Encrypted payment channel: superconductor for payment

Encrypted channels are the superconductor of payments, and the system provides faster settlement times, lower fees and the ability to operate seamlessly across borders.

Written by: Dmitriy Berenzon

Compiled by: Will Awang

As time approaches 2025, blockchain has gradually built a financial payment ecosystem parallel to the traditional financial system. The encrypted payment channel already carries 200 billion yuan in stablecoin volume and US$5.62 trillion in stablecoin transaction volume in 2024. This is Visa’s adjusted data and is more suitable for payment itself. It is almost the same as Mastercard’s annual transaction volume. According to ARK Invest’s report, in 2024, the annualized transaction volume of stablecoins will reach US$15.6 trillion, which is approximately 119% and 200% of Visa and Mastercard respectively.

In any case, the popularity and large-scale adoption of crypto payments is an indisputable fact, especially represented by Stripe’s US$1.1 billion acquisition of stablecoin service provider Bridge. As Stripe CEO Patrick Collison said, the encrypted payment channel is a superconductor of payments. They form the basis of a parallel financial system that provides faster settlement times, lower fees and the ability to operate seamlessly across borders. It took a decade for the idea to mature, but today we see hundreds of companies working to turn it into reality. In the next decade, we will see crypto channels becoming the core of financial innovation and driving global economic growth.

Previously, we have introduced the Web3 encrypted payment system built with blockchain as the infrastructure through several Web3 payment articles:

• Web3 Payment Ten Thousand Words Research Report: The all-army attack of industry giants is expected to change the existing encryption market landscape, introduced how Web3 payments are built and the layout of market giants in 2023;

• Web3 Payment Ten Thousand Words Research Report: From e-cash, tokenized currency, to the future of PayFi, systematically introduces how Web3 payments have gone from electronic cash to tokenized currency/digital dollar, and its future development trends. Also refer toCircle 2025 USDC Market Economy Report: The Value of Digital Dollar on the Internet。

• Web3 Payment Ten Thousand Words Research Report: How will stablecoins be interpreted in 2025Let’s see what happens from the perspective of a stablecoin.

The subsequent articles will be viewed from the perspective of market adoption in global crypto payment regions. After all, the different logics of financial efficiency improvement in the northern hemisphere and anti-inflation value storage in the southern hemisphere have created a situation where you are in the red building and I am in the west. situation. In addition, since payments and currency are both on the chain, how to combine encrypted payments with DeFi to achieve maximum effectiveness of payments is also a future trend, which is what we call PayFi or DeFi 2.0? Welcome to communicate, so stay tuned.

There are still many things that need to be solved, as Kevin’s boss listed:

• transaction market: $16 trillion

• trade finance: $89 trillion

• remittance $4 trillion prefund

• The average international transfer rate is close to 7%

• 3-5 Business day arrives

• 1.4 billion people have no bank accounts

So this compilation of Dmitriy Berenzon’s article Cryptorails: Superconductors for Payments looks at how blockchain-based encrypted payment channels can bring benefits to traditional payment channels from the perspective of traditional payments, and provides multiple real-life application scenarios and future predictions are worth reading in depth.

When Satoshi Nakamoto released Bitcoin in 2009, he envisioned using encrypted networks for payments, allowing payments to flow freely on the Internet like information. While this was the right direction, the technology, economic models and ecosystems at the time were not suitable for commercializing this use case.

Fast forward to 2025, and we are witnessing the convergence of several important innovations and developments that have made this vision inevitable: Stable coins have been widely adopted by consumers and businesses, market makers and over-the-counter trading desks can now easily hold stable coins on their balance sheets, DeFi apps have created a powerful on-chain financial infrastructure, and large amounts of gold and cash currency acceptance exist around the world, block space is faster and cheaper, embedded wallets simplify the user experience, and a clearer regulatory framework reduces uncertainty.

Today, we have the opportunity to build a new generation of payment companies that leverage the power of “encrypted channels” to achieve better unit economic benefits than traditional financial payment systems, which are subject to multiple rent-seeking intermediaries and outdated infrastructure. These crypto channels are forming the backbone of a parallel financial system that operates in real time 24/7 and is essentially global.

In this article, Dmitriy Berenzon will:

• Explain key components of the traditional financial system;

• Overview of the current main use cases for encrypted channels;

• Discuss obstacles and challenges to continued adoption;

• Share forecasts for the market outlook five years from now.

To further inspire this article, it’s worth noting that there are many more companies operating here than you might think. As of the time of writing, there are approximately 280 companies:

1. Existing payment channels

To understand the importance of crypto channels, one must first understand the key concepts of existing payment channels and the complex market structures and system architecture in which they operate. If you are already familiar with these, feel free to skip this section.

1.1 Card Networks

Although the topology of credit card organization networks is complex, the main players in credit card transactions have not changed over the past 70 years. Essentially, credit card payments involve four main players:

1. merchants

2. cardholder

3. issuing bank

4. acquiring bank

The first two are simple, but the last two are worth explaining.

