by Anupam Majumdar and Dan Carr, 15 February 2022

Crypto Starting to Realize its Promise in Payments
Crypto’s Evolution From a ‘Store Of Value’ to a ‘Medium Of Exchange’
Despite its recent dip, 2021 was a breakthrough year for crypto, with its market
capitalization rising by 188% to reach ~$3 trillion in November 2021. Crypto’s profile andgrowth to date has derived from its utility as a store of value, but we are finally starting tosee its potential as a ‘medium of exchange’. In this article, we examine how crypto payments
are gaining relevancy in mainstream commerce, illustrate the current payments use cases,and evaluate their growth outlook.
Bitcoin, the first cryptocurrency, was introduced in 2009 as an alternative medium ofexchange to fiat-based currencies. This first generation of cryptocurrencies (bitcoin thenothers) never gained meaningful traction as payment methods due to their high volatility,
low transaction processing speeds, and lack of acceptance. Bitcoin was highly successful asa validation of blockchain technology, which subsequently inspired the development of
new generations of crypto across a wide range of applications (as shown in figure 1). Today,
select cryptocurrencies (e.g., Solano) and next generation crypto innovations such as
stablecoins (e.g., Tether, USDC, Dai) and central bank digital currencies (CBDCs) are drivinga radical shift in consumer and merchant perceptions and accelerating usage of crypto
payments.
FIGURE 1: Evolution of Crypto & Relevance as a Medium of Exchange

Source: Flagship market observations

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Drivers of Crypto as a ‘Medium of Exchange’
As we outline in figure 2, crypto currencies are evolving beyond a ‘store of value’ torelevance as a ‘medium of exchange’. Emergence of new technological innovations suchas stablecoins, NFTs (non-fungible tokens, which are essentially digitized tokens ofownership against digital assets) and DeFi (decentralized finance, a new breed of financial
securities and investment vehicles built on the blockchain network) have accelerated
consumer curiosity and adoption. Traditional PSPs have invested in crypto as a growthvertical and have further invested in strategic M&A. Visa and Mastercard have also
adapted their rails to settle select crypto directly. Lastly, while regulations continue to be adouble-edged sword, greater clarity in some markets is encouraging adoption bytraditional actors.
FIGURE 2: Building Blocks of Crypto Payments Adoption*Non-fungible Tokens (NFTs) and Decentralized Finance (DeFi)
Source: Theblockcrypto.com, Chainanalysis.com, Flagship Advisory Partners analysis

2© 2022 Flagship Advisory Partners LLC. These materials may be freely copied and distributed so long as the user
attributes the source as Flagship Advisory Partners and references our website: www.flagshipadvisorypartners.com

Current State of Crypto Payments
As illustrated in figure 3, crypto payments primary use case today is on-ramping and offramping fiat to crypto via exchanges (where volumes are huge). Several specialized
fintechs that offer fiat on-ramps (buying crypto in exchange for fiat currency) haveemerged on this basis (e.g., Ramp, MoonPay, Wyre), and many traditional PSPs have also
thrived supporting these volumes (e.g., Checkout.com, Nuvei, Worldpay). New merchantsegments, beyond exchanges, have also emerged (e.g., NFT marketplaces, GameFi, DeFi)
accelerating the opportunity for C2B crypto acceptance. In traditional ecommerce, wehave seen an acceleration of crypto acceptance as a payment method by merchants inselect verticals such as online gaming, luxury travel, digital and adult services. In the last
12 months, Visa and Mastercard have partnered with over 80 crypto exchanges, enablingthese exchanges to issue branded cards. These cards have accelerated the acceptance ofcrypto towards C2B online commerce. Visa recently announced the total card volumes
exceeded $2.5 billion in its fiscal Q1 of 2022, already accounting for 70% from last year’svolumes. Select businesses are also facilitating B2C and B2B payouts using crypto, though
this is specific to select verticals, mainly addressing payouts to contract and gig workers(independent, online platform contractors). Crypto payments are also evident in C2C
remittances today, providing an economical way to remit payments especially for
consumers in emerging markets.
FIGURE 3: Crypto Payments Proposition Models Overview

Source: Flagship market observations

3© 2022 Flagship Advisory Partners LLC. These materials may be freely copied and distributed so long as the user
attributes the source as Flagship Advisory Partners and references our website: www.flagshipadvisorypartners.com

As we illustrate in figure 4, we estimate crypto payment volumes at €0.5 trillion today, atiny fraction compared to the global aggregated C2B, B2B and B2C payments turnover.
C2B Fiat on/off ramps account for 95% of this share, so general purchasing and other use
cases remain small.

FIGURE 4: Global Volumes: Traditional Payments vs. Crypto Payments (USDtrn.; 2021)

Global includes payment volumes in B2B, B2C, C2B and C2C services.
Source: Visa, Flagship analysis

While crypto payments are small today, we expect volumes to accelerate and growrapidly in the next 12-18 months. As illustrated in figure 5, C2B crypto payment adoption
will continue to grow as newer generations of crypto mature with the ability to support
rapid, simple and low cost means of payment in everyday life. We consider cross-border
C2C to be potentially disruptive to traditional fiat remittance payments, as consumers arelikely to benefit from economical price points and to be able to remit money in real time.
B2C and B2B may take a little longer to mature, as traditional businesses will take time toembrace crypto.

4© 2022 Flagship Advisory Partners LLC. These materials may be freely copied and distributed so long as the user
attributes the source as Flagship Advisory Partners and references our website: www.flagshipadvisorypartners.com

FIGURE 5: Crypto Payments Maturity by Use Case

Source: Flagship market observations

Our expectation for acceleration of crypto use cases is based on the growth drivers that
we outline in figure 6. In the near term, we anticipate mainstream PSPs to play a central
role in driving consumerization of crypto. New blockchain applications in the form of NFTs
will gain momentum and be accessible through fiat rails. We anticipate card schemes andregulators to play an important role in creating the network and the rules for direct crypto
settlement. In the medium term, we do expect a tipping point when crypto becomes moremainstream, due to 1) regulatory clarity and sovereign, acceleration of CBDCs, and 2)
acceleration of new commerce activity in platforms such as Metaverses and platforms built
on Web 3.0.

5
© 2022 Flagship Advisory Partners LLC. These materials may be freely copied and distributed so long as the user
attributes the source as Flagship Advisory Partners and references our website: www.flagshipadvisorypartners.com

FIGURE 6: Growth Drivers

Source: Flagship Advisory Partners analysis

Conclusion
Payments has been an elusive aspiration of the cryptocurrency ecosystem since its
inception many years ago. However, the key building blocks are now in place and a seriesof growth drivers are coming that we expect will accelerate the digital enablement ofcrypto payments in everyday commerce. We remain optimistic of the upsides in crypto
and its appeal to both consumers and merchants as a long-term vehicle of commerce.
Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Dan
Carr at Dan@FlagshipAP.com with comments or questions.

6© 2022 Flagship Advisory Partners LLC. These materials may be freely copied and distributed so long as the user
attributes the source as Flagship Advisory Partners and references our website: www.flagshipadvisorypartners.com