The Future of Payments and Web3
An interview with Sean Alexander, ClearSpend’s Director of Risk, on how crypto and web 3 will change payments as we know it, and how they won’t.
With jpegs of apes selling for multiple millions, virtual real-estate costing the same as physical real-estate, and ‘decentralized’ everything, web3 is the latest craze in the cryptocurrency space. To understand more about this topic and how it affects payments (for small businesses in particular), I sat down with Sean Alexander, ClearSpend’s Director of Risk and our resident expert.
Tom: So, general thoughts on web3, for or against?
Sean: My general thoughts on web3 are bearish and conservative. Many crypto bulls are crazy about it, and I don’t think ideas like NFTs (non-fungible tokens) of apes on a yacht are grounded in reality and likely a bubble. However, there are good ideas in web3 that can solve some of the issues of web2, mainly around digital ownership and privacy.
Tom: What about the idea of limitless money exchange? By that, I mean fully decentralized payments and exchange of funds with no banks or even any intermediaries involved.
Sean: It’s a good idea in theory, but the problem is that things start to deteriorate without regulations like KYC (Know Your Customer) in place. That’s because you don’t want just anyone to be able to use these means of money exchange. Take Putin, for example, or fraudsters. Steam, the video game company, had to stop accepting Bitcoin as payment because many Bitcoin payments were fraudulent.
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Tom: Can you elaborate on some of the good ideas in web3?
Sean: Decentralization is the crucial idea of web 3, which I love. I’m not a fan of selling private data like big tech companies in Silicon Valley are doing. Also, the general social perspective is shifting to one where people should control their data, and regulations are coming out to support that. I believe in the ‘right to be forgotten,’ and Web3 has this concept built-in.
Tom: So if decentralization is a crucial part of digital privacy, why not decentralized payments?
Sean: The reality of capitalism is that you can’t truly own all your data. The payment rails that run things like Visa, Mastercard, and the ACH (Automated Clearing House) network, control the data. Creating a whole new payment rail over the web without one of these overseers is difficult. While these organizations retain control, they also protect users against fraud, which seems rampant in decentralized systems.
Tom: What would it take for a decentralized, blockchain-based payment rail like Bitcoin and other cryptocurrencies to go mainstream?
Sean: Society is starting to care more about digital identity protection and online safety. While the anonymity of some crypto platforms protects identity, they don’t ensure safety against fraud and risk. That’s why, for now, eliminating banks in favor of crypto can’t just happen overnight. However, DAO (Decentralized Autonomous Organization) groups are leading the charge of web3 decentralization into payments. Think of them as mini-organizations that act as the governing bodies of independent people or groups. Suppose a DAO worked as an inclusive body of respected organizations and included regulators from various countries who "buy in" to proper protections. In that case, you have a step in the right direction to building safe, secure, and, most importantly, trusted decentralized payment rails.
Tom: What kinds of regulations would it take for crypto to reach mainstream status?
Sean: Crypto needs regulations to stop fraud and money laundering. Europe is a close example of what crypto would need because it has an Open Banking system where banks from different countries and different payment rails are connected through fintech apps, like how crypto has a bunch of different currencies. In Europe, Open Banking has allowed fintech companies to connect people across different countries and currencies, but they must comply with GDPR (General Data Protection Regulation) and PSD (Payment Services Directive). For example, a fintech company that facilitates cross-border transactions in Europe can apply to be regulated by an institution like the Malta Financial Services Authority (MFSA) to comply with PSD. This ‘fencing’ stops money laundered and fraudsters from gaining access to the ecosystem, similar to what crypto would need for a truly secure payment system.
Tom: So, given that you feel like there’s a lack of regulation, what are your thoughts on payment cards vs. crypto? Is there a chance that crypto could replace payment cards at some point?
Sean: Originally, I was a big proponent of Bitcoin (BTC) as a means of trade, but it never panned out. The finite amount of BTC makes it take more processing power to decrypt over time, which is not optimal for small transactions. Even with the lightning network, it can take days for a BTC transaction to go on the official ledger, so if someone buys something from you with BTC, you might not get your money for quite a while, which leaves you exposed to a high amount of risk. With credit cards, the seller gets paid instantly and takes on little to no risk, which is why sellers are willing to pay up to 3% fees to use card networks. Also, if you’re a buyer, you get a lot more fraud protection with your debit or credit card than you do with BTC, especially if you’re using Visa or Mastercard, where they have top-tier fraud protection in place. You can instantly dispute a charge and get the money reversed. With crypto, you’re on your own.
Tom: So you don’t think crypto will be a competitor to payment cards, or at least that’s a long way off?
Sean: Without the ability to get your money quickly or dispute a fraudulent transaction, mainstream businesses and consumers would constantly live in fear with every purchase. That’s why you see many people who are only willing to accept payment in crypto end up being fraudsters and scammers. So, for now, it’s a long way off and will require favorable regulation to get there.
Tom: What about payment cards that convert crypto into dollars at the point of sale and allow you to spend crypto anywhere?
Sean: While those platforms are a fantastic idea and a step in the right direction to add safety and security to crypto payments, there are still some issues. There are still going to be the long settlement times and huge value fluctuations that crypto brings. It’s still dependent on Visa payment rails and not fully blockchain-based, so it’s still leveraging the card networks because they work.
Tom: So payment cards for the win? At least for now?
Sean: Debit and credit cards are the safest, fastest, and most secure means of making payments online or in-person, hands down. They have six decades of stability behind them, and I don’t see them being wiped out by crypto anytime soon.
A safe business payments solution for today and the future
The ClearSpend Go Card gives business owners the power to control their spending and directly protect against non-approved purchases. Spend restrictions based on daily, monthly, and per-transaction limits, and merchant categories empower businesses to ensure every penny is accounted for.
Cards can be frozen via the web or mobile app and have the fraud protection the Visa network provides. That means that if a suspicious transaction manages to get through, you can instantly dispute it with a click of a button.
ClearSpend provides a viable expense management and spend control platform for today’s small businesses and will always keep an eye out for the future so that we can evolve alongside future trends.