The issuing bank or issuer provides a credit or debit card to the customer and authorizes the transaction. When a transaction request is made, the issuing bank determines whether to approve it by checking the cardholder’s account balance, available credit limits and other factors. Credit cards essentially lend funds from the card issuer, while debit cards transfer funds directly from your account.

If merchants want to accept credit card payments, they need aAcquisition institution (Acquirer)(Can be a bank, payment processor, gateway, or independent sales organization), which is an authorized member of the credit card organization network. The term acquirer stems from its role in collecting money on behalf of merchants and ensuring that these funds reach merchant accounts.

The credit card organization network itself provides channels and rules for credit card payments. They connect acquiring institutions to issuing banks, provide clearing functions, establish participation rules, and determine transaction fees. ISO 8583 remains the main international standard, which defines how credit card payment information (such as authorizations, billing, refunds) is structured and exchanged between network participants. In a network environment, card issuers and acquirers are like their distributors. Card issuers are responsible for putting more cards into users ‘hands, while acquirers are responsible for putting as many card terminals and payment gateways as possible into merchants’ hands so that they can accept credit card payments.

In addition, there are two types of credit card organization networks: “open loop” and “closed loop”. Open-loop networks like Visa and Mastercard involve multiple parties: issuing banks, acquiring banks and the credit card organization network itself. The credit card organization network facilitates communication and transaction routing, but is more like a market that relies on financial institutions to issue credit cards and manage customer accounts. Only banks are allowed to issue credit cards for open-loop networks. Each debit or credit card has a bank identification number (BIN) that is provided to banks by Visa, while non-bank entities like PayFaces require a “BIN sponsor” to issue credit cards or process transactions.

In contrast, closed-loop networks like American Express are self-sufficient, with one company handling all aspects of the transaction process. They usually issue their own cards, are their own bank, and provide their own merchant acquiring services. The general consideration is that closed-loop systems provide more control and better profits, but at the expense of more limited acceptance by merchants. In contrast, open-loop systems provide wider adoption, but at the expense of control and benefit sharing among the participants.

Source: Arvy

The economics of payment is very complex, and there are multiple levels of fees in the network.Exchange Fees (Exchange Fees)Is part of the payment fee charged by the issuing bank to provide access to its customers. Although technically the acquiring bank pays the exchange fee directly, the cost is usually passed on to the merchant. Card organization networks usually set exchange fees, which often account for the majority of the total cost of payment. These fees vary widely among regions and transaction types. For example, in the United States, consumer credit card fees range from ~1.2% to ~3%, while in the European Union, the cap is 0.3%. Also,Card Set Fees (Scheme Fees)It is also determined by the card organization network to compensate for the network’s ability to connect acquirers and card issuing banks, and to act as a “channel” to ensure the accurate flow of transactions and funds. andSettlement FeesTo be paid to the acquirer, it is usually a percentage of the transaction settlement amount or transaction volume.

While these are the most important players in the value chain, the reality is that today’s market structures are much more complex in practice:

Source: 22nd

In the above link, there are also several important participants:

• Payment GatewayEncrypt and transmit payment information, connect payment processors and acquirers for authorization, and communicate transaction approvals or rejections to companies in real time.

• Payment ProcessorProcess payments on behalf of the acquiring bank. It forwards transaction details from the gateway to the acquiring bank, which then communicates with the issuing bank through the card organization network to obtain authorization. The payment processor receives the authorization response and sends it back to the gateway to complete the transaction. It also handles settlement, the process by which funds actually enter a merchant’s bank account. Typically, a company sends a batch of authorized transactions to a payment processor, who submits the transactions to the acquiring bank to initiate a transfer of funds from the issuing bank to the merchant’s account.

• Payment Facilitator or Payment Service ProviderLaunched around 2010 by PayPal and Square, it is like a small payment processor between merchants and acquiring banks. It effectively acts as an aggregator by bundling many smaller merchants into its systems to achieve economies of scale and simplifies operations by managing the flow of funds, processing transactions and ensuring payments. PayFaces holds a direct merchant ID from the card organization network and assumes on-site, compliance (e.g., anti-money laundering laws) and underwriting responsibilities on behalf of the merchants it works with.

• Orchestration PlatformIt is a middleware technology layer that simplifies and optimizes merchants ‘payment processes. It connects to multiple processors, gateways, and acquirers through a single API, improving transaction success, reducing costs, and improving performance by routing payments based on factors such as location or fees.

1.2 Automated Clearing House

Automated Clearing House (ACH)It is one of the largest payment networks in the United States and is actually owned by the banks that use it. It was originally established in the 1970s, but really became popular when the U.S. government began using it to send out social protection payments, which encouraged banks across the country to join the network. Today, it is widely used for payroll processing, bill payments and B2B transactions.

