Coinbase and PayPal: a sign of things to come

Thursday 07 July 2016

Crypto is complicated and risky, if you don’t know what you’re doing. But there’s money to be made for big businesses. The solution? Strategic partnerships.

US bitcoin broker and wallet company Coinbase recently announced a partnership with PayPal. On their blog, they explain: ‘One of our objectives at Coinbase is to add as many funding mechanisms as possible to make exchanging digital currency easy. As a step in that direction, Coinbase now accepts PayPal (for bitcoin sells) and credit cards (for bitcoin buys).’

Note the direction in which the funds are flowing, here: from Coinbase to PayPal. There’s a simple reason for this: PayPal is a payment processor and, like most payment processors, has a high degree of control over its users’ accounts. It can if needs be reverse a payment. The classic scenario is if an eBay merchant does not honour a purchase. The customer can appeal to PayPal for a refund (in these situations, PayPal almost always sides with the customer - it’s great for customers, bad for honest merchants getting hit with chargebacks).


Strategic partnerships increase adoption but lower risk - allowing each party to do what they do best

Because bitcoin transactions aren’t reversible, keeping payments going from Coinbase to PayPal but not the other way avoids the problem situation of an account being fraudulently funded by PayPal and those funds being used to buy bitcoin - which is then withdrawn, with no hope of recovery. It’s nice and safe for PayPal. (Incidentally, the same problem can arise with bitcoin purchases using a credit card. Exchanges and brokers that accept credit card deposits typically avoid this problem with an additional layer of security and KYC.)

PayPal have dabbled with bitcoin in the past but there’s no surprise they have gone down the route of partnering with a major US exchange. Coinbase is big, it’s regulated, and it knows what it’s doing. Plus the risks for PayPal are minimal, thanks to the fact it’s not exposed to counterparty risk because it’s only used as a cash out option.

Effectively, PayPal have chosen to outsource the risk and expertise to Coinbase, allowing them to profit from transaction costs (and PayPal’s are a good deal higher than bitcoin’s tx fees) without any of the downside. I take no issue with that: all’s fair in love and capitalism, and no business in its right mind would take on risk unnecessarily. What it does signpost is the way in which bitcoin and other blockchain services will eventually reach mass adoption.

Companies like Coinbase will increasingly act as intermediaries or gateways between ‘old’ money (yes, I include PayPal in that description) and the new protocols of cryptocurrency. They will join the dots, make the markets, ensure that life is easy for the risk-averse corporations that want to engage with blockchain technology but don’t want to get their hands dirty with the protocol itself. They will be the glue that binds the real world to the virtual world of digital money. There's nothing particularly profound about this insight, but it does provide a foil to the idea that the only way this is going to happen is through Wall Street or a national government getting in on the act. Those smaller businesses will want to make their offering as attractive as possible by reducing risk for the big guys. Right now the marketplace is wide open and there’s everything to play for.

TL;DR: bitcoin adoption will come through strategic partnerships with exchanges, brokers and other businesses acting as gateways - not simply through big corporations using the blockchain directly. 

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