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Corporate crypto 101: How companies are using Bitcoin and other digital currency

July 29, 2021, 9:18 AM UTC

In the early evening hours of May 12, Elon Musk sent out a tweet that, like many others from the ever-controversial CEO, proved market-moving: Tesla would no longer be accepting Bitcoin as payment for its sleek electric vehicles.

On cue, Bitcoin plunged over 10% following the tweet. The move to stop accepting the stalwart cryptocurrency came perhaps as more of a surprise than Tesla’s decision to accept it: Musk has long voiced his belief in crypto (proclaiming himself the “Dogefather,” a riff on joke cryptocurrency Dogecoin), and even companies as disparate as AT&T and WeWork are accepting the digital coin as payment.

In Musk’s case, the decision to suspend purchases with Bitcoin was due primarily to concerns about Bitcoin’s massive carbon footprint. He said that Tesla would consider accepting the coin again once the technology improved (which, Musk recently hinted, will likely be sooner rather than later).

Qualms over energy efficiency notwithstanding, the jury is still out among corporates and investors alike over what, exactly, cryptocurrency should be used for.

“I think we are so early in the understanding of what Bitcoin in particular and cryptocurrency in general is going to mean for our financial system and for commerce,” Mark Palmer, a fintech and cryptocurrency analyst at investment firm BTIG, tells Fortune. “We have holders of Bitcoin who believe it makes zero sense to use it for purchases, simply because many of those who are holding it at these levels believe it’s going to be trading at $100,000 to $200,000-plus, and the last thing you want to do is look back at that time in 2021 when you used your Bitcoin to buy a cup of coffee.”

“One of the big questions that needs to be addressed is the extent to which holders of crypto are even interested in participating in commerce,” Palmer adds.

It seems some crypto holders, at least, are interested. According to a July report from credit card behemoth Visa, over $1 billion was spent using crypto-linked Visa cards in the first half of 2021. (To put that in perspective, Visa handled $11.6 trillion in volumes in the 12 months ending March 31—so crypto is still small potatoes.) And many companies are increasingly offering crypto-linked payment options, albeit most still convert the coins into fiat currency during the transaction. According to a December estimate by fintech Fundera, over 2,300 businesses in the U.S. accepted Bitcoin, excluding Bitcoin ATMs.

With the growing popularity of crypto (and the growing number of coins in circulation), some companies are aiming to get ahead of the curve and potentially capture a new crypto-centric customer.

Which companies are using crypto, and how?

If you ask BTIG’s Palmer, the reason some companies are allowing crypto payments is simple: “I think you have forward-looking merchants who appreciate the fact that cryptocurrencies are here and they’re here to stay, and they don’t want to be left behind relative to their competitors.”

One company facilitating much of that acceptance is BitPay. Founded in 2011, BitPay is a payments processor that enables companies to spend and accept Bitcoin and other cryptocurrencies. The firm boasts a long and wide-ranging list of companies that accept crypto through BitPay, either through a debit card or gift cards—including mega mobile service provider AT&T, Amazon, DoorDash, electronics retailer Newegg, Twitch, Shopify, Microsoft, WeWork, the Dallas Mavericks, and even the first airline to accept Bitcoin, Latvia’s airBaltic. Many of these companies don’t directly accept the crypto, but rather BitPay allows customers to convert their crypto into fiat gift or debit cards.

Chief marketing officer Bill Zielke says that BitPay typically processes between 100,000 and 150,000 transactions a month, with the total value of those transactions often surpassing $1 billion on an annualized basis. “Many of the purchases that we’re seeing [are] larger-ticket purchases that are making up those types of numbers,” including luxury cars and jewelry, he tells Fortune.

Notwithstanding the ticket size, the process is fairly simple: Users can convert their crypto (like Bitcoin) into fiat spending power on sites like Amazon or Home Depot through a gift card or BitPay’s prepaid Mastercard debit card. Customers can go to the checkout of a company like Newegg and select which coin they’d like to use, and gain access to a QR code that they can scan with their crypto wallet to make the purchase. What’s happening “behind the scenes,” explains Zielke, is that the merchants “never have to touch that crypto.” BitPay takes “control” of the coin and settles with the merchant for the amount in their local fiat currency (or crypto, if they choose). “Now we have the crypto, and we own the risk associated with that crypto, whether the crypto goes up or down,” he says.