There are two main types of ACH transactions: remittances and withdrawals. Users are using the ACH network when they are receiving their salary or using a bank account to pay bills online. The process involves multiple participants: the company or individual initiating the payment (originator), their bank (ODFI), the receiving bank (RDFI), and the operator acting as the operator for all these transactions. In the ACH process, the initiator submits the transaction to ODFI, which then sends the transaction to the ACH operator, which then switches the transaction to RDFI. At the end of each day, the operator calculates the total net settlement for its member banks (the Federal Reserve manages the actual settlement).

Source: U.S. Payment System: A Guide for Payment Professionals

One of the most important things about ACH is how it handles risks. When a company initiates ACH payments, its bank (ODFI) is responsible for ensuring everything is legal. This is especially important for withdrawals. Imagine if someone used your bank account information without permission. To prevent this from happening, regulations allow disputes to be filed within 60 days of receiving a statement, and companies such as PayPal have developed clever verification methods, such as making small test deposits to confirm account ownership.

The ACH system has always strived to meet modern needs. In 2015, they launched “Same Day ACH” to process payments faster. Despite this, it still relies on Batch Processing rather than Real-www.gushiio.com Transfer and has limitations. For example, you cannot send more than $25,000 in a single transaction, and it does not apply to international payments.

1.3 Wire Transfer

Wire transfers are at the heart of high-value payment processing, and the two major systems in the United States are Fedwire and CHIPS. These systems handle time-sensitive, guaranteed payments that require immediate settlement, such as securities transactions, major business transactions and real estate purchases. Once executed, wire transfers are usually irrevocable and cannot be cancelled or revoked without the recipient’s consent. Unlike conventional payment networks that process transactions in bulk, modern wire transfers useReal-time full settlement system (Real-www.gushiio.com Gross Settlement, RTGS), which means that each transaction is settled separately when it occurs. This is an important feature because the system processes hundreds of billions of dollars every day, and banks using traditional net settlements are at too high a risk of intraday failure.

Fedwire is an RTGS system that allows participating financial institutions to send and receive same-day fund transfers. When a company initiates a wire transfer, its bank verifies the request, debites the account, and sends a message to Fedwire. The Federal Reserve Bank then immediately debited the sending bank’s account and credited it to the receiving bank’s account, which then credited it to the final payee’s account. The system operates weekdays from 9 p.m. to 7 p.m. EST the previous day and is closed during weekends and federal holidays.

CHIPS is owned by large U.S. banks through clearing houses and is a private sector alternative, but is smaller and serves only a few large banks.

Unlike Fedwire’s RTGS method, CHIPS is aNeting Settlement SystemThis means that the system allows multiple payments between the same counterparty. For example, if Alice wanted to send $10 million to Bob and Bob wanted to send $2 million to Alice, CHIPS would combine these payments into a single $8 million payment from Bob to Alice. Although this means that CHIPS payments take longer than real-time transactions, most payments are still settled within days.

To complement these systems, SWIFT is not actually a payment system, but a global information network for financial institutions. It is a member-owned cooperative organization, with shareholders representing more than 11,000 member organizations. SWIFT enables banks and securities companies around the world to exchange secure structured information, much of which initiates payment transactions across various networks. According to Statrys, a SWIFT transfer takes approximately 18 hours to complete.

In the general process, the sender of funds instructs its bank to send a wire transfer to the recipient. The value chain below is a simple case where two banks belong to the same wire transfer network.

Source: U.S. Payment System: A Guide for Payment Professionals

In more complex cases, especially cross-border payments, transactions need to be passed throughCorrespondent Banking Relationshipto perform, usually using SWIFT to coordinate payments.

Source: Matt Brown

2. Realistic use cases

Now that we have a basic understanding of traditional payment channels, we can focus on the advantages of encrypted payment channels.

When the use of traditional U.S. dollars is limited but the demand for U.S. dollars is strong, the encrypted payment channel is most effective. Think of places where dollars are needed to preserve wealth or as a bank alternative, but traditional dollar bank accounts are not easily available. These are countries that often have unstable economies, high inflation, currency controls, or underdeveloped banking systems, such as Argentina, Venezuela, Nigeria, Turkey and Ukraine. In addition, one can argue that the U.S. dollar is a superior store of value compared to most other currencies, and consumers and businesses often choose the U.S. dollar because it can be easily used as a medium of exchange or exchanged into local fiat tender at a point of sale.

The advantages of encrypted payment channels are also most obvious in payment globalization scenarios, because blockchain networks are not restricted by national borders and rely on existing Internet connections to provide global coverage. According to the World Bank, there are currently 92 RTGS systems in operation around the world, with each system usually owned by its own central bank. Although they are ideal for handling domestic payments within these countries, the problem is that they cannot “communicate with each other.”Cryptographic payment channels can serve as a glue between these different systems or can be extended to countries that do not have these systems.

