Exploring the Emergence of Crypto Payments: Alchemy Pay

77

The cryptocurrency landscape is witnessing significant expansion, with established commercial institutions like Visa, Mastercard, Tesla, BNY Mellon, BlackRock, Gucci, and even countries like El Salvador and the Central African Republic venturing into the cryptocurrency realm. This growing interest is prompting investors to view cryptocurrencies with renewed curiosity. In 2022 alone, the number of cryptocurrency users reached an impressive 320 million, underscoring the enormous potential user base.

Cryptocurrency, functioning on a decentralized and transparent blockchain network, possesses attributes such as peer-to-peer transactions, irreversibility, and transparency. These qualities make cryptocurrencies highly suitable for applications in the payment industry. Coinbase’s cryptocurrency research report from 2021 reveals that as of June that year, approximately 20 million merchants already supported cryptocurrency payments. Moreover, Visa’s data indicates that in the first quarter of 2022, their payment network processed $2.5 billion worth of cryptocurrency transactions, compared to $1 billion in the first quarter of 2021. These figures clearly demonstrate the rising trend and surging demand for crypto payments.

Advantages of Crypto Payments and Market Demand

Compared to traditional payment methods, crypto payments offer several distinct advantages:

1. Decentralized, peer-to-peer transactions facilitate international transfers and payments.
2. Fewer intermediaries result in faster settlement times, often within minutes.
3. Lower transaction costs compared to traditional credit card fees (crypto payment fees averaging around 1% compared to credit card fees ranging from 1.5% to 3.5%).

Not only cryptocurrency investors and payment consumers, but individuals residing in areas with high fiat inflation, such as Southeast Asia, Latin America, and Africa, show a keen interest in holding cryptocurrencies as a means to hedge against inflation.

Within the cryptocurrency industry, crypto payments typically encompass two components: cryptocurrency consumption payments (utilizing cryptocurrencies to purchase goods and services, including cross-border transfers), and the exchange between cryptocurrency and fiat currency, which supports the former and generates additional demand for various crypto payment roles.

Individual User Demand:

1. Cryptocurrency investors often require the use of fiat currency to buy or sell cryptocurrencies for investment expansion or cash withdrawal.
2. Cryptocurrency consumers commonly view cryptocurrencies as a “value transfer tool” and frequently exchange them for fiat currency once their goals are achieved.
3. Users residing in areas with high inflation, such as Southeast Asia, Latin America, and Africa, seek to resist inflation rather than invest or make consumption payments. This segment presents a potential market for crypto payment businesses.

Market Pain Points:

1. Cryptocurrency accessibility presents challenges due to complex processes, high fees, and the potential risk of involvement in money laundering. Certain regions lack access to services provided by centralized exchange (CEX) platforms, which serve as primary hubs for cryptocurrency trading.
2. Enterprise users require crypto payments to prevent payment fraud, such as instances where fraudsters purchase goods and subsequently refuse to return them or apply for refunds.
3. Expanding the consumer base through cryptocurrency is an objective for enterprises, attracting more cryptocurrency enthusiasts and investors to become users.
4. Exploring additional business models to generate supplementary derivative income is an area of interest.

Market Pain Points:

1. Self-built crypto payment interfaces may pose security risks due to inherent cryptographic technical issues (e.g., private key leakage).
2. Tracking consumer data, including settlement and clearing information, proves challenging.
3. The lack of fiat-to-cryptocurrency exchange channels within payment gateways, with most users being cryptocurrency investors.
4. Directly building interfaces raises compliance concerns.
5. Profits from cryptocurrency may result in potential capital gains tax in certain regions.
6. Third-party payment institutions such as Visa, Mastercard, and PayPal can meet enterprise requirements for cryptocurrency payment and settlement, ensuring compliance and security. However, these services often come with high fees and limited flexibility, including geographical restrictions that fail to cater to all payers’ needs.

Crypto Gateway Products Shine in the Payment Industry

From a holistic perspective, the crypto payment field presents new demands from both individual and enterprise users. Businesses that focus on catering to both user types and providing comprehensive services can foster the overall development of the field. This approach differs from concentrating on one user type while neglecting support for the other.

For instance, let’s consider the purchase of USDT with the need to pay for an online service, send money to overseas friends, and invest in DeFi. One option is to visit CEX platforms like Binance and Coinbase, purchasing USDT through their over-the-counter (OTC) services, which usually involve peer-to-peer matching of fiat and cryptocurrency trades. The USDT can then be withdrawn from the trading platform and used for payments and transfers to the intended addresses.

However, frequent cross-border remittances and payments, especially for businesses and enterprises, necessitate multiple confirmations from OTC merchants, fiat currency payments, and withdrawal reviews from CEX platforms. Each step incurs transaction fees, which can become cumbersome.

Although OTC services offered by CEX platforms currently dominate the market, the emergence of crypto gateway products provides a more convenient and accessible fiat-to-cryptocurrency exchange solution through a “cross-gateway” approach.

Crypto gateway protocols integrate liquidity from CEXs, market makers, and other sources, supporting fiat currency deposits and withdrawals. On the deposit side, they integrate various third-party payment channels such as PayPal and Visa, while the withdrawal side supports fiat currencies in most countries worldwide. This comprehensive approach enables seamless trading in one location.

Notable crypto gateway payment protocols include Alchemy Pay, MoonPay, Banxa, and Ramp.Network. However, the breadth of payment methods, regional support, and realized functionalities may vary among these platforms.

Challenges and Obstacles in Operating a Crypto Payment Business

While crypto gateway products address some pain points and cater to the demands of individual and enterprise users, operating a crypto payment business is inherently challenging due to its role as an infrastructure provider. The high barriers to entry make implementation difficult. Operating teams require extensive experience in the payment industry to expand localized payment channels and navigate security compliance issues, which vary across regions.

Financial development, mobile phone adoption, network availability, and electronic payment usage exhibit significant variations among countries and regions, resulting in substantial disparities in the payment market. Crypto gateways must not only process payments on a global scale but also tailor their services to specific local conditions. This necessitates operational expertise in both local and global payment channels.

Security and adherence to regulations are paramount for payment products, as safeguarding user funds takes precedence. Despite some countries allowing cryptocurrency investments and transactions, stringent regulatory requirements persist. Obtaining the necessary licenses for payment and financial services across various countries is an expensive and complex process with lengthy approval cycles. Currently, less than 1% of web3 companies in the crypto payments sector possess the required licenses.

Moreover, crypto payment gateways must maintain a certain amount of funds, leading to time delays when converting fiat and cryptocurrency funds in and out of the gateway. The seamless real-time payment experience expected by users necessitates the availability of fiat and cryptocurrency fund advances. Without an adequate flow of funds, ensuring smooth operation of the payment system becomes challenging for crypto payment gateways.

Additionally, technologies such as anti-fraud solutions, Know Your Customer (KYC) procedures, and anti-money laundering verification are crucial for securing payments. Crypto payment gateways must integrate these technologies seamlessly to enhance security. For example, Alchemy Pay collaborates with Sardine Systems for security and anti-fraud foundations and works with Forter, an e-commerce trust platform, to provide

Frequently Asked Questions (FAQs) about crypto payments

More about crypto payments

• Coinbase’s cryptocurrency research report
• Visa’s data on cryptocurrency transactions
• Alchemy Pay official website
• MoonPay official website
• Banxa official website
• Ramp.Network official website