Differences Between Fiat and Crypto Processors
Jul 18, 2022
The number of people using Bitcoin has grown exponentially in the last few years. According to recent data by BitInfoCharts, the total market value of all existing Bitcoin reaches $388 billion, and this number is only expected to grow in the future. It is not difficult to understand why businesses want to accept cryptocurrency payments. In this article, we examine what crypto processors are and how they differ from traditional fiat payment processors.
Before we talk about fiat and cryptocurrency processors, it is necessary to understand what cryptocurrency and fiat money are, how they work, and what the difference is between them.
What is the Сoncept of Fiat Money?
A fiat currency is a currency issued by a government that is not backed by any physical commodity, such as gold or silver, but rather is backed by the government. Government-issued fiat money's value is determined by supply and demand and the government's stability. Examples of such currencies include the US dollar, the Euro, and others.
Fiat currency completely replaced gold standards and commodities-based systems as the basis of legal tender in the 20th century. Today, the fiat currency system is widely used worldwide by organizations and institutions of all levels to purchase goods and services, to invest and to save money.
Fiat currency systems give authorities direct control over the value of their currency. This means that government and central banks can respond to different financial events and crises by implementing different policies, such as fractional reserve banking or quantitative easing. This flexibility makes the fiat system much more responsive to economic conditions than the gold standard system, but it also makes fiat much more government-controlled.
And What Is Cryptocurrency?
In a nutshell, cryptocurrency is a form of digital money in which the formation of units of currency is controlled and the movement of money is verified using encryption techniques.These virtual currencies are intended to be safe and anonymous 24/7 .
Decentralization is at the core of the cryptocurrency concept, and exactly here lies the fundamental difference between cryptocurrencies and the fiat money system.
All the information about all cryptocurrency transactions is recorded on a public ledger called a blockchain. Each node (a computer connected to the network using a client that verifies and relays transactions) gets a copy of the blockchain, so it's nearly impossible to manipulate this network or hack it. Crypto requires consensus to change rules on the blockchain; no third-party organization can do so on its own.
Now that there is a clear understanding of what both currency systems are, identifying the differences between fiat processors and crypto processors will be much easier.
Crypto and Fiat Processor: What Are They? How Do They Differ?
Essentially, all payment processors are services that manage the transaction process for credit or debit cards. This kind of service acts as an intermediary between the merchant and the consumer, facilitating the exchange of payment data.
As the name implies, fiat processors are software that offers transaction services in traditional fiat currencies. Providers of these services link the merchant directly or indirectly (through card associations) to banking institutions. Thus, such processors act as a bridge between the merchant and the traditional fiat banking system. Some top-rated fiat payment processors include Square, Stripe, and PayPal.
And what about crypto processors? Crypto payment processors are software applications built on blockchain networks to facilitate the transfer of cryptocurrency assets. Simply put, crypto payment processors are responsible for processing crypto transactions on websites.
In both cases, the payment processor is responsible for authenticating and processing a transaction. Payment services record and transmit data securely, authenticate credentials, enable money transfers, and issue confirmations to parties involved.
Cryptocurrency processing also has an extra step that involves writing the transaction to a blockchain network. Using crypto processors, companies can accept Bitcoin payments online without the need to deal with the complex blockchain manually.
As soon as the payment processor confirms that the credit card details have been verified, it sends this information back to the fiat or crypto payment gateway. The merchant then completes the payment transaction. This process is the same for both types of processors.
As already mentioned, among the biggest differences between cryptocurrencies and fiat money is that fiat is governed by the state, whereas crypto is decentralized and anonymous.
In Which Aspects Do Crypto Processors Win Over Fiat Processors :
Even though fiat processors are far more common, many crypto enthusiasts believe that the future lies in cryptocurrency payments and blockchain technology. And not without reason - cryptocurrency processors have a number of significant advantages over fiat ones.
Lower transaction costs of crypto payments make them much cheaper than traditional fiat payment processors. According to a Forbes article comparing popular fiat processors, all of the top-rated ones charge transaction fees of about 3%. In the meantime, many cryptocurrency payment processors charge a flat 1% fee, some as low as 0.5%. The fact that all cryptocurrency transactions take place on a blockchain allows providers to reduce costs and offer lower prices significantly.
Another advantage is that cryptocurrency payment processors have made it possible to easily and seamlessly transact between countries. This is a huge benefit for businesses and consumers alike, as it opens up a whole new world of opportunities for international trade. In contrast, cross-border fiat payments are usually slow and expensive.
It's also worth noting that crypto processors can be used to transfer accepted cryptocurrency into the merchant's preferred currency. It is possible, for instance, for a merchant to accept Ethereum payments but withdraw money in US dollars.
It is evident that fiat processing services will be necessary for a very long time. Some service providers, however, are following trends and adopting Bitcoin technology to enable crypto services. For example, according to the company's press release, PayPal, one of the most well-known payment companies in the world, announced that it is introducing cryptocurrency support on its platform.
There is no denying that cryptocurrency payments are gaining popularity and have several benefits over conventional fiat-based payments. However, the biggest challenge facing cryptocurrencies is the lack of widespread acceptance. This has been attributed to issues such as security and volatility. Nevertheless, as cryptocurrencies become more popular, more merchants will want to receive cryptocurrency payments, creating more opportunities for their business growth.