Crypto payments are also particularly suitable for payments with a certain level of urgency or generally high time preferences. This includes cross-border supplier payments and foreign aid payments.This can also be helpful in scenarios where the correspondent banking network is particularly inefficient.For example, despite geographical proximity, sending money from Mexico to the United States is actually more difficult than sending money from Hong Kong to the United States. Even in developed corridors such as the United States to Europe, payments often need to go through four or more correspondent banks.

On the other hand, encrypted payment channels are less attractive for domestic transactions in developed countries, especially where credit card usage is high or real-time payment systems already exist. For example, intra-European payments proceed smoothly through SEPA, while the stability of the euro eliminates the need for dollar-denominated alternatives.

2.1 Merchant Acceptance

Merchant acquiring can be divided into two different use cases: front-end integration and back-end integration. In the front-end approach, merchants can directly accept cryptocurrency as a payment method for customers. Although this is one of the oldest use cases, historically it has not seen much transaction volume because very few people hold cryptocurrency and even fewer want to spend it, and for those who hold cryptocurrency, the useful options are limited. Today’s market is different because more people hold cryptoassets (including stablecoins) and more merchants are accepting them as payment options because it allows them to reach new customer bases and ultimately sell more goods and services.

From a geographical perspective, the majority of transaction volume comes from companies selling products to consumers in countries that were early adopters of cryptocurrencies, usually emerging markets such as China, Vietnam and India. From a merchant perspective, most of the demand comes from online gambling and retail stockbrokerage companies that want to reach out to emerging markets, Web2 and Web3 markets such as watch suppliers and content creators, and users of real-money games such as fantasy sports and sweepstakes.

The “front-end” merchant acceptance process is usually as follows:

• PSP usually creates wallets for merchants after KYC/KYB;

• Users send cryptocurrency to PSP;

• The PSP converts cryptocurrency into legal tender through a liquidity provider or stablecoin issuer and sends funds to the merchant’s local bank account, possibly using other licensed partners.

The main challenge hindering the continued adoption of this use case is psychological, as cryptocurrencies do not seem to be “real” to many people. Two major user roles need to be addressed: one is completely indifferent to its value and wants to treat everything as a magical Internet currency; the other is pragmatic and deposits funds directly in the bank.

In addition, in the United States, it will be more difficult for consumers to adopt crypto payments because credit card rewards actually pay consumers a 1% to 5% purchase rebate. There have been attempts to persuade merchants to promote crypto payments directly to consumers as an alternative payment method to credit cards, but so far they have failed. While lowering exchange rates is a good idea for merchants, it is not a problem for consumers. The merchant customer exchange was launched in 2012 and failed in 2016, which is why they were unable to launch the consumer side with flywheel.In other words, it is difficult for merchants to directly incentivize users from credit card payments to crypto-asset payments, because payments are already “free” to consumers, so the value proposition should be resolved first at the consumer level.

In the end approach,Encrypted payments can provide merchants with faster settlement times and channels to obtain funds。Settlement for Visa and Mastercard can take 2-3 days, 5 days for American Express, and longer for international settlement, such as about 30 days in Brazil. In some use cases, such as markets such as Uber, merchants may need to inject funds into bank accounts in advance to make payments before settlement.

Instead, people can effectively access the encrypted payment channel through the user’s credit card, transfer funds over the chain, and ultimately transfer funds directly to the merchant’s bank account in local currency. In addition to improving working capital due to reduced duration of funds occupied in the payment path, merchants can further improve their money management by freely and instantly exchanging between digital dollars and income assets such as tokenized U.S. Treasuries.

More specifically, the “back-end” merchant acceptance process might look like the following:

1. Users enter their credit card information to complete the transaction;

2. The PSP creates a wallet for customers and funds the wallet through an entrance that accepts traditional payment methods;

3. Credit card transactions purchase USDC and then send it from the customer’s wallet to the merchant’s wallet;

4. PSP can choose to transfer it to the merchant’s bank account via local railway T+0 (i.e. the same day);

5. The PSP usually receives funds from the acquiring bank within T+1 or T+2 (i.e. within 1-2 days).

2.2 Debit Cards (Debit Cards)

The ability to link debit cards directly to unmanaged smart contract wallets creates a surprisingly powerful bridge between blockchain space and the real world, driving the organic adoption of different user roles. In emerging markets, these cards are becoming a major consumer tool, increasingly replacing traditional banks. Interestingly, even in countries with stable currencies, consumers are using these cards to gradually accumulate dollar savings while avoiding foreign exchange (FX) fees at the time of purchase. High-net-worth individuals are also increasingly using these cryptocurrency-linked debit cards as effective tools to spend USDC globally.

The advantages of debit cards over credit cards lie in two factors: debit cards face fewer regulatory restrictions (for example, MCC6051 is rejected outright in Pakistan and Bangladesh, where capital controls are tight), and debit cards have a lower risk of fraud because refunds of settled crypto transactions pose serious liability issues for credit cards.

