What are crypto payment gateways, and how do they work?

Key takeaways

• Crypto payment gateways enable businesses to accept cryptocurrency payments from customers. 

• They act as intermediaries, converting crypto payments into the business’s preferred currency (crypto or fiat). 

• Crypto payment gateways reduce transaction fees compared to traditional banking systems and provide access to a global customer base.

• These gateways leverage blockchain technology to offer secure and faster transactions with fewer intermediaries, enhancing transparency and reducing the risk of fraud.

The cryptocurrency industry faces significant challenges, particularly in the area of seamless conversion between digital assets and fiat currencies. This issue makes it difficult for businesses and users to adopt cryptocurrencies for everyday transactions. 

Crypto payment gateways address this need by simplifying the process of converting digital currencies into fiat, enabling smooth and efficient transactions. 

This article explores what crypto payment gateways are, how these gateways work, and their pros and cons. 

Cryptocurrency payment gateways, explained

A cryptocurrency payment gateway is a digital transaction facilitator that enables businesses to accept crypto payments while ensuring seamless processing and settlement.

These gateways act as intermediaries between customers who pay with digital assets and merchants who receive crypto payments, helping businesses navigate the complexities of blockchain transactions. Examples of crypto payment gateways include BitPay, Coinbase Commerce and PayPal’s crypto payment service.

One of the key advantages of using a crypto payment gateway is that businesses can receive payments in cryptocurrency while opting to convert them into fiat currency, which is then deposited into their bank accounts. This eliminates concerns about crypto price volatility while allowing merchants to offer additional payment options to their customers.

Are crypto payment gateways necessary for accepting digital currencies?

While crypto payment gateways simplify the process of accepting digital assets, they are not the only way for businesses to receive cryptocurrency payments.

Merchants can choose to accept crypto directly by using personal wallets, bypassing third-party processors. However, without a payment gateway, they would need to manually manage transactions, track payments on the blockchain, and handle currency conversion if they wish to receive fiat instead of crypto.

For businesses looking to integrate cryptocurrency payments alongside traditional methods, crypto payment gateways provide an efficient solution. These services offer real-time transaction processing, automatic conversion to fiat and additional security features that protect businesses from fraudulent transactions.

However, be aware of fees. Coinbase Commerce charges a 1% fee on all crypto payments. After your customer completes a payment, this fee is collected in the settlement currency of the transaction.

For example, if your customer makes a $250 purchase in Bitcoin (BTC), and your settlement currency is in euros, it would collect 2.5 euros (1% of the payment amount) as a fee.

Types of crypto payment gateways: Custodial vs. non-custodial

Crypto payment gateways can be classified into two main types: custodial and non-custodial. The choice between these options depends on a business’s preferences regarding security, control and ease of use.

Custodial crypto payment gateways

Custodial gateways function similarly to traditional payment processors. They receive and temporarily hold payments before allowing merchants to withdraw funds to their crypto wallets or convert them to fiat currency. This model is ideal for businesses that want a streamlined experience without dealing with direct wallet management.

Key characteristics of custodial payment gateways include:

• Automated fiat conversion: Payments can be converted to local currency instantly, mitigating volatility risks.

• User-friendly dashboard: Merchants can manage transactions, track payment history, and withdraw funds through an online portal.

• Compliance features: Many custodial gateways implement Know Your Customer (KYC) and Anti-Money Laundering (AML) measures to meet regulatory requirements.

Non-custodial crypto payment gateways

Non-custodial payment gateways provide merchants with full control over their funds by immediately transferring payments to their wallets without holding them on behalf of the business. These solutions prioritize decentralization and security, allowing merchants to manage their own private keys.

Key characteristics of non-custodial payment gateways include:

• Enhanced security: Funds are not stored by the gateway, which reduces the risk of hacks or third-party control.

• Direct crypto transfers: Payments are sent straight to the merchant’s wallet, which eliminates withdrawal processes.

• Greater privacy: Merchants can accept payments without undergoing extensive KYC verification.

• Lower fees: Transaction costs are reduced for both parties since…