On the corporate side, BitPay’s “Send” feature, launched last year, allows companies to also use crypto for their own payroll or to pay contractors.

Other payments companies like Visa, PayPal, and Bakkt (born out of NYSE parent Intercontinental Exchange) facilitate payments using cryptocurrencies by acting as intermediaries that deal with the logistics of converting a customer’s crypto into fiat currency so merchants don’t need to directly handle the coins. Visa and PayPal don’t hold the cryptocurrencies themselves: Visa partners with crypto platforms to issue crypto-backed cards and, recently, a crypto settlement partner Anchorage to start settling payments in USD Coin (USDC). PayPal lets its crypto custody partner, Paxos, manage transactions.

Bakkt actually does hold on to the crypto: It lets users spend cryptocurrencies, rewards points from hotels and airlines, and gift cards at a variety of merchants. That includes the likes of Starbucks, where users can convert crypto to fiat currency to reload Starbucks cards. Bakkt converts the customer’s Bitcoin into fiat and “then transfer[s] the proceeds of that transaction to Starbucks to facilitate the reload, and we take care of all of the logistics of the transfer,” Bakkt CEO Gavin Michael explains to Fortune.

Visa has formed a slew of partnerships for card programs with some 50 crypto companies (including Coinbase, Crypto.com, and FTX) to allow consumers to use their cryptocurrency at a host of merchants, from coffee shops to dry cleaners. “The consumer is effectively using their crypto assets to fund that purchase, and Visa is managing the conversion along with the issuer of that card from crypto into fiat,” Terry Angelos, senior vice president and global head of fintech at Visa, tells Fortune.

Meanwhile other crypto-native players like Coinbase are also getting in on the commerce action. The newly public crypto exchange launched Coinbase Commerce, its service catering to merchants who want to accept crypto, back in 2018. The exchange is giving merchants the option to have crypto sent directly from the customer’s wallet to the merchant’s own wallet.

According to Sanchan Saxena, the vice president of ecosystems who heads up Coinbase Commerce, the company sees “two categories of merchants, those that are crypto-native businesses that believe in the ethos of decentralization” and “want full control,” and “larger, more traditional businesses that want to be able to offer crypto payments to their customers, but would prefer to have an intermediary.” In an email to Fortune, Saxena highlights art auction house Sotheby’s as a traditional example. “In order to support this growth,” he adds, “we also offer a version of Coinbase Commerce that allows us to take a more intermediary role.”

A few companies like Square, MicroStrategy, Tesla, and Musk’s other venture, SpaceX, are holding Bitcoin on their balance sheets. Other companies are focused on DeFi, or decentralized finance, applications. “The primary use case of DeFi has been borrowing and lending,” says BTIG’s Palmer. “If you look at any of the big DeFi platforms like Compound or Aave, this is all about traders and investors being able to gain outsize yields by getting involved with the protocols.”

Challenges of using Bitcoin and cryptocurrency

Cryptocurrencies like Bitcoin come with their own set of challenges when operating as a currency in transactions.

As for Bitcoin itself, certain factors have made the best-known cryptocurrency less appealing to use than to hold. These include the coin’s incredible volatility (Bitcoin has been known to shed or gain double-digit percentages in value at the drop of a hat during trading, which happens 24/7); the sometimes high fees charged for completing transactions on the blockchain, which is the distributed ledger technology that supports cryptocurrencies; the potential tax implications of selling Bitcoin to fund a purchase; and the often long settlement times. Other less widely held cryptocurrencies pose some of the same obstacles to users.

Among the drawbacks of using Bitcoin for transactions is its so-called scalability issue—which centers around the blockchain’s ability to handle more transactions in a short period of time, as well as how long it takes for a transaction to be considered complete and unchangeable (known as finality) on Bitcoin’s public network, which comprises far-flung computers across the globe.

“Fees vary; speed and this concept of finality is one that really is more of a question,” argues BTIG’s Palmer. “Nobody wants to wait around for five minutes while a transaction is settling.”

Some companies are working to address precisely these issues. Lightning Labs, backed by investors including Twitter and Square chief Jack Dorsey, has what’s called a “layer two” solution network, which basically settles crypto transactions separately from the blockchain, speeding up the transaction times and lowering fees.