In the long run, cards tied to encrypted wallets used for mobile payments may actually be the best way to fight fraud, because there is biometric verification on the phone: scanning your face, spending, and recharging your wallet from your bank account.

2.3 Remittance

Remittances are the act of people who migrate abroad in search of work sending money back to their home country from their country of work.According to the World Bank, the total amount of remittances in 2023 will be approximately US$656 billion, equivalent to Belgium’s GDP.

Traditional remittance systems are costly, resulting in less money in recipients ‘pockets.On average, the cost of cross-border remittances is 6.4% of the amount transferredHowever, these fees vary widely. The cost of sending money from Malaysia to India is 2.2%(even lower for large traffic channels such as the United States to India), and the cost of sending money from Turkey to Bulgaria is as high as 47.6%. Banks tend to have the highest fees, at about 12%, while money transfer operators such as MoneyGram have an average fee of 5.5%.

Source: World Bank

Crypto payments can provide a faster and cheaper way to send money overseas, and the number of such companies depends largely on the size of the broader remittance market, with the largest transaction volume flowing from the United States to Latin America (especially Mexico, Argentina and Brazil), the United States to India, and the United States to the Philippines. An important factor driving this trend are unmanaged embedded wallets, which provide users with a Web2-level user experience.

The process for using crypto payments for remittance payments may be as follows:

• The sender enters the PSP through a bank account, debit card, credit card, or a direct-to-chain address; if the sender does not have a wallet, one will be created for them;

• PSP converts USDT/USDC into the recipient’s local currency, either directly or through a market maker or OTC partner;

• The PSP pays legal currency to the recipient’s bank account, either directly from their comprehensive bank account or through a local payment gateway; alternatively, the PSP can first generate an unmanaged wallet for the recipient to collect funds and give them the option to keep it on the chain;

• In many cases, recipients need to complete KYC before receiving funds.

Despite this, the marketing path of crypto-remittance projects is still difficult. One problem is that you usually need to incentivize people to leave money transfer operators, which can be expensive. Another problem is that transfers on most Web2 payment apps are already free, so local transfers alone are not enough to overcome the network effects of existing apps. Finally, although the on-chain transfer component works well, you still need to interact with traditional banking institutions on the “last mile”, so users may still end up encountering the same or worse problems due to the cost and friction of deposit and deposit currency acceptance. In particular, payment gateways that convert into local fiat currency and make payments using customized methods such as mobile phones or self-service terminals will occupy the largest profit margin.

2.4 B2B Payments

Cross-Border (XB) B2B payments are one of the most promising applications for crypto payments because of the inefficiency of traditional payment systems. Payments through the agent banking system can take weeks to settle, and in some extreme cases even longer. One founder said it took them 2.5 months to send supplier payments from Africa to Asia. To give another example, cross-border payments from Ghana to Nigeria (two neighboring countries) can take weeks and transfer fees can be as high as 10%.

In addition, cross-border settlement is slow and expensive for PSPs. For companies like Stripe that make payments, it can take up to a week for them to make payments to international merchants, and they must lock in funds to deal with fraud and refund risks. Shortening the conversion cycle will release a large amount of working capital.

XB B2B payments have been able to make significant progress on encrypted channels, mainly because merchants care more about fees than consumers.Reducing transaction costs by 0.5% to 1% may not sound like much, but when transaction volume is high, especially for companies with thin profits, it can be considerable. In addition, speed is also important. Completing payments in hours rather than days or weeks has a significant impact on a company’s working capital. In addition, companies are more tolerant of worse user experiences and more complex experiences than consumers who expect a smooth out-of-the-box experience.

In addition, estimates from different sources vary widely, but based on the large size of the cross-border payment marketAccording to McKinsey data, revenue from the cross-border payment market in 2022 will be approximately US$240 billion, and transaction volume will be approximately US$150 trillion.That said, building a sustainable business remains difficult. Although a “stablecoin sandwich” must be faster to convert local currency into a stablecoin and then exchange it back again, it is also expensive,Because currency acceptance of deposits and withdrawals on both sides will erode profits and often lead to unsustainable unit economies.Although some companies are trying to solve this problem by establishing internal market-making departments, this is very costly on the balance sheet and difficult to scale. In addition, the customer base is relatively slow, worried about regulation and risk, and often requires a lot of education.

That said, as stablecoin legislation opens the door for more companies to hold and operate digital dollars, foreign exchange costs are likely to fall rapidly over the next two years. As more deposit and deposit currency acceptance and token issuers will have direct banking relationships, they will be able to effectively provide Internet-scale wholesale acceptance rates.

2.4.1 XB Supplier Payments

For B2B payments, the majority of cross-border transactions involve importers making payments to suppliers, usually buyers in the United States, Latin America or Europe, and suppliers in Africa or Asia. Local payment channels in these countries are underdeveloped, making it difficult to find local banking partners. Crypto payments can also help alleviate pain points in specific countries/regions. For example, in Brazil, you can’t pay millions of dollars using traditional payment channels, making it difficult for companies to make international payments. Some well-known companies, such as SpaceX, are already using encrypted payments to achieve this use case.

