Writing:

Will Wang, Master of International Business Law from the United States, with ten years of legal practice experience, a serial entrepreneur in the TMT industry, and an investment and financing lawyer.

Diane Cheung, Master of Accounting from the University of Sydney and MEM from Peking University, with ten years of experience as a FinTech product manager and a practitioner of Web3.

The emergence of blockchain and cryptocurrency technology not only allows people to purchase NFT digital artworks, interact with players in the Metaverse, and make money in GameFi gameplay, but also provides the most essential decentralized peer-to-peer payment solutions. These fast and convenient Web3 payment solutions are changing our current payment methods and even the entire financial market.

Since PayPal launched the stablecoin PayPal USD in August, we have seen many industry giants announcing one after another that they are expanding their business scope to Web3 payments or integrating Web3 payment channels, giving a strong sense of a full-scale attack on the Web3 payment business. We can see the entry and exit fund aggregation solution of MetaMask; X's (formerly Twitter) payment license application; VISA USDC settlement blockchain payment network, and a series of actions by industry giants in the upstream of the industrial chain.

As Web3 payments cover almost all infrastructure in the industry, including payments, stablecoins, wallets, custody, and trading, understanding the wide range of use cases and potential advantages of Web3 payments is crucial for all participants in the Web3 ecosystem.

This article will briefly describe the concept and path of Web3 payments, and from a business perspective and a legal compliance and regulatory perspective, explain why Web3 payments are expected to reshape the cryptocurrency market. I hope this article can be helpful in this regard, and welcome discussions and exchanges. The full text is about 16,000 words, with an estimated reading time of 30 minutes.

TL; DR

• Traditional payments and Web3 payments are not separate, but present a situation of mutual interaction. Fiat currency and cryptocurrency continuously interact and gradually integrate into stablecoins, central bank digital currencies, and other real-world use cases.
• Bitcoin was designed to achieve a decentralized peer-to-peer electronic cash payment system, and Web3 payments stem from this. Currently, Web3 payments can be roughly divided into two categories: entry and exit fund payments, and cryptocurrency payments (on-chain and off-chain).
• Industry giants such as PayPal, Coinbase, and MetaMask are gradually opening up/accessing Web3 payment businesses and scenarios, including wallets, custody, payments, trading, and stablecoins, ultimately gradually covering their entire ecosystem and forming their own closed loop ecosystems.
• The infrastructure of Web3 payments is gradually taking shape, linking wallets, custody, and stablecoins. More important than this is how to build payment scenarios. Imagine how X (Twitter), Telegram, MetaMask, and PayPal will form their own large encrypted ecosystems. In this context, the existing structure of the cryptocurrency market is bound to change.
• Compliance is the foundation of payment business. The complex nature of Web3 payment business across regions and scenarios poses a huge challenge for regulatory compliance. However, with further clarification of cryptocurrency regulation, the adoption of cryptocurrencies is expected to increase, driving the rapid development of the Web3 payment industry.
• From the perspective of the monetary system, the BIS believes that the key to the development of digitalized currency is tokenization, which can significantly enhance the capabilities of the currency and financial system. The future monetary system is expected to unleash new economic growth drivers through tokenization.
• The biggest opportunity for cryptocurrencies may not be to view them as cryptocurrencies, but as a new set of payment methods. Some people believe that the killer application of Web3 has not yet arrived, but it may have quietly arrived: it is payment!

I. Overview of Web3 Payments

In simple terms, Web3 payments refer to a payment method based on blockchain and cryptocurrency technology, but due to the characteristics of blockchain and cryptocurrency, Web3 payments include more than just the attribute of payment.

Cryptocurrencies like Bitcoin have multidimensional attributes. They are not only a form of payment, but also an innovative technology, a store of value, and a financial infrastructure, and can also serve as a unit of account in transactions to mark value.

