US FinTech Will Expand Cryptocurrency Use Case, But Unknowns Remain
FinTech companies such as PayPal, Visa, Square, Mastercard and others are expanding cryptocurrency (crypto) and blockchain capabilities but several factors could limit widespread acceptance in the near term, says Fitch Ratings. We expect strategic crypto investments to have a limited near-term effect on credit profiles, given modest capital deployed and the long ramp time. However, adding crypto capabilities opens up incremental revenue streams for these companies, even if the return on investment over time and compliance risks are uncertain.
PayPal Holdings (BBB+/Stable) and Square have plans to expand crypto capabilities, after having added crypto trading on their mobile apps. Square added the ability to trade bitcoin on its Cash App in 2017 and is on pace to realize more than $100 million of annualized gross profit from bitcoin trading. This is less than 5% of Square’s overall gross profit and is buoyed by bitcoin’s dramatically increased valuation in recent months, but it provides an avenue for incremental profitability as Square continues to build out functionalities of its Cash App ecosystem.
PayPal enabled similar capabilities in its app in October 2020, with strong results to date. The company plans to launch pay with crypto functionality at its 29 million merchants starting in the US in late 1Q21 and then expand internationally. This represents one of the first real world, non-trading related use cases at scale for crypto in the US, but consumer usage will ultimately dictate its success.
Visa, Mastercard and Moneygram are also making strides into digital currencies. Mastercard has crypto card programs in place in the US and UK, is adding digital currency support on its network in 2021 and is working with governments worldwide to carry central bank digital currencies (CBDCs). Visa’s strategy similarly entails allowing digital currency wallets to use the full range of its network. Moneygram partnered with blockchain company Ripple, which issues and manages XRP, for cross-border settlement using digital assets.
The inability to easily use digital currencies with retailers, significant potential price volatility, limited regulation in place today, and a lack of knowledge by the general public limit the ability of cryptos to go mainstream. Yet, despite these hurdles, thousands of cryptos exist, such as bitcoin, the first crypto to launch in 2009, and Ethereum. There are also stable coins, which are backed by fiat currency, and CBDCs that are meant to be less volatile.
Improved settlement speeds, typically one to three days for various types of financial transactions through the legacy US financial system, is one area blockchain may help improve over time. This has implications for business-to-business payments, cross-border and consumer-based transactions. There is also development underway to improve speed in the financial system by competing platforms, such as the RTP Network and FedNow.
Other potential crypto benefits include lower fees, elimination of intermediaries to enable 24×7 money movement, enhanced security and anonymity. Still, significant unknowns exist, particularly related to security, money protection, given the lack of regulatory oversight or FDIC insurance, and speculative behavior that drives significant price swings.
Cryptos are not currently regulated by the US government but regulation is anticipated. Tighter regulation could limit certain benefits described previously, particularly if digital currency issuers are required to obtain banking charters, maintain reserves and/or other strict banking-like requirements.
The Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act was introduced in the US Congress at the end of 2020 to protect consumers from crypto-related financial threats by regulating crypto issuance and commercial activities. US legislation may provide a framework for the US crypto market but many digital currencies have no geographic boundaries, so varied global regulations could affect mainstream adoption.
Source: Fitch Ratings