Wallets & payments with cryptocurrencies (in the real economy)

Digital wallets are becoming increasingly popular. No matter whether Apple Pay, Google Pay or Samsung Pay, they all have one thing in common: they serve as an additional means of accessing the funds in an associated account. Some wallets also offer the possibility of viewing and interacting with cryptocurrencies. By entering a respective key, one tells the software which ‘account’ is to be linked and thereby which currencies one wants to have access to.

Wallets for cryptocurrencies work similarly in their basic features but differ from fiat currency (Euro, Dollar, Pounds, etc.) wallets in their handling.

The different types of cryptocurrency wallets

Just as with a bank account, different methods can be used to access and store the currencies in crypto wallets. Three prominent options are:

• The hardware wallet
  A physical device designed to securely store cryptocurrencies offline. In most cases, the device is additionally secured by a PIN code or other means of authentication, thus protecting against unauthorized access. Since the wallet is only secured offline, one will lose access to the crypto values stored on it if one no longer owns the hardware wallet.

• The Desktop Wallet
  This option is one of the classic methods of storing crypto assets and is primarily suitable for just this purpose. As the name suggests, the wallet can be installed on PCs and laptops as a program to manage and store crypto assets.

• The wallet app on mobile devices
  With a primary focus on temporary storage or smaller amounts, a wallet app offers on-the-go access to cryptocurrencies and thus enables the payment, sending and receipt of coins in daily use. These apps can be used for payments in shops and restaurants, provided that cryptocurrencies are already accepted as means of payment there.

With wallets of different providers, one doesn’t only decide between different functionalities, but also between different access and storage options of the private keys, which represent the possibility of transferring cryptocurrencies and thus the ownership. These variants can generally be divided into the categories ‘custodianship’, ‘partial custodianship’, and ‘non-custodianship’.

A wallet with custodianship allows the wallet provider to access and store the private keys of the crypto wallet, meaning a user has to trust the provider when using them.

In a wallet with partial custodianship, both the provider and the user themselves have access to the private keys of the wallet. In this case, a user still has to trust the provider but does have more control over its own funds.

Exclusive control for the user is only provided by non-custodial wallets, resulting in sole responsibility for the safekeeping of private keys. However, one also enjoys the advantage of sole power of disposal.

Card payments vs. payments with cryptocurrencies

These days card payment is nothing special anymore, a payment with cryptocurrencies is almost as easy.

The merchant pulls the goods over the reader and announces the total price. The buyer announces that he or she wants to pay with a cryptocurrency. The merchant enters the amount in Euro while the payment terminal automatically retrieves and fixes the exchange rate with the respective cryptocurrency. A QR Code containing the recipient address and currency amount is generated and displayed to the customer. This code is scanned with the customer’s wallet app and the initialized transaction confirmed. Once the transaction is recognized by the system in the respective blockchain network, it gets confirmed at the terminal and a payment receipt is printed.

In short, only the reading medium (NFC to QR code, for now) changes and one confirmation step is added during a payment with cryptocurrencies, but the process remains almost identical.

A payment with cryptos could be compared to a payment abroad: If you want to buy goods in England and pay with a Euro-backed credit card, the correct exchange rate is called up during the payment process and the amount is paid to the merchant in Pounds.

Nevertheless, it should be noted that there are still potential problem areas with crypto transactions at this time.

• At the moment, the transaction confirmation can take a little longer with up to 90 seconds for some cryptocurrencies, however this is rather the exception. However, this is only really relevant with Bitcoin.
• The amount paid must be identical to the amount displayed by the system, denominated in the used cryptocurrency. As an example, if the system displays an amount of 0.01175248 BTC as the amount to be paid, the wallet must also display this when confirming the transaction. The amount is embedded in the QR code and can lead to incorrect payment transactions if the customer chooses to change it afterwards or to enter the amount manually. If a paid amount does not match the systems expectation, the payment system will inform about this and offer problem resolution possibilities.
• Some wallets, as an example the mobile wallet app by Wirex in the case of Bitcoin, round up decimal places, which can also lead to incorrect payments. These differences in the decimals for each transaction do currently not play big a role, however, this may quickly change in the future if the price of Bitcoin increases.

In conclusion:

There are wallets with different properties for varying applications and situations. It’s likely that in the future an end-user will not only be using one but several, connected digital wallets for different purposes, similar to today’s different bank accounts or credit cards. The choice of the wallet provider will play an important role in this, similar to the choice of one’s bank today.

On the surface, a payment with cryptocurrencies today may still seem strange and complex, but it fundamentally is not. Future optimizations will eliminate the existing problem areas and offer users a smooth payment process.

To learn more about crypto currencies and how to pay with them, visit our website at www.salamantex.com.