Traditional payments and Web3 payments are not separate, but present a situation of mutual interaction. Fiat currency and cryptocurrency continuously interact and gradually integrate into stablecoins, central bank digital currencies, and other real-world use cases. Web3 payments are redefining our payment methods and financial systems.

1.1 Traditional Payments

Let's first look at traditional payments. Payment is the act of transferring currency (or currency equivalents) or claims from the payer to the payee, completing the matching of information flow and fund flow to deliver goods and money. The essence of payment is the transfer of funds.

In a broad sense, payments include cash in the form of banknotes and electronic currency. There are roughly four ways of fund transfer: cash payment; bank account transfer; debit card transfer; credit card payment. The last three forms of electronic currency payments require the involvement of centralized financial institutions such as banks to complete fund transfers. If the bank cannot directly complete the payment, the involvement of third-party payment institutions is also required.

Depending on the currency used for payment, payments can be classified as domestic payments and cross-border payments. As Web3 payments are conducted on the blockchain, they can achieve dual functions of cross-currency (fiat currency vs. cryptocurrency) and cross-regional transactions, and can therefore be classified as a form of cross-border payment.

There are many participants in the cross-border payment industry chain, including customers, commercial banks, third-party account/acquiring payment institutions, clearing institutions, and merchants. The entire industry chain can be basically divided into three levels: the first level is users and merchants, which are the source and end of payments; the second level is payment service institutions, such as banks and third-party payments; the third level is the cross-border payment network, which is the bottom layer support for cross-border payments, such as SWIFT and SEPA.

The following is the architecture of cross-border payments:

(Source: How new entrants are redefining cross-border payments)

According to the type of cross-border payment service provider, it can be divided into interbank telegraphic transfer, specialized remittance companies, bank card clearing institutions, and third-party payment institutions. The following comparison is based on blockchain settlement for Web3 payments.

1.1.1 Interbank Cross-Border Payments

(Source: SWIFT gpi- Future of Cross Border payments)

Early cross-border payments were mainly conducted through banks, such as the early appearance of interbank telegraphic transfers, mainly used for cross-bank transactions, import and export trade, and other cross-border payments. This payment method requires complex bank networks and may take several days or even weeks to complete. It may involve the exchange of multiple currencies, and the costs are relatively high.

Traditional interbank cross-border payments mainly rely on the SWIFT network. SWIFT does not hold funds for users or manage accounts, but provides a communication information network and exchanges standardized financial messages. SWIFT can be understood as a network connecting almost all major banks globally to complete foreign exchange transactions using the same language. However, the drawback of SWIFT is that if a payment passes through multiple intermediary banks, encounters anti-money laundering checks, etc., it is easy to experience delays or even payment failures, as well as exchange losses.

As shown in the above figure, when the receiving bank and the paying bank have established a commercial account relationship, the funds paid by the user will be transferred directly through the bank's commercial account to complete the payment, and the bank will charge the corresponding fees. When there is no commercial account relationship between the receiving bank and the paying bank, an intermediary bank is needed to complete the payment. The intermediary bank will charge additional fees, and the time for the payment to arrive will be extended due to the increase in transaction parties.

Bank cross-border payments are heavily regulated, and the regulatory policies in various countries and regions differ, which also imposes certain limitations on cross-border payments. In addition, bank cross-border payments mostly have strict KYC/AML requirements, requiring users to open accounts before completing transactions, resulting in relatively high costs.

1.1.2 International Card Organizations

Similar to SWIFT, international card organizations are also the main network for traditional cross-border payments, but they focus more on the acquiring scenarios of merchant payments (deducting funds from the buyer's account). There are various acquiring methods, and the exchange process is completed directly during the payment process, settling the local currency for merchants.

Card organizations are international regional payment information processing networks. There are currently six major card organization networks globally: VISA, Mastercard, China UnionPay, American Express, JCB, and Discover. Cross-border payments processed through international card organizations usually take at least T+1 day or longer to complete, meaning it takes at least T+1 day to reach the merchant's account. International card organization payments also require licensing to operate and are subject to different regulatory policies in various countries.