2.4.2 XB Receivables

Companies with global customers often have difficulty collecting funds in a timely and efficient manner. They usually work with multiple PSPs to collect funds for them locally, but need a quick way to collect money, which can take days or even weeks, depending on the country. Crypto payments are faster than SWIFT transfers and can compress the time to T+0.

The following is an example of the payment process for a Brazilian company to purchase goods from a German company:

• Buyers send Real to PSP through PIX;

• PSP converts Real to USD and then to USDC;

• The PSP sends USDC to the seller’s wallet;

• If the seller wants local fiat currency, the PSP will send the USDC to the market maker or trading counter to convert it into local currency;

• If the seller has a license/bank account, the PSP can send money to the seller through a local payment channel, or if not, use a local partner.

2.4.3 Financial Operations (Treasury Operations)

Companies can also use crypto payment channels to improve financial operations and accelerate global expansion. They can hold U.S. dollar balances and use local deposit and currency acceptance channels to reduce foreign exchange risk and enter new markets faster, even if local banks are reluctant to support them. They can also use crypto payment channels as an internal means of reorganizing and repatriating funds between the countries in which they operate.

2.4.4 Foreign Aid Disbursement

Another common use case we see for B2B is time-critical payments, for which these encrypted channels can be used to reach the payee faster. One example is foreign aid payments that allow NGOs to use encrypted payment channels to remit money to local export agents, who can individually make payments to eligible individuals. This is particularly effective in economies where the local financial system and/or government are very weak. For example, in countries like South Sudan, where the central bank has collapsed, local payments can take more than a month. butAs long as there is a mobile phone and Internet connection, there is a way to bring digital currency into the country, and individuals can exchange digital currency for legal tender, and vice versa.

The payment process for this use case might look like this:

• NGOs provide funding to the PSP;

• PSP sends bank transfers to OTC partners;

• OTC partners convert fiat currency into USDC and send it to local partners ‘wallets;

• Local partners obtain USDC through peer-to-peer (P2P) traders.

2.5 Payroll (Payroll)

From a consumer perspective, one of the most promising early adopters is freelancers and contractors, especially in emerging markets. The value proposition of these users is that more money will end up in their pockets rather than going to intermediaries, and that money can be in digital dollars. This use case also provides cost-effectiveness for businesses on the other side that send large payments, and is particularly useful for cryptocurrency-native companies such as exchanges that already hold most of their funds in cryptocurrency.

The contractor’s payment process is usually as follows:

• The company conducts KYB/KYC with PSP;

• The company sends US dollars to the PSP or USDC to a wallet address tied to the contractor;

• Contractors can decide whether to keep it as cryptocurrency or withdraw it into a bank account, and PSPs typically have some master service agreements with one or more off-site partners who hold relevant licenses in their respective jurisdictions to make local payments.

2.6 Currency acceptance of deposits and withdrawals (On/Off-ramps)

Currency acceptance of deposits and deposits is a crowded market with fierce competition. While many early attempts failed to scale up, the market has matured in the past few years and many companies are operating sustainably and provide global local payment channels. While currency acceptances for deposits and withdrawals can be used as stand-alone products (such as simply purchasing crypto assets), they are arguably the most critical part of the payment process for bundled services (such as payments).

Building a currency acceptance for deposits and withdrawals typically consists of three parts: obtaining the necessary licenses (e.g., VASP, MTL, MSB), ensuring that local banking partners or PSPs have access to local payment channels, and connecting to market makers or OTC counters to gain liquidity.

Initially, exchanges dominated market entry channels, but today a growing number of liquidity providers, from small foreign exchange and over-the-counter trading desks to large trading companies such as Cumberland and FalconX, are providing market entry channels. These companies can typically handle up to $100 million in trading volume per day, so they are unlikely to drain liquidity from hot assets. Some teams may even prefer them because they can promise spreads, which helps control profit margins.

Due to licensing, liquidity, and orchestration complexity, the non-U.S. portion of deposit and deposit currency acceptance is often much more difficult than the U.S. portion. This is particularly true in Latin America and Africa, where there are dozens of currencies and payment methods. For example, you can use PDAX in the Philippines because it is the largest cryptocurrency exchange there, but in Kenya, you need to use multiple local partners such as Clixpesa, Fronbank and Pritium depending on the payment method.

P2P channels rely on a network of “agents” local individuals, currency providers and small businesses such as supermarkets and pharmacies who provide fiat currency and stablecoin liquidity. These agents are particularly common in Africa, where many people already operate mobile money booths for services such as MPesa, and their main motivation is the economic incentive for them to make money through transaction fees and foreign exchange spreads. In fact, for individuals in highly inflationary economies such as Venezuela and Nigeria, becoming an agent is more profitable than working in traditional services such as taxi drivers or food delivery. They can also use their mobile phones to work from home, often with just a bank account and mobile money to get started. What makes this system particularly powerful is that it can support dozens of local payment methods without formal licensing or integration because transfers occur between personal bank accounts.

