a consumer perspective as seamless as people want them to be. And as consumers we don't yet have with crypto payments, much consumer protection built-in. One of the reasons that consumers like to buy with a card, particularly a credit card, is that if then the goods and services aren't delivered, they have somebody to phone. They can say, "Hey, I want to raise a charge back on this transaction because my airline went bust and I never got my flight or the furniture company never delivered my table."

Jessica Houlgrave:

There's nobody to call when you make that transaction in cryptocurrency. And so that's not to say that will never exist and I think that there's a big role for some third parties to play in providing some of these consumer protections on top of crypto rails, and I think that we'll see those soon. But today, that's not the case and so as a consumer, do I mind paying for my coffee in crypto? Probably not because Starbucks isn't going to go out of business in the three minutes I'm waiting for my coffee. But would I be trying to make a big payment for a good or a service that's not going to get delivered for a while? Probably not today.

Mark Lurie:

Interesting. Okay. That makes sense and I think I'd be there too. I pay with credit card most of the time and I think that's a big part of why. I guess I prefer to pay with debt because it has consumer protections and I guess there's a lot of solutioning to do before we figure out how to do that just with crypto. Awesome. Well, Jess, anything else you'd like to share about the future of payments in crypto before we tie off?

Jessica Houlgrave:

Look, I'm super optimistic and I'm really excited about the benefits that this technology is going to unlock. As I said, I think it may be in some places that people aren't expecting it and I do think that the B2B use case, it's going to grow quickly. But I think what's most exciting is that from a technological perspective, we're starting to see systems that might be able to scale to support and compete with global payment systems today and that's going to unlock a whole ton of innovation.

Mark Lurie:

Got it. Awesome. Well, thank you. And if people want to follow you or learn more about you, how should they do that?

Jessica Houlgrave:

Probably best on Twitter. I am @JessHoulgrave and always keen to geek out on crypto and payment.

Mark Lurie:

Awesome. Well, thank you Jess. Really appreciate your time today. Thank you for taking us through this, we appreciate it.

Jessica Houlgrave:

Thanks Mark, great to be here.

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