Square Inc, (SQ) a San Francisco-based company financial services and mobile payment company launched in 2009 by Twitter (TWTR) founder Jack Dorsey, has introduced the option to buy and sell Bitcoin through its Square Cash app.
Credit Suisse research analysts Paul Condra and Mrinalini Bhutoria have given the stock a neutral rating. In a report released this week, the duo highlighted that this move could make Square an early-mover position as a mainstream fin-tech company.
"Impact of this latest move is uncertain, but could give SQ [Square Inc] early mover advantage: While the function currently appears to only permit buying and selling of bitcoin via an exchange with no ability to purchase other coins or to send coins directly to other Cash users, we believe it could place SQ in an early-mover position as a mainstream fin-tech company providing crypto-currency services," the report said. "SQ is also well positioned to enable crypto transactions at the physical point of sale."
In a statement, Square has confirmed the pilot and says its customers are interested in using the app to buy Bitcoin and that it believes cryptocurrency can expand participation in the global financial system. PayPal (PYPL) is also well-positioned to provide similar services.
"Not only is this positive for mainstream Bitcoin adoption, but Square is well positioned to capture a big part of that market," said Luke Besser principle of Cosimo LLC, a cryptocurrency hedge fund. "It will be interesting to see how they handle the regulatory side of things as this implementation rolls out."
The Credit Suisse analysts highlighted that Square is aggregating the bitcoins of its users rather than creating individual private bitcoin addresses per user. "This is similar to how the popular app Coinbase works," Condra and Bhutoria said. "As of November, Coinbase reported having almost 12 million users, up from 7 million in June."
According to the duo, Coinbase charges roughly 1.5% per bitcoin purchase, and the underlying exchange fees (i.e., network fees) are in the range of 75 to 100 basis points. We expect Square could be using various bitcoin exchanges to complete purchases.
Regulatory risks are flagged
The huge risk flagged by the Credit Suisse analysts is regulation, which could limit its ability to provide the service or outright ban it.
James Song, founder of ExsulCoin, a firm using blockchain technology to solve the refugee crisis, noted that the potential regulatory risks could impede Square's foray into bitcoin payments.
"When a company does crypto to fiat conversions, it runs the risk of being labeled as a commodities exchange, and commodities exchanges are highly regulated," Song said. "This is a challenge the crypto community is working to solve, because everyone holding bitcoin wants to be able to spend it everywhere, in every country they visit, and that's just not the case right now."
Song explained that Square is also going to have to think about banking restrictions. -- not just for itself, but also for the merchants who use accept payments through Square.
"Right now, lots of banks are hostile towards cryptocurrencies because they don't know how the U.S. government will treat it in the future, especially in regards to anti-moneylaundering laws," he said. "They are closing any and all accounts with any kind of cryptocurrency activity, preemptively."
Song warned that merchants using Square can also have their accounts closed if Bitcoin payments continue to raise red flags at banks.
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