The emergence of crypto commerce and payments

Crypto’s profile and growth to date have derived from its utility as a store of value, but we are finally starting to see its potential as a ‘medium of exchange’ in mainstream digital commerce (which we refer to as crypto commerce). 

Bitcoin and the first generation of cryptocurrencies (Cardano, Litecoin, others) never gained meaningful traction as payment methods due to their high valuation volatility, low transaction processing speeds, and lack of acceptance. However, these first-generation cryptocurrencies and their underlying blockchain technology inspired the development of new generations of crypto across a wide range of applications (as shown in figure 1). Today, select cryptocurrencies (e.g., Solano) and next-generation crypto innovations such as stablecoins (e.g., Tether, USDC, Dai) and central bank digital currencies (CBDCs) are driving a radical shift in consumer and merchant perceptions, while accelerating the usage of crypto payments.

The emergence of new technological innovations such as stablecoins, NFTs (non-fungible tokens, which are essentially digitised tokens of ownership against digital assets) and DeFi (decentralised finance, a new breed of financial securities and investment vehicles built on the blockchain network) have further accelerated consumer curiosity and adoption. Traditional PSPs have invested in crypto as a growth vertical and have further invested in strategic M&As. Visa and Mastercard have also adapted their rails to settle select crypto directly. Regulations, on the other hand, continue to be a double-edged sword, considering that clarity in some markets is encouraging adoption by traditional actors. 

Figure 2: Global C2B volumes: traditional ecommerce vs. crypto commerce (USD trn.; 2021) 

As shown in Figure 2, 95%+ of C2B crypto commerce volumes today are attributable to the on-ramping and off-ramping fiat to crypto via crypto exchanges and wallets. Several specialised fintechs that offer fiat on-ramps (buying crypto in exchange for fiat currency) have emerged on this basis (e.g., Bifinity, Ramp, MoonPay, Wyre), and many traditional PSPs have also thrived supporting these volumes (e.g., Checkout. com, Nuvei, Worldpay). New merchant segments, beyond exchanges, have also emerged (e.g., NFT marketplaces, GameFi, DeFi) accelerating the opportunity for C2B crypto acceptance. 

We are now seeing the expansion of crypto acceptance into more traditional areas of commerce, such as digital entertainment and services.

While crypto commerce is small today, we expect volumes to accelerate and grow rapidly in the next 12- 18 months. Our expectation for acceleration of crypto use cases is based on the growth drivers that we outline in figure 3. We anticipate mainstream PSPs (e.g., Nuvei, Worldpay, Checkout, Paysafe, Paypal, Square) to play a central role in driving the consumerisation of crypto by acquiring and building capabilities beyond just enabling fiat purchases of cryptocurrencies. New blockchain applications in the form of NFTs will gain momentum and be accessible through fiat rails. We anticipate Visa/Mastercard and regulators to play an important role in creating the network and the rules for direct crypto settlement. 

Moreover, we see compelling long-term growth from emerging blockchain ecosystems such as the Metaverse. The Metaverse refers to an online, virtual, 3D universe that users can access via PC, virtual reality (VR) / augmented reality (AR) hardware, and/or mobile application, where the virtual and physical world converge. Users can play, work, transact, meet, and socialize within an open virtual community. The Metaverse is intended to be an interconnected and open community across platforms. Virtual assets in the Metaverse are owned through NFTs and are transferrable across platforms.

Cryptocurrencies (wallets and exchanges), blockchain technologies, and NFTs play the central role in enabling the Metaverse commerce today given that the foundation of Metaverse worlds tends to be blockchain. Because the Metaverse is built on blockchain, transacting is almost always via cryptocurrencies; mainstream fiat payments such as cards are not yet relevant. As illustrated in Figure 4, most platforms have created their own utility token (e.g., SAND used in The Sandbox, MANA used in Decentraland) which can be bought or swapped on most crypto exchanges. 

Metaverse users are needed to set up a crypto-based wallet to hold digital custody and enable crypto payments. For example, Metamask, one of the largest crypto wallets, allows players to send and receive Ethereum-based currencies and tokens, store and manage account keys, and connect to decentralized platforms (e.g., The Sandbox). Blockchain tech and cryptocurrencies are well built for virtual and decentralised ownership, but not yet well-enabled for frictionless commerce. As we illustrate in Figure 5, the Metaverse payment experience of today is clunky, with many steps required to complete a transaction.

We expect rapid evolution of crypto commerce payments in the next several years, and these improved experiences will also help to drive UX improvement in the Metaverse. Payments providers that crack the code on frictionless experiences across the Metaverse have massive long-term upside.

This article is part of ‘Who’s Who in 2022’s payments ecosystem? Full rundown of key topics and actors reshaping the industry as we speak’, a thorough analysis of the payments ecosystem by pinpointing the key trends that shaped the market over the last year, but also the most important names needed to be taken into account when it comes to relevant case studies in the field. The article is published in Who’s Who in Payments Report 2022. 

About Flagship Advisory Partners

Flagship Advisory Partners is a boutique consultancy and M&A advisory firm focused on payments. We provide strategy, delivery, and M&A support to financial institutions, PSPs, fintechs, technology providers, brands, and investors. We serve clients globally from offices in Europe and the US.