May 07, 2021 at 04:54PM

We’re seeing it in earnings reports and in a slew of announcements that are coming over the wires, as they say, in press releases and blogs.

Cryptocurrencies – beyond their current and wild rides, marked by price volatility, by Dogecoin and tweets touting and bashing various coins – are gaining traction within some commerce ecosystems.

Call it the “walled garden” approach, where buyers and sellers converse, interact and transact across a continuum of physical and digital settings, where what ties it all together may be a (digital) wallet, a platform (and in the case of Apple, for example, hardware and operating systems).

We want to stress that the walled garden, in general, can work with any tokenized offering, and it need not be bitcoin.  For now, bitcoin is the marquee name in the crypto field, and so may be the low-hanging fruit in the equation.

Square’s earnings on Thursday show how buyers and sellers, digital wallets and platforms are coalescing around cryptos, and though it’s early days yet, we can glean hints as to how it all hangs together.

As noted in this space, Square said that the company’s bitcoin revenue soared to $3.5 billion, up from $306 million year on year, driven by more than one million customers buying bitcoin in January. The company itself has, as is well-known, been going all in on the crypto, too.  In February, the company said, it invested $171 million in bitcoin, buying more than 3,300 bitcoin.

During the quarter, management noted that Square launched peer-to-peer functionality for bitcoin. “Customers can now send bitcoin to friends and family for free within the app, which has attracted new customers to bitcoin,” CEO Jack Dorsey said on the call. “This gives even more opportunities to build new network effects across the entire cash ecosystem.”  Bitcoin, he told analysts on the call, has the potential to be currency that is native to the internet.  Square has added bitcoin Boost to its offerings, which gives cash back in the form of bitcoin for purchases made on holders’ Cash Cards.

“So if you’re about to go to a restaurant, you might see a bitcoin boost for 20% off,” Dorsey explained, adding that “you might see that boost for the pet store to buy some dog food, you might see that.”

Such activities, he said, provide a network effect for the company, and specifically for cryptos to be used across activities that are specific to the Square ecosystem and among stakeholders.

Ecosystem-Wide Moves 

We’re seeing some of the same ecosystem-wide movement by firms such as PayPal, which has said in recent weeks that PayPal users can link their wallets to Coinbase to buy a range of cryptos. The company has also said (in a release late last year) that it allows customers to buy, hold and sell cryptocurrency directly from their PayPal accounts — with an eye toward using those cryptos to shop at tens of millions of merchants on its network this year.

Venmo is a key part of the ecosystem here, and for crypto within that ecosystem. Critical mass, and ramping numbers for Venmo, imply that buying, selling and holding cryptos will gain adoption fast among followers.  PayPal’s earnings report this week showed that $51.4 billion of TPV was up 63 percent year on year. Management noted that half of the company’s crypto users open up their app every day.

In terms of cross pollination, it’s not too farfetched to see a series of ecommerce ecosystems develop where consumers use their digital wallets to connect to exchanges, buy cryptos, hold them in those wallets, transact in P2P or C2B settings, and for merchants to settle in cryptos, held in their own corporate accounts — once the multi-step process of converting/working with fiat and cryptos is streamlined somewhat (and we are not there yet).

The walled garden approach, then, is a greenfield opportunity that has evolved a long way away from the days of Facebook Credits.  You may remember that virtual currency that went into alpha phase in 2010, was launched, and was effectively shuttered in 2012.  Credits went bust in part because of an initial embrace by gamers, but pretty much no one else, and because there was, really, no liquidity — outside of gaming, merchants never really got on board.  Facebook’s newest foray, Diem, of course, may or may not get off the drawing board, but would be coming into a very crowded field.

As to the liquidity and scale, we’re seeing it on the institutional side, too, as J.P. Morgan has developed its JPM Coin for B2B money movement, which is an ecosystem all its own.  eBay has been mulling accepting crypto as payments.

Ecosystems have been springing up — tying the physical and digital realms together — and now cryptos may knit those ties ever-tighter between firms, individuals and all manner of interactions.

Next Up: The Regulatory Environment


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