1.1.3 Third-Party Cross-Border Payments

With the development of e-commerce and internet technology, electronic transfers have become a popular cross-border payment method. This type of cross-border payment is generally provided by non-bank institutions (such as Alipay, PayPal, etc.) as third-party payment institutions offering all or part of the fund transfer services. These third-party payment institutions play an important role in cross-border e-commerce retail, remittances, import and export businesses, and overseas mobile payments.

Third-party cross-border payments require access to international card organizations or banks for clearing and settlement to complete payments. The currency exchange process in cross-border payments is mainly completed through banks. Third-party payments usually have custody functions, meaning that the payment funds can be held in the third-party payment account and transferred to the seller's account after the transaction is confirmed.

(Source: Acquiring Banks vs Issuing Banks in Credit Card Processing)

In a cross-border e-commerce scenario, as shown in the above figure, the user side is the starting point of fund transfer, and the third-party payment institution connects the user's bank account with the issuing bank's credit/debit card. After the user makes a purchase, the user's funds are transferred to the payment channel and settled with the card organization. After settlement, the third-party payment institution transfers the funds to the merchant. In offline shopping scenarios, an acquiring agent is needed to connect the merchant with the third-party payment institution.

Traditional payments have been developed for a long time and currently cover most application scenarios with extensive functionality. However, cross-border payments face real issues such as high costs, slow speed, restricted access, and lack of transparency. According to a survey by the Federal Reserve, user pain points mainly focus on two aspects: the need to improve payment speed, as the current payment deadlines do not meet user needs, and the demand for periodic real-time payment scenarios.

1.2 Web3 Payments

Although current payment methods are rapidly digitizing, the involvement of numerous participants makes the fund transfer process very cumbersome, resulting in significant friction costs and high overall costs. The improvement of payment experience has been constrained by various intermediaries, banks, technology companies, and others.

Bitcoin was designed from the beginning to achieve a decentralized peer-to-peer electronic cash payment system. In 2008, Satoshi Nakamoto released the Bitcoin whitepaper against the backdrop of the global financial crisis, hoping to change the traditional bank-centric financial system and achieve decentralization of the entire financial system. Since the birth of Bitcoin on January 9, 2009, it has opened up large-scale applications of cryptocurrencies.

Bitcoin payments allow direct transfers between users without the need for banks, clearing centers, and electronic payment platforms, avoiding high fees and cumbersome transfer processes. Any user with a device connected to the internet can use it without permission.

(Source: How Crypto Payment Solutions Have Changed the Market)

Similar to the Bitcoin payment network, cryptocurrency payments rely on the blockchain network as the backbone infrastructure, allowing cryptocurrencies to be transferred directly between the sender and receiver without any third parties, quickly, conveniently, and at extremely low costs.

As the acceptance of cryptocurrencies continues to increase, interaction between cryptocurrencies and fiat currencies in the real world is inevitable. Here, institutions providing entry and exit fund services play the role of banks providing foreign exchange services in cross-border payments, facilitating the exchange between cryptocurrencies and fiat currencies.

Currently, Web3 payments can mainly be divided into two payment methods: (1) entry and exit fund payments (On Ramp & Off Ramp), which involve the exchange of cryptocurrencies and fiat currencies; (2) cryptocurrency payments, including (2.1) on-chain native asset payments, between two addresses on the blockchain or the interaction of cryptocurrencies with on-chain assets (such as purchasing NFTs with cryptocurrencies, swapping different cryptocurrencies); and (2.2) off-chain traditional physical payments with cryptocurrencies, such as using cryptocurrencies as currency equivalents to purchase other goods/services.

Web3 payments connect fiat currencies with cryptocurrencies through entry and exit fund payments and enable the circulation of cryptocurrency assets through cryptocurrency payments, forming a complete payment loop.

