A bonus for wallets, a risk for crypto exchanges?

Converting currency to fiat has never been easier, so the recently announced partnership between Web3 infrastructure firm Transc and credit card giant Visa is perhaps welcome news — especially for users of crypto wallets like MetaMask, Ledger, and Trust Wallet.

As Cointelegraph reported in late January, “Metamask users can now sell crypto directly for Visa cards. Some 40 types of crypto can now be converted into local fiat currency at 130 million Visa merchant locations in 145 countries.

The numbers alone are scary, but this may be the tipping point.

Nexo co-founder and managing partner Anthony Trenchev recently told Cointelegraph that “Visa and MasterCard's rejoining of the crypto sector marks a major shift in the direction of the industry.”

It's great news for people who use crypto to pay for things — they now have more options and arguably better options for how to make these types of payments, Joanna Wasic, a partner at law firm Beckerhosteler, told Cointelegraph.

That said, it wasn't that long ago that Visa was backing away from crypto. Just over a year ago, Reuters announced that “Visa and MasterCard are putting the brakes on plans to form new partnerships with crypto companies” — a claim that Visa later took issue with Reuters' confirmation.

“This strategic reform is not even surprising given that Visa has distanced itself from crypto a year ago,” Trenchev said last week.

“With market volatility, especially with rising Bitcoin prices, an approved Bitcoin ETF [exchange-traded fund] And the upcoming ‘halving', we're seeing the start of a bull market in crypto,” Trenchev continued. Arguably, you won't want to miss out on Visa and MasterCard.

While the announcement may seem surprising and sudden, it is part of a larger process that has been underway for some time. “Visa's decision to enable real-time card withdrawals is the latest step in the monetization of cryptocurrencies,” William Luther, an associate professor in the Department of Economics at Florida Atlantic University, told Cointelegraph.

A loss for centralized exchanges?

Still, in a dynamic economy – where “creative destruction” is common – there are often losers and winners.

What does this mean for centralized crypto exchanges like Coinbase and Binance? Why would that individual even need a crypto exchange if Visa can directly convert their holdings of crypto to fiat?

“More and more users are choosing to engage directly with Web3 using decentralized applications instead of centralized exchanges,” or CEXs, Sami Start, Transak's co-founder and CEO, told Cointelegraph.

When recently asked about the rate of crypto withdrawals to Visa cards, Start declined to provide disaggregated data, but said the company's off-ramp transactions — including MasterCard and Visa transactions — “have grown by about 24.27% since December 2023.” January 2024.

Latest: CBCCs: User Privacy Problem or Future Currency?

The risk of a centralized crypto exchange, however, may be overstated. “The idea that this development can affect CEXs and platforms is too easy,” Trenchev said. Visa and MasterCard's involvement in decentralized finance (DeFi) could spur broader cryptocurrency adoption — “which will benefit the entire industry.”

CEXs still have a role to play. “They are critical in terms of scale,” says Trenchev, which pioneered crypto-backed MasterCard in some parts of Europe several years ago. They offer a level of reliability, accessibility and security that many DeFi platforms still don't. He added:

“The appeal of self-preservation in DeFi is obvious, but it comes with risks such as lack of insurance.”

Both DeFi and CEXs contribute to the growth of the blockchain ecosystem, Trenchev said, and “their success is universally beneficial.

The importance of network effects

Obviously, there is a lot more discussion about crypto as an exchange now that there wasn't in the depths of the crypto winter.

The biggest obstacle to getting the money that “will” get out the gate is what economists call “network effects,” Luther explained. They can't be useful unless your business partners are willing to use them, and to begin with, few parties are willing to do so, he says:

“Intermediaries like Visa have the potential to eliminate the problem of network effects. By converting your preferred cryptocurrency to your trading partner's preferred currency on the fly, [they can make a new] Exchange rate is more useful.

Visa is not the first to take this step. Xapo started issuing Bitcoin (BTC) debit cards in 2014. “But Visa supports many cryptocurrencies and has a very large network. That's a big deal,” Luther added.

Trenchev has embraced this idea, including credit card giants that have been building notables into the crypto world for some time.

In the year In 2021, Mastercard acquired CipherTrace – a leading cryptocurrency intelligence company – to boost crypto capabilities. According to the company's executive vice president, Raj Damodharan, it is mutually exclusive.

It's part of our commitment to support the broader #digitalasset industry by introducing the MasterCard Multi-Token Network to make transactions in this ecosystem secure, scalable and interoperable. pic.twitter.com/MwkkxbyAuk

— Mastercard News (@MastercardNews) June 29, 2023

Visa began supporting Circle's USD Coin (USDC) with select Visa cards in 2020 and followed up in September 2023 by supporting USDC payments on the Solana blockchain.

Building new relationships is what companies like this are designed to do. “The core strategy of payment gateways like Visa and MasterCard is to be a network of networks,” said Lex Sokolin, managing partner at venture capital firm Generative Ventures.

“Integrating with Web3 networks is a very natural thing for these companies,” said Sokolin, “wealth managers are less ‘risky' to sell crypto as an investment product.”

The question remains whether crypto will become part of mainstream payments and financial services, but rather how big a part crypto will play, Wasic added.

“So crypto may still be a relatively small part of payments and financial services – compared to cash, say – crypto's teeth are sinking in.”

Betraying the basics?

A lot of work still lies ahead. Some worry about security or loss of privacy. Others fear the growing trend toward financial centralization that crypto is designed to counter. There are also compliance and tax questions.

“I think the main reason for crypto holders — at least American holders — to use crypto for payments is the same as it has been for years: the United States tax code,” Wasic said.

People don't want to think about tax reform every time they buy a cup of coffee. But doing it directly through a payment platform like Visa is arguably easier than previous payment methods.

Some cryptocurrency activists may see the credit card giants' entry into the space as a further betrayal of Bitcoin and other cryptocurrencies' desire for decentralized money without the control of any party, company or government.

Luther voiced something along these lines. While welcoming Visa and MasterCard's support, he said, “I think it's important to recognize the downsides.

Yes, they make it easier to use cryptocurrencies to buy things, “but they do so at the expense of some cryptocurrency promises.” More specifically:

“They tend to reduce – and in some cases completely – the financial privacy and censorship-resistant features of cryptocurrencies.”

These aspects are important, Luther added, and he hopes future changes will “make it easier to use cryptocurrencies in regular transactions while maintaining a high level of anonymity.”

Instilling confidence?

Finally, what does all this mean in terms of adoption? Crypto adoption is still relatively low – at least as a percentage of the world's population. Luther added that those who own it often “hold cryptocurrencies in hopes of price appreciation.”

But there is another way of looking at things. In this view, crypto is already part of mainstream payments and financial services.

“Some institutional investors hold cryptocurrencies. We have access to crypto futures and ETFs,” Luther said, and a growing number of payment apps are making it easier than ever to send and receive cryptocurrencies.

Related: Is US stablecoin payment just around the corner?

Visa's new partnership is also important because of the impact it could have on people who have been hesitant to accept cryptocurrencies until now – that is, not just existing wallets.

The giant credit card companies may give crypto fence-sitters the confidence to take action. If so, a kind of virtuous cycle can be created because “as people become more comfortable with payment solutions, these solutions will be everywhere,” Wasic said.

“There is still a long way to go,” Luther summed up. But cryptocurrencies have come a long way.