Those fees, which fluctuate based on things like the congestion of the network and the size of the transaction, can be a big headache. According to crypto research and data firm Messari, the average Bitcoin transaction fee on July 27 was around $2.48. That was down drastically from the $60 range back in April when the price of Bitcoin was nearly double its current trading value. That range and unpredictability can make Bitcoin less attractive as a payment medium.

“I think the most natural problem there…if you’re buying something that’s a smaller ticket, especially those that are sub-$100, [is] the fees that are associated with that transaction,” BitPay’s Zielke notes.

Other complications, like settlement time, aren’t as worrisome to certain companies, including BitPay. “We have thousands of merchants on our platform, and none of them complain about whether a transaction can be confirmed fast enough,” suggests Zielke.

How are companies navigating crypto transactions?

With adoption of crypto as a payment method still in the early stages, many companies have opted to partner with payments processors to mitigate some of the drawbacks.

“Any merchant anywhere in the world could accept Bitcoin directly if they have the technical acumen, or the appetite, to accept a transaction on a blockchain,” Visa’s Angelos notes, but “we have not seen demand from our merchants to directly accept Bitcoin.”

According to Angelos, “The way that Visa and our ecosystem partners are dealing with all of these issues [is] first of all, the transaction is authorized on the Visa network. So that means that it is instantly authorized. It goes over the Visa network; the merchant has the guarantee of payment,” he says. Since the merchant is paid in the preferred local currency, the volatility of a coin like Bitcoin “is not an issue from the merchant standpoint.”

But on the back end, it’s up to the card issuers—those like FTX or Coinbase that hold the Bitcoin or other coins—to liquidate “your Ether or your Bitcoin or your USDC and [settle] with Visa in a stable currency.” (With Visa’s new Crypto.com/Anchorage partnership, that process can be simplified using USDC.)

While the transaction times for Bitcoin may take 10 to 15 minutes on the blockchain, Angelos says to “think of Visa as a very efficient ‘layer two’ network sitting on top of a slower settlement ecosystem, of which Bitcoin is one.”

BitPay’s platform is coin agnostic, Zielke notes—meaning crypto holders can use various coins that may not have the same fees and volatility. He says that crypto holders can navigate fee issues by choosing a different coin “or frankly adjust[ing] their timing” of the purchase when the price of one coin, like Bitcoin, is especially high. “Long term,” he adds, “I believe that with continued innovation in the space…these fees will become less and less of an issue.” Zielke also points to the planned rollout of Ethereum 2.0, whose proof-of-stake model promises, among other things, lower fees.

Others like Bakkt are able to bypass some of the challenges associated with using Bitcoin, including settlement time, by keeping transactions in a “closed loop,” in which they circulate the Bitcoin within their own ecosystem and don’t take it in or out. “We don’t settle transactions directly to the blockchain,” says Michael. “We’re therefore able to remove the latency issue; everything’s done…in real time.”

And while “volatility, high cost, and delayed settlement are definitely deterrents in the adoption” of some cryptos, PayPal isn’t exposed to that volatility since it doesn’t keep crypto on its balance sheet (users’ coins are held by PayPal’s custody partner Paxos), Jose Fernandez da Ponte, PayPal’s vice president and general manager of blockchain, crypto, and digital currencies, told Fortune via email.

For Coinbase, Saxena said the company aims “to alleviate pains around volatility with product features like customizable time windows in which a payment must be initiated and automatically converting payments to stable currencies,” he noted. “We’re also looking into ways to provide instant payments when the payer and merchant are both in the Coinbase ecosystem.”

A stable option?

For some companies and consumers, opting to use stablecoins like USDC, which is backed by the U.S. dollar and far less volatile than Bitcoin, could be a simple way to sidestep many of the obstacles. Stablecoins are cryptocurrencies whose values are tethered to a less volatile underlying asset, like a fiat currency. In fact, an increasing portion of BitPay’s volumes now come from USDC, the company tells Fortune.

According to Visa’s Angelos, stablecoins are well-suited for cross-border payments between companies, and part of the appeal of stablecoins is “they make money programmable: I can now send them 24/7 over a blockchain network; I can put them into a smart contract; I can put them into a DeFi contract; and that’s very difficult to do with traditional money.”

The bottom line for crypto HODLers with Bitcoin in their proverbial pocket, then, is that there are more and more options to use their coins to pay for things. The question is whether they’ll want to.

This story is part of Fortune’s special report on this pivotal moment in cryptocurrency—and what comes next.