ETA Expert Insights: Cryptocurrency and ISOs – A Conversation with Coinbase

ETA Technology Committee

Contributing authors: Jared Poulson; Sarah Richmond and Justin O’Brien, Coinbase

Now that the proverbial dust has settled from the furious pace of cryptocurrency activity earlier this year, we are in a good position to examine the opportunities that cryptocurrencies offer as decentralized applications start to gain broader acceptance. Will cryptocurrencies ever replace dollars or traditional Card Brands in the payments space? Probably not, but there is space for multiple payment types to exist, each with their benefits.  I had a chance to sit down with Sarah Richmond and Justin O’Brien from Coinbase to discuss their view of the current cryptocurrency landscape and how it relates to the ISO community:

What does the landscape look like for mass adoption of digital currency acceptance for goods and services among merchants?  Is it mostly major, sophisticated merchants, or are smaller merchants coming on board?

The early adopters of Coinbase’s first merchant tools included a diverse array of businesses and organizations. The desire to accept cryptocurrency, and specifically bitcoin at that stage, seemed to be driven just as much by the belief that cryptocurrency would be a viable and more efficient payment mechanism as the optics of being ‘digital-forward’ and ‘tech-savvy.’ With the recent media hype, this theme certainly persists today but increasingly, we are seeing greater adoption by the long-tail of merchants who accept cryptocurrency payments as a means to gain exposure to the asset. In addition, we consider ecommerce and web development platforms to be the biggest opportunities to reach a diverse group of merchants across the globe.

Over time, we have observed that Bitcoin’s scaling challenges have, thus far, prevented it from being a superior payment solution to the existing payment infrastructure in the developed world. This is an important distinction as cryptocurrencies should be considered an appealing solution today for consumers, merchants, and digital commerce platforms in countries with significant instability or currency volatility.

Coinbase wants to create products that further the adoption of cryptocurrency across all merchant types while delivering a great customer experience. With that in mind, Coinbase has just rebuilt our merchant offering from the ground up. The new product, Coinbase Commerce, intends to be the easiest way to enable cryptocurrency transactions across the world.

Bitcoin fees are currently too expensive to work on a massive scale. What alternatives do you see emerging that would be more conducive to everyday transactions?

It’s important to remember that cryptocurrency is still in the very early days. The tools merchants can use today to accept crypto payments are not as sophisticated as conventional payment processing tools. More importantly, there are significant scaling challenges that create high transaction fees and prevent blockchain technologies from processing at the same capacity as traditional payment networks.

That being said, we are excited about a number of projects that are attempting to solve these critical scaling issues for both the Bitcoin and Ethereum protocols. Secure, off-chain scaling solutions like Lightning Network will significantly improve the Bitcoin network’s ability to manage high volumes of transactions, which will correspond with lower fees. Innovations in achieving distributed consensus aim to significantly lower the costs in securing the Ethereum network.

In an increasingly globalized and digitized world, finding a solution to enable inexpensive and frictionless cross-border payments has never been more important.We hope that Coinbase Commerce will bring us one step closer to fulfilling Coinbase’s mission of creating a more open financial system for the world.

In your opinion, what would spur faster adoption of cryptocurrencies as a payment option either online or at the point of sale?

To increase the pace of adoption, the technology will have to evolve so that paying with digital assets is a better experience for consumers and a cheaper and more seamless experience for merchants. There are four primary steps to realize this goal:

• Reduce the barriers to entry to accept cryptocurrency – It is the objective of Coinbase Commerce to be the simplest tool to accept global cryptocurrency payments and to increase the adoption of cryptocurrency. With just an email address and a phone, a merchant can begin accepting payments in four different currencies. The process can be completed in a matter of minutes.

Furthermore, we plan to integrate Commerce into select ecommerce and web development platforms with a wide range of merchant customers.

• Eliminate the UX issues of paying with crypto at the payment protocol layer – incorporate layered technologies, like Lightning Network and other off-chain solutions, directly into the protocol layer to solve high transaction fees and long processing times.
• Achieve greater price stability – we believe greater competition amongst currencies will be a driving factor in price stabilization which is why Commerce will initially support four different currencies: Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.
• Define tax treatment for merchants more clearly – 2018 was the first year Coinbase distributed 1099-K forms to certain segments of Coinbase customers. We want to develop more robust tax and other value-added services for all our customers as we grow as a business.

What are some pros and cons merchants should consider before accepting digital currency payments?

This will vary based on the unique features of the business. Each merchant should consider how digital currency aligns with the merchant’s goals and customer objectives.

What does Coinbase have coming down the road to proliferate digital currency acceptance by smaller merchants?

• Coinbase Commerce is a new service that enables merchants to accept multiple cryptocurrencies directly into a user-controlled wallet. Our mission at Coinbase is to create an open financial system, so we’ve designed this solution to serve merchants worldwide.
• Coinbase Commerce can be directly integrated into a merchant’s checkout flow or added as a payment option on an e-commerce platform. With just an email address and a phone, merchants can begin accepting payments in Bitcoin, Bitcoin Cash, Ethereum and Litecoin.
• We’ve already integrated with Shopify, one of the largest multi-channel commerce platforms, and are actively adding more integrations to make accepting cryptocurrency as easy as possible.

As Sarah and Justin reflected, “It’s important to remember that cryptocurrency is still in the very early days.” While sophisticated merchants are often early adopters of newer technologies, ISOs have traditionally been right behind them in adopting technologies and solutions that provide an advantage to their merchants. The fervor of cryptocurrencies has waned somewhat in recent weeks, but it is a technology that is here for the long haul. As blockchain technology matures, it would serve ISOs well to stay educated on how they can best serve their merchants in this new space.

Jared Poulson is Chief Technology Officer of Payroc. He chairs the ETA Technology Committee.

Sarah Richmond works on Coinbase’s Business Development team.

Justin O’Brien is the Product Manager for Coinbase Commerce.