It is worth noting that foreign exchange rates on P2P channels are usually more competitive. For example, banks in Khartoum in Sudan typically charge foreign exchange fees of up to 25%, while the local cryptocurrency P2P ramp offers foreign exchange fees of 8% to 9%, which is actually a market exchange rate rather than a bank’s mandatory exchange rate. Similarly, P2P channels can provide foreign exchange rates approximately 7% cheaper than bank rates in Ghana and Venezuela. Generally, in countries with a large supply of U.S. dollars, the spread is small. Also,The best markets for P2P channels are those with high inflation, high smartphone penetration, weak property rights, and unclear regulatory guidelines because financial institutions will not be exposed to cryptocurrencies, creating an environment for self-custody and P2P to flourish.

The payment process for a P2P portal may be as follows:

• Users can select or automatically designate a counterparty or “agent” who already owns USDT, which is usually hosted by P2P platforms;

• Users send legal tender to agents through local payment channels;

• The agent acknowledges receipt and sends the USDT to the user.

From a market structure perspective, most currency acceptances for deposits and deposits are commoditized and customer loyalty is low because they usually choose the cheapest option. To remain competitive, local payment channels may need to expand coverage, optimize for the most popular channels, and find the best local partners. In the long run, we may see each country integrated into several gold and export currency acceptance channels, each with comprehensive licensing, supporting all local payment methods and providing maximum liquidity. In the medium term, aggregators will be particularly useful because local providers are often faster and cheaper, and combination options will often provide consumers with the best prices and completion rates. If they can effectively optimize and route payments for hundreds of partners and routes, they may also suffer minimal commoditization. This also applies to orchestration platforms, including compliance, PSP selection, bank partner selection, and value-added services such as card issuance.

From a consumer perspective, the good news is that fees may be heading towards zero。We’ve seen this today on Coinbase, where the cost of instant conversion from USD to USDC is $0. In the long run,Most stablecoin issuers are likely to offer this service to large wallet and fintech companies, further reducing fees。

Obtaining regulatory approval is a painful but necessary step in expanding the scope of crypto payment applications。For startups, there are two methods: working with already licensed entities or getting licensed independently. Working with licensed partners allows startups to bypass the high costs and lengthy time it brings to their own licensing, but at the expense of reduced profit margins because a large portion of revenue goes to licensed partners. Alternatively, startups can choose to invest upfront (possibly hundreds of thousands to millions of dollars) to obtain licenses independently. While this road typically takes months or even years (one project said it took them 2 years), it allows startups to deliver more comprehensive products directly to users.

While there are established options for obtaining regulatory licenses in many jurisdictions, achieving global license coverage is extremely challenging or even impossible because each region has its own unique currency transfer regulations and you need more than 100 licenses to cover the world. For example, in the United States alone, a project requires a Money Transfer License (MTL) for each state, a BitLicense for New York, and a Money Services Business (MSB) registration with the Financial Crimes Enforcement Network. Simply obtaining MTLs in all states can cost $500,000 to $2 million and can take up to a year. Overseas, the demands are equally dazzling. Importantly,Startups that are not managed and are not exposed to capital flows can often bypass immediate licensing requirements and enter the market faster。

4. Challenges

The popularization of payment methods is often difficult because it is a chicken-or-egg question. Either let consumers widely adopt one payment method, which will force merchants to accept it, or let merchants use a specific payment method, which will force consumers to adopt it. For example, credit cards were a niche market in Latin America before Uber became popular in 2012; everyone wanted a credit card because it would allow them to use Uber, which was safer and (initially) cheaper than taxis. This has made other on-demand apps such as Rappi popular because people now have smartphones and credit cards. This creates a virtuous cycle, with more and more people wanting credit cards because there are more cool apps that require credit card payments.

This also applies to mainstream consumer adoption of crypto payments. We haven’t seen a particularly advantageous or completely necessary use case for payments using stablecoins, although debit card and money transfer apps are bringing us closer to that moment. If P2P apps can unlock a completely new online behavior, it has the opportunity to micropayments and creator payments seem exciting candidates. This generally applies to general consumer applications and will not be adopted without step-by-step functional improvements to the status quo.

There are still some problems in terms of currency acceptance of deposits and withdrawals:

• High failure rate: If you have tried using a credit card to access, you will understand the frustration.

• User experience barriers: While early adopters can accept the pain of acquiring assets through exchanges, most early users will likely use them directly in specific applications. To support this, we need smooth in-app upgrades, preferably through Apple Pay.

• High cost: Access costs are still very expensive and can still be as high as 5% to 10% depending on provider and region.

