Why Are Payment Processors Avoiding the Blockchain?

Why Are Payment Processors Avoiding the Blockchain?

Why Are Payment Processors Avoiding the Blockchain?

Lori Breitzke

Lori Breitzke

Lori Breitzke is founder of E&S Consulting. Lori's commitment to "Perfecting Payments" has led her and her associates to be regarded as leading experts in the payments, banking, retailing and POS industry sectors.

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In the past few years, the use of Bitcoin and other cyber-currencies has curried favor for its advantages — mainly that it eliminates the middle man (banks and related institutions) with transaction fees that are either lower or non-existent.

Advantages also come from the limit on the number of cryptocoins, eliminating the risk that hyperinflation will destroy the currency's value. It offers anonymity for buyers and sellers alike and has come to be accepted by major retailers. However, many payments processors are eschewing the virtual currencies and the blockchain to instead use the prepaid rails.

At first glance, this appears unlikely in the face of the benefits already mentioned. But in fact, there are several reasons why this choice could seem like a better option – for now.

Why the prepaid rails?

Regulatory uncertainties surrounding cryptocurrency is perhaps the biggest argument for payment industry players to leverage prepaid rails instead of those used for Bitcoin and similar options. While specific rules govern the prepaid arena, virtual currency and virtual currency exchanges are largely unregulated. While prepaid card products can be replaced if lost or stolen, this is not the case with cryptocurrency.

Even more importantly, the legal status of cryptocurrency varies significantly from country to country and is still changing or undefined in many nations throughout the world. Some countries, such as Iceland and Ecuador, have banned cryptocurrency entirely. In the United Kingdom, for instance, the rules are fairly straightforward: Bitcoin and its ilk are considered private money, meaning that when exchanged for sterling or foreign currencies, such as the euro or dollar, no value-added tax (VAT) needs to be paid on the value of the virtual coins themselves. In the U.S., things are more fluid, with cryptocurrency classified as more than just tender for transactions. The U.S. Treasury classified Bitcoin as a convertible decentralized virtual currency in 2013, and the Commodity Futures Trading Commission (CFTC) classified it as a commodity in September 2015. But virtual currency is treated as property for tax purposes, in accordance with a directive handed down by the Internal Revenue Service (IRS), and cybercurrency exchanges must register as money-transmitting businesses.

A state-by-state approach

Different U.S. states also take different legal approaches to cryptocurrency. Some states tax it; others do not. Some, including New Mexico, South Carolina and Montana, do not regulate money-transmitting companies, enabling these operations to handle cryptocurrency-based transactions without incident.

However, this is not the case in other states. For example, in June of 2015, the New York State Department of Financial Services released the first virtual currency-specific licensing regime in a move to regulate cryptocurrency usage. Even earlier than this — in May 2013, to be exact — California's state financial regulator issued a letter to the Bitcoin Foundation, a non-profit organization designed to promote Bitcoin, warning that it "may be a money-transmission business" and threatening potential fines and jail time for continuing to enable Bitcoin use without a license.

Should any new regulations governing cryptocurrencies or future changes to existing rules be unfavorable to Bitcoin or similar virtual tender, payments industry players may find themselves facing new, possibly insurmountable challenges on the cryptocurrency front.

There are other potential obstacles surrounding cybercurrency that do not present themselves on the prepaid side. One such obstacle is the size of the blockchain. It is widely acknowledged that in order to become a leading payment solution, the cybercurrency community must agree to increase the size of the blockchain so that it can handle larger transaction volumes. This has yet to happen.

The consumer side

Of course, there is also the consumer side of the story. Many consumers object to cybercurrency because they associate it with illegal activities, such as money-laundering and tax evasion, and because the anonymity with which it can be used paved the way for virtual currency exchanges, funds and marketplaces to be targets of theft by hackers. Some look askance at cybercurrency based on the fact that it is anti-bank because transactions do not involve financial institutions in any way. For the bulk of the population, then, prepaid is safer and thus a better option than virtual currency.

However, one exception to the rule holds true, and that's millennials. While prepaid products appeal to consumers in this demographic, they also demand complete flexibility when it comes to payments. This includes the ability to use any currency — including cryptocurrency — and to take advantage of mobile payment platforms. In fact, when Business Insider magazine surveyed millennials ages 18 to 34 about their payment preferences, 40 percent of participants said they would stop using cash at all if they had access to convenient payment alternatives, such as mobile options.

Given the problems with virtual currencies and consumer perceptions, it looks like payments industry players will continue to stay off the cybercurrency rails for the foreseeable future. However, riding the prepaid rails may not be the best long-term solution, either. The payment processing 'train' will probably find itself moving down the tracks in a different direction.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Lori

Lori Breitzke

Lori Breitzke is founder of E&S Consulting. Lori's commitment to "Perfecting Payments" has led her and her associates to be regarded as leading experts in the payments, banking, retailing and POS industry sectors. Lori is co-founder and co-chairman of the Prepaid Financial Crimes Task Force of the National Branded Prepaid Card Association, member of the ETA Risk and Fraud Committee, ETA Prepaid Legal Group, U.S. Payments Forum and on various committees and was awarded the EMF Honor Roll 2014-2015. Lori regularly blogs on payment topics at www.eandsconsultingllc.com.

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