A deeper look into Starbucks’ crypto plans.
The United States coffeehouse chain Starbucks is one of the most mainstream companies to look into crypto, and its intentions have finally been confirmed this week: The company has teamed up with Microsoft to track its beans with a blockchain.
Moreover, reports say that the coffee giant might start accepting bitcoin (BTC) payments in its U.S. branches later this year. So, is the long-awaited mainstream adoption finally coming to the crypto market?
As many mainstream companies, Starbucks leans toward the “blockchain before bitcoin” approach
Starbucks’ relationship with crypto could be traced back to January 2018, when its executive chairman and former CEO Howard Schultz discussed the subject during the company’s Q1 2018 earnings call.
Schultz appeared skeptical about bitcoin at the time, saying that it won’t be “a currency today or in the future.” However, the chairman suggested that some other cryptocurrencies might succeed instead:
“I’m bringing this up because as we think about the future of our company and the future of consumer behavior, I personally believe that there is going to be a one or a few legitimate trusted digital currencies off of the blockchain technology.”
Those cryptocurrencies, Schultz added, would have to be legitimized by a brick-and-mortar environment.
In an interview with Fox Business that aired in March 2018, Schultz continued to discuss cryptocurrencies and their underlying technology. “I think blockchain technology is probably the rails in which an integrated app at Starbucks will be sitting on top of,” the executive chairman declared.
First crypto steps: Bakkt, BTC payments
In August 2018, the Seattle-headquartered coffee giant revealed itself as one of Bakkt’s key partners, alongside Microsoft and consultancy Boston Consulting Group. Bakkt is a digital assets platform created by Intercontinental Exchange (ICE), which is expected to launch later this year.
Notably, according to the original press release, Starbucks would not only be working with Bakkt to create its platform, but it would also be using it to accept crypto payments in its coffeehouses.
“As the flagship retailer, Starbucks will play a pivotal role in developing practical, trusted and regulated applications for consumers to convert their digital assets into US dollars for use at Starbucks,” said Maria Smith, vice president of partnerships and payments at Starbucks.
The news provoked bullish headlines akin to CNBC’s “New Starbucks partnership with Microsoft allows customers to pay for Frappuccinos with bitcoin.” However, the coffee retailer was quick to set the record straight. A Starbucks spokesperson told Vice on the same day the press release was published:
“It is important to clarify that we are not accepting digital assets at Starbucks. Rather the exchange will convert digital assets like Bitcoin into US dollars, which can be used at Starbucks. At the current time, we are announcing the launch of trading and conversion of Bitcoin. However, we will continue to talk with customers and regulators as the space evolves.”
“Customers will not be able to pay for Frappuccinos with bitcoin,” the spokesperson specifically stressed.
In March, new details about Starbucks’ partnership with Bakkt surfaced, confirming its intention to accept BTC-based payments once an equity deal between the two is struck.
Thus, according to The Block’s report citing anonymous sources, Starbucks will install Bakkt’s payment software in its branches, which will allow customers to pay with digital assets. Such payments will be instantly converted to fiat, however, so that the coffee giant does not have to deal with crypto, supposedly to simplify accounting. The option will be available exclusively for U.S. customers first, the article suggests.
That’s “no different” than other BTC merchant programs out there and hence is not a major case of retail adoption, says Michael Dowling, CEO and founder of FairX, a financial services company involved with banking and digital assets, and former chief technology officer at IBM’s blockchain arm. He told Cointelegraph:
“No one wants to hold BTC because of its USD volatility, but they love how ‘easy’ it is to receive value on BTC as long as it converts immediately to USD.”
Dowling suggested that it could be an attempt for Starbucks and Bakkt to bypass Visa and MasterCard’s interchange fees through the initiative, which can be helpful to merchants, but nonetheless should come with its own shortcomings:
“As a merchant, you’re just betting the exchange rate will be neutral or in your favor when it comes time to redeem. Oh yeah, and hopefully the redemption agent will always be able to provide USD liquidity.”
Eyal Shani, a blockchain researcher at Aykesubir, is also too skeptical to consider the initiative as a case of mainstream adoption, but admits that it could pave the way for further cases.
“Accepting bitcoin and immediately transferring it to fiat is simply enjoying the rate and exchange fees on Starbucks’ side,” he told Cointelegraph. “They can accept any currency together with the right fee to process it later. With that being said, any new real use case of bitcoin could serve as another step for larger adoption later down the road, if that happens.”
