Bitcoin and other cryptocurrencies have benefitted, both in terms of price and sentiment, following the news that PayPal PYPL +1.6% will support crypto transactions, but what does this mean for the longer-term development of the sector?
Trying to forecast the future of digital currency is a lot like trying to forecast the future of the Internet in 1992; a difficult task at best. That said, it is hard to overstate just how significant the news related to PayPal supporting crypto transactions is for the adoption and maturation of cryptocurrency. Virtually overnight, over 300 million users will have the ability to pay for goods and services via crypto and to do so using a platform and interface that is an embedded aspect of e-commerce.
Such a development, coupled with the rumors that PayPal was/is in talks to purchase a cryptocurrency organization, including potentially a bitcoin custodian, has driven bitcoin prices to sustained levels not previously seen in 2020.
Exciting news to be sure, but drilling down past the headlines and excitement, there are several interesting considerations that these developments can hold for the future of digital money and transactions. Not only specific to bitcoin, but these potential effects and developments also have the potential to redefine how virtual currency is perceived from a business, regulatory, and consumer perspective.
Virtual currencies are mainstream
Starting with the most obvious impact of the announcement is that different types of virtual currencies are definitively in the mainstream conversation. PayPal, of course, is one of the financial intermediaries that bitcoin was originally designed to disrupt, but it seems inevitable that some level of collaboration and compromise will be necessary to achieve wider adoption and utilization.
No matter what form virtual currencies eventually take, the fact remains that digital transactions are the future of money.
Regulation is catching up
Even with all of the disruption and negative news that has occurred during 2020, the pace of regulatory clarity and updates related to blockchain and cryptoassets continues virtually unabated. Punctuated with the recent clarification from the Office of the Comptroller of the Currency, which basically opened up the commercial banking system to stablecoin issuers, the trend is unmistakable. Not only have regulators across the globe rapidly become educated on blockchain and crypto issues, the approach seems to be shifting to one that is market friendly and pro-growth.
As major organizations, including PayPal, continue to invest significantly in the blockchain and crypto sector, it would be reasonable to conclude that regulatory clarity will continue to improve.
The on-ramps are here
A continuing obstacle and headwind to non-expert users actually using cryptocurrencies as a legitimate fiat alternative has been that, in many cases, buying and utilizing cryptocurrencies is not as intuitive or as easy as current alternatives. With PayPal opening the marketplace to a worldwide audience, complete with mobile applications used by many of those customers, this narrative has been flipped. Now, complete with the familiarity and security of PayPal that consumers are comfortable using, individuals and merchants can transact using crypto.
Alt-coins and CBDCs are coming
One other megatrend that was, temporarily at least, pushed out of the headlines is the continued rise and proliferation of stablecoins and central bank digital currencies. In 2020 alone there have been dozens of hearings, whitepapers, and conversations around the potential of various asset-backed-coins, for several logical reasons. Reduced price volatility, the implicit or explicit backstop of the underlying asset or issuing governmental agency, and potential greater usage as an actual currency have all powered the growth of this space. The fact that PayPal has, in essence, authorized the use of cryptocurrency as a viable online purchasing mechanism, will only accelerate these trends in the medium and longer term.
Accounting can catch up
Accounting regulations and rules might not make headlines, or be the most buzzworthy topic of conversation in the blockchain and cryptoasset space, but it is integral to the successful growth of the sector. With large institutions, including but not limited to the announcements and actions at PayPal, entering the space, accounting, and reporting guidelines need to keep pace.
As individuals and institutions adopt cryptocurrencies, no matter what form they take, as an embedded part of business operations, clarity and transparency around accounting, tax, reporting, and disclosure are essential. Recent institutional moves might just be the proverbial nudge that standard setters need to get this ball rolling.
The news around the actions taken by PayPal, expanding the potential market for crypto use by non-experts by hundreds of millions of people overnight, has been substantial. Even with all of this coverage, however, there are several other trends and considerations that will be turbocharged by these announcements.
Cryptocurrency was designed to be used as an alternative to existing fiat options, and the moves by PayPal and others might, in hindsight, be seen as the tipping point for increased consumer use, pro-growth regulatory policies, and increased adoption across the board.