• Inconsistent quality: Reliability and compliance are still too different, especially in non-U.S. dollar currencies.

One issue that has not been discussed in depth is privacy. While privacy is not currently a serious issue for individuals or companies, it will become an issue once crypto payments are adopted as the primary mechanism for business. When malicious actors begin to monitor the payment activities of individuals, companies, and governments through public keys, there will be serious negative consequences. One way to solve this problem in the short term is to “protect privacy through concealment” and launch a new wallet every time you need to send or receive funds on the chain.

In addition, establishing bank relationships is often the most difficult part because it is another chicken-or-egg issue. If your bank partners get trading volume and make money, they will accept you, but you need the bank to get that trading volume first. In addition, currently only 4-6 small U.S. banks support crypto payment companies, and several of them have met internal compliance limits. This is partly because today’s crypto-payments are still classified as “high-risk activities” similar to marijuana, adult media and online gambling.

The reason for this problem is that compliance has not yet reached the level of traditional payment companies. This includes AML/KYC and travel rule compliance, OFAC screening, cybersecurity policies and consumer protection policies. What is even more challenging is integrating compliance directly into crypto payments rather than relying on out-of-band solutions and companies. Lightspark’s common currency address provides a creative solution to this challenge by facilitating compliance data exchange between participating institutions.

5. Future Outlook

On the consumer side, we are currently at a stage where certain groups of people are beginning to accept stablecoins, especially freelancers, contractors and remote workers. By leveraging a network of credit card organizations to provide consumers with dollar exposure and daily spending power, we are also getting closer to emerging economies ‘demand for dollars. In other words, debit cards and embedded wallets have become “bridges” to bring cryptocurrency offline in a form that is intuitive to mainstream consumers. On the commercial side, we are in the early stages of mainstream adoption. Companies are using stablecoins on a large scale, and this number will increase significantly over the next decade.

With all of this in mind, here are my 20 predictions for the industry over the next 5 years:

1. Payments made through encrypted channels are between US$200 billion and US$500 billion each year, driven mainly by B2B payments.

2. More than 30 new banks around the world have launched natively on encrypted payment channels.

3. FinTech companies are racing to remain relevant, and dozens of crypto-native companies have been acquired.

4. Some cryptocurrency companies, possibly stablecoin issuers, will acquire fintech companies and banks that are in trouble due to high CAC and operating costs.

5. About three cryptographic networks (L1 and L2) emerged and expanded with architectures specifically designed for payments. Such a network is similar in spirit to Ripple, but has a reasonable technology stack, economic model, and marketing strategy.

6. 80% of online merchants will accept cryptocurrency as a means of payment, whether it’s expanding their product range through existing PSPs or providing them with a better experience through crypto-native payment processors.

7. The card organization network will expand to cover approximately 240 countries and regions (currently approximately 210), using stablecoins as a last-mile solution.

8. The majority of remittances from the world’s 15 remittance channels will be made through encrypted payment channels.

9. On-chain privacy primitives will eventually be adopted, driven by businesses and countries that use encrypted payment channels rather than consumers.

10. 10% of all foreign aid spending will be sent through encrypted payment channels.

11. The market structure for currency acceptance of deposits and deposits will be rigid, with 2-3 suppliers in each country receiving most of the transaction volume and partnerships.

12. There will be as many P2P currency acceptance liquidity providers as there are food delivery agents in the countries where they operate. As transaction volume increases, brokerage will become an economically sustainable job and continue to be at least 5% to 10% cheaper than the foreign exchange rates quoted by banks.

13. >10 million remote workers, freelancers and contract workers will be paid for their services through encrypted payment channels (paid directly in stablecoin or local currency).

14. 99% of AI agent commerce (including agent-to-agent, agent-to-person, and person-to-agent) will occur over the chain through encrypted payment channels.

15. >Twenty-five well-known cooperative banks in the United States will provide support to companies operating on crypto payment channels, eliminating bottlenecks exacerbated by operational bottlenecks.

16. Financial institutions will try to issue their own stablecoins to promote real-time global settlements.

17. The stand-alone “encrypted Venmo” app will still not be popular because user roles are still too niche, but large messaging platforms like Telegram will integrate encrypted payment channels and begin to be used for P2P payments and remittances.

18. As less funds are used during transportation, loan and credit companies will start collecting and paying payments through encrypted payment channels to improve their working capital.

19. Several non-US dollar stablecoins will begin to be tokenized on a large scale, creating an on-chain foreign exchange market.

20. Due to government bureaucracy, CBDC is still in the experimental stage and has not yet reached commercial scale.

VI. Conclusion

As Stripe CEO Patrick Collison said, encrypted channels are superconductors of payments. They form the basis of a parallel financial system that provides faster settlement times, lower fees and the ability to operate seamlessly across borders. It took a decade for the idea to mature, but today we see hundreds of companies working to turn it into reality. In the next decade, we will see crypto channels becoming the core of financial innovation and driving global economic growth.

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