Charlie Smith, an analyst at asset management firm Blockforce Capital, however, thinks that Starbucks’ expected arrival into the field of BTC payments is a largely positive thing for the crypto market as it is. “While some may try to downplay this news because Starbucks will be instantly converting bitcoin payments into fiat currency, we do not believe it diminishes the significance of this news at all,” he wrote to Cointelegraph in an email, adding:
“We believe that Starbucks’ reported adoption of BTC as an accepted form of retail payment is a clear case of retail adoption. The fact that customers will be able to pay using bitcoin not only helps increase the overall usability of the currency but should also increase awareness and understanding of bitcoin and cryptocurrencies in general, given Starbucks’ market share. Additionally, if a retail corporation on the scale of Starbucks has determined that it is in their best interest to accept bitcoin as a form of payment, it is a clear signal that there is a significant consumer population ready to use cryptocurrency as a form of payment on a day-to-day basis.”
As for the immediate conversion of BTC, Smith said it should be similar to how a U.S. company converts payments made in euros into U.S. dollars: “There is a big difference between retail adoption of bitcoin or other cryptocurrencies and those same corporations being able or willing to deal with the exchange rate risks inherent in any multinational organization. Starbucks instantly converting bitcoin payments into fiat currency does not impact the retail use case for bitcoin any more so than a US company converting payments made in Euros into USD impacts the retail use case for Euros.”
The analyst summarized:
“Starbucks adoption is a leap forward for cryptocurrencies allowing people to utilize their bitcoin for more than just an investment, which should hopefully lead to further adoption.”
Bean-to-cup initiative: arming farmers with a blockchain
This week, tech news publication GeekWire reported that Starbucks will implement tech giant Microsoft’s recently announced Azure Blockchain Service to track coffee production.
First announced in 2018, the initiative is called “bean to cup.” Initially, Starbucks mentioned that it was considering using a “traceability technology” for its coffee-tracking system, without specifying that it necessarily would be a blockchain.
Now, more details have been unveiled. The Azure-powered blockchain system will purportedly allow customers to track the production of their coffee and allegedly provide coffee farmers from Rwanda, Colombia and Costa Rica with more financial independence.
Additionally, Starbucks noted that it would make the pilot program open source to disseminate their findings. Other projects announced in collaboration with Microsoft include predictive drive-thru ordering and connecting Internet-of-Things (IoT)-enabled equipment at different cafe locations.
Microsoft’s Azure Blockchain Service was announced earlier in May. It is a blockchain-as-a-service (BaaS) platform that allows users to build blockchain applications on a preconfigured network. It currently supports Quorum, the Ethereum-based platform of JPMorgan Chase. The new Microsoft BaaS aims to streamline the use of consortium blockchain networks, from creation to modification.
Explaining why Starbucks could pick the Microsoft blockchain solution over other ones, Shani suggested that it could be a move to strengthen the partnership:
“Although no relevant information was published, we can safely assume that the choice of Microsoft’s blockchain services over other options were mainly affected by the current partnerships the firms hold rather than the technical differences of blockchain on Azure vs blockchain managed services on AWS, at this level of maturity of those services.”
Indeed, the two companies seem to have a close relationship. Starbucks CEO Kevin Johnson is a former Microsoft executive who ran the worldwide sales and the Windows divisions before joining the coffeehouse chain in 2015.
Smith, on the other hand, argues that Microsoft’s product is simply better for Starbucks than other options on the market. “Azure provides the ability to develop and implement blockchain technology into existing infrastructure in a faster and less resource intensive manner,” comparing to Quorum or other existing blockchain protocols, he told Cointelegraph.
“This allows Starbucks to focus on its own processes while outsourcing the responsibilities that may be best handled by a blockchain-savvy third party.”
Dowling of FairX suggested that Microsoft’s blockchain platform could seem more reputable to Starbucks than Quorum due to its roots:
“In enterprise IT, there’s an old saying ‘no one gets fired for buying IBM.’ Basically, Quorum is written and maintained by JPM, which is a bank and not a SW dev shop. So, if I’m an enterprise customer, I’m going to feel much more comfortable with a Microsoft branded version – along with their support structure – over the JPM offering, even though they might be the same piece of software. JPM knows that, and that’s why they partnered with Microsoft. That’s also the reason R3 and IBM did the same with Corda and Fabric.”