As cryptocurrency payments are conducted on the blockchain, they are not significantly restricted by geographical factors, and the regulation of cryptocurrency payments in various jurisdictions is gradually being improved. However, entry and exit fund payments themselves involve fiat currency payments and will therefore be subject to existing financial regulations.

1.3 Advantages of Web3 Payments Compared to Traditional Payments

(Source: Tech Giants Betting Big, Can Web3 Wallets Become the Pivot of the Industry?)

Traditional payments are a payment system based on an account system, with the transfer of value recorded in the accounts of intermediary institutions (such as banks, third-party payment companies). Due to the involvement of numerous participants, the fund transfer process is very cumbersome, resulting in significant friction costs and high overall costs.

In contrast, Web3 payments are based on a value or token-based system, with the transfer of value stored by users themselves in the distributed ledger of the blockchain. Based on the blockchain network as the backbone infrastructure, Web3 payments allow cryptocurrencies to be transferred directly between the sender and receiver, solving issues in traditional payments such as high costs, low efficiency in cross-border transfers, and high overall costs.

(Source: Blockchain & Crypto in Payments: Transforming the Way Money Moves)

What are the advantages of Web3 payments compared to traditional payments?

Firstly, relying on blockchain technology can effectively reduce the trust costs between transacting parties, making payments more direct, fast, and secure. Smart contract functionality can achieve programmable payments and automated execution, improving payment efficiency and trustworthiness.

Secondly, currently, cryptocurrency payments have a significant advantage over traditional payments in terms of timeliness, especially in cross-border payments. This feature will be an important driver for the development of cryptocurrency payments and also a major force driving the upgrade of traditional cross-border payment technologies.

Furthermore, based on the decentralized nature, Web3 payments simplify the processes built on centralized clearing institutions, reducing friction costs, especially significantly improving cross-border payment efficiency and accelerating clearing and settlement speeds.

Various signs indicate that traditional cross-border payments and Web3 payments are not completely separate, and both are forming a two-way trend in various aspects. On one hand, this is reflected in the accelerating application of blockchain technology in the traditional payment industry. In addition to the CBDCs being practiced by multiple countries, major participants in traditional payments such as SWIFT, VISA, and PayPal are exploring Web3 payment solutions. On the other hand, this is reflected in Web3 payment projects actively collaborating with traditional financial institutions, third-party payment institutions, and exploring the accelerated application of compliant stablecoins.

Although Web3 payments still face challenges in terms of technology, user acceptance, security, and compliance, Web3 payments have significant implications for the cryptocurrency industry and even the entire traditional finance industry.

2. Main Paths of Web3 Payments

Currently, Web3 payments can mainly be divided into two payment methods: (1) entry and exit fund payments (On Ramp & Off Ramp); (2) cryptocurrency payments (including on-chain native scenarios and payments with traditional off-chain entities).

Web3 payments connect fiat currencies with cryptocurrencies through entry and exit fund payments and enable the circulation of cryptocurrency assets through cryptocurrency payments, forming a complete payment loop.

Due to the relatively small volume of native assets in the cryptocurrency market and the limited payment scenarios, most of the Web3 industry's discussions about payments are related to the exchange of fiat currencies and cryptocurrencies.

2.1 Entry and Exit Fund Payments

Entry and exit fund payments are an important bridge connecting fiat currencies and cryptocurrencies, forming a complete payment loop. Apart from OTC/P2P entry and exit fund methods, other entry and exit fund processes require the participation of third-party payment institutions.

2.1.1 Entry and Exit Fund Payment Process

The flow of funds behind entry and exit fund payments: Users transfer fiat currency through payment channels to liquidity providers behind third-party payment institutions (Crypto Liquidity Providers), which are more like merchants in traditional third-party payment scenarios, transferring cryptocurrencies as "goods" to users' addresses on the blockchain and providing cryptocurrency liquidity to third-party payment institutions. The process is reversed for exit fund payments.

These liquidity providers are typically centralized exchanges (such as Coinbase Prime, Binance, Kraken) or stablecoin issuers