PayPal now allows payment for goods and services with cryptocurrency, with a twist: Merchants receive cold, hard, American cash, less PayPal’s standard merchant fee. Starting with U.S. customers and merchants, the global payment-processing firm’s new “Checkout with Crypto” provides the most mainstream conduit to convert value in bitcoins and three other digital currencies into government-backed dollars to complete purchases.
“What I love about this for the consumer is that their crypto holdings are just like any other funding instrument inside the PayPal wallet, whether it be your credit card, your debit card, your balance that you may have. . . . You just select whatever funding source you want,” says PayPal CEO Dan Schulman. He conducted the first official purchase, buying a pair of cowboy boots, part of his trademark look. The rollout begins today and will expand to all U.S. customers over the next few weeks.
During checkout, customers with cryptocurrency holdings in their PayPal accounts will see the option to apply their balance to complete the purchase if they hold sufficient value at current dollar exchange rates. They can then select that option, and PayPal will manage the process of moving bits out of their digital wallet and clearing the transaction.
The value of cryptocurrencies such as the bitcoin is famous for wild fluctuation. But Schulman says PayPal’s risk is isolated, in part by compartmentalization. Its customers buy cryptocurrency in unique transactions before it’s available to use at checkout, and the value is held in the customer’s wallet. PayPal performs an exchange via its clearinghouse partner, Paxos, at a rate based on the spot market. The exchange rate builds in a 0.50% spread. PayPal then remits the dollars to the merchant’s account under its normal terms. “This is happening almost instantaneously, so the amount of risk that [Paxos] is bearing is quite small,” said Schulman of Paxos. “We hold no risk in that piece of it.”
Accepted all over
PayPal’s move is significant, as it marks the first time average consumers—albeit ones with online payment accounts—will be able to spin cryptocurrency into spending power at a large array of merchants. Previously, just a handful of major companies have accepted payment directly in cryptocurrency, including e-commerce site Overstock and electronics e-tailer NewEgg. Microsoft also allows bitcoin purchases of certain digital goods.
The crypto option is now available for use with more than half of PayPal’s 29 million U.S. merchants, with more on their way. Schulman says that merchants can’t opt out of receiving currency in this fashion, because PayPal treats it as just another funding source in a buyer’s wallet. For merchants, there’s no difference in the value they receive, including the fact that PayPal charges its standard commercial transaction fee, collecting 2.9% plus 30¢ in the U.S.
Last October, PayPal began allowing its U.S. customers to buy, sell, and keep cryptocurrency in a PayPal-managed wallet. (The wallet manages the private encryption keys that represent ownership of cryptocurrency.) The supported currencies for wallets are the same as for purchases: bitcoin, bitcoin cash, ether (via the Ethereum system), and litecoin. Purchases can’t mix and match those currencies but must be made entirely from one type at present.
Schulman confirms that for now, cryptocurrency used for payment must be purchased within a customer’s PayPal account. That leaves the billions of dollars of valuable bits held natively outside of the payment behemoth unavailable for use. “We’ve limited it to all within the PayPal ecosystem, which enables us to do full KYC [Know Your Customer] and full understanding of that transaction,” he says, referring to regulations that require companies handling financial transactions to have made an effort to validate a customer’s identity. Additional functionality “will come when we have the right guardrails in place,” he says.
Schulman adds that PayPal considers this just a first step in providing more streamlined transactions that involve fewer fees and intermediaries, whether it takes place with current popular cryptocurrencies or future central-bank-issued digital currency. “There’s so many more things that I envision that PayPal will do to increase utility around the evolution of all forms of digital currencies,” he says. “How do we enhance the utility of a payment by using some of these underlying technologies that will, we think, fundamentally modernize the existing financial system?”
Yet Schulman stresses the oversight of regulatory systems in this process. That outlook differs from that of techno-utopians who view bitcoins and other cryptocurrencies as a way to bypass the costs, friction, and limitations of the current financial system and allow unfettered, borderless exchanges of value. For all its potential virtues, such an approach doesn’t distinguish between legal and illegal transactions and makes the collection of taxes difficult too.
Crypto for the masses
In the long run, making cryptocurrency more accessible could also help people who are far outside the realm of its current casual users, investors, and speculators. Those theoretical users include some of the billions of folks worldwide who lack access to low-cost banking or any banking whatsoever. Unbanked people in the U.S. and elsewhere pay excessive fees for check cashing, and those with low balances often pay usurious amounts for routine transactions.
PayPal CEO Dan Schulman
Somebody sends $100 to somebody they love, and the people they love at home get $92.”
As Schulman puts it, “Somebody sends $100 to somebody they love, and the people they love at home get $92.” He noted that recipients then have to stand in line, remember a password, typically receive cash, and potentially pay additional fees to move the money around in their local economy. Though PayPal isn’t making any announcements relating to these issues, Schulman envisions a seamless, global digital wallet that allows instantaneous and low-cost transactions that still fit within a regulatory system.
“There’s a world that you might imagine that becomes much more inclusive, and enables the potential for much more financial health across those segments of the population that have been previously excluded, who have paid very high fees for basic transactions,” he says.
Starting with cream at the top of existing PayPal customers with crypto-curiosity, PayPal may be able to unleash some of cryptocurrency’s potential to solve real problems. The company has a long road to tread, from customers largely in developed nations who have the world’s financial systems at their fingertips, to unbanked migrants around the globe. But the idea hearkens back to PayPal’s humble origins over two decades ago, when it seemed ridiculous to think that an upstart company could make any headway with the fees and complexities of payment processing.