Why Starbucks would need a blockchain
However, Dowling is not sure why Starbucks would need a blockchain in the first place. He suggested that it could represent a potentially efficient way to track which farmer is sourcing the best beans as “voted” by customers, but could not think of any other real case use that could be achieved with blockchain technology specifically:
“To be honest, I find the entire program, as explained in the press, very confusing and I’m not sure what problem they are trying to solve. […] Why does it need to be decentralized? Why does this program — of people voting for beans, I think — require the application of public/private keys and a distributed database?”
Indeed, accomplishing this goal could be done without using blockchain, agrees Smith of Blockforce Capital, “but incorporating an enterprise blockchain solution is more efficient than alternatives.” He went on:
“With this initiative, Starbucks is looking to greatly bolster the transparency of its supply chain. […] The proposed solution can be compared to how other blockchain networks, such as the bitcoin network, validate a large number of transactions without a centralized authority. The underlying technology is similar, its application is just different.”
There are other major cases of corporations successfully incorporating blockchain, the analyst adds, arguing that the technology should be the right fit for the “fair trade” concept that is popular within the coffee industry in particular:
“The IBM Food Trust program works with Walmart and other major food producers to track food production in order to help stem food-borne illnesses. Starbucks is tackling a similar problem but for a different reason. Whereas food safety isn’t the root cause, Starbucks wants to provide customers the opportunity to track where the coffee they consume is being produced. Any person that is even a casual coffee consumer has heard the term ‘fair trade’ used quite frequently. The concept of fair trade has gained significant attention over the past several years in a number of industries, with coffee being one of, if not the largest industry to focus on fair trade. Through the ‘bean-to-cup’ initiative’s use of blockchain, customers will be able to personally verify where their coffee is coming from and pinpoint specific producers that are producing coffee sustainably and fairly, as well as those that are creating exceptional coffee. A customer drinking Starbucks today has little to no idea who is producing the coffee they are consuming, and can only rely on a sticker to ‘verify’ that coffee is fair trade. In essence, Starbucks is looking for a way to provide greater accountability and that can be accomplished with an enterprise blockchain solution.”
Similarly, Shani believes that the “bean-to-cup” initiative is part of the general “food trust” trend empowered by blockchain:
“The use of blockchain in the food supply chain is a very interesting one for several reasons. If you’re a building constructor, you’re very likely to buy your hammers all at one place. Firms like Starbucks source their coffee beans from hundreds of thousands of small farmers to meet demand. Some of those farmers won’t even be registered business in their home countries. It is impossible to maintain trust when dealing with such large scale long-branched supply chain. Instead of making one entity to hold all the data and attest it’s correct, a smarter idea would be to create a collaborative blockchain based database where every party is liable to their part.”
However, the blockchain researcher added that even a centralized database could create new opportunities within the coffee industry, considering “the state in which the legacy systems are today.” Shani also stressed that neither the exact architecture of the solution nor the trust model have been disclosed by Startbucks at this point.
The potential financial opportunities for coffee farmers mentioned in the press release and the GeekTimes report are also somewhat unclear.
“The only thing I can think of here is there’s a payment rail component that reduces the cost of cross-border transactions,” Dowling told Cointelegraph. “Though they make no mention of that. Or there’s some kind of ‘bean-coin’ the farmers get, and they redeem that for fiat? If that’s the case, why blockchain?”
Given that the main benefit of the “bean-to-cup” initiative is that it can provide farmers increased transparency and a large amount of new data, Smith suggested, it could allow them to build their unique brands “outside the overall Starbucks name.” He continued:
“Currently, when you buy coffee from Starbucks the only information available is the type of coffee and the country where it was grown. By utilizing blockchain, Starbucks will be able to provide its customers with endless amounts of new information, such as when the coffee was harvested, when it was shipped, what farm it came from, and potentially even the farming techniques used as that farm.
“This will provide customers with greater power to support certain farmers, whether because of sustainability or simply because that farmer makes the best tasting coffee. This, in turn, should allow the more than 380,000 farms to differentiate themselves and build a unique brand outside of the overall Starbucks name. From the farmers’ standpoint, this new service should provide valuable data on consumer preferences and taste profiles, which will allow farmers to form data-driven conclusions and help them make more profitable decisions.”
Cointelegraph has reached out to Starbucks to clarify why it would need a blockchain and how exactly it could benefit the coffee farmers, among other things, but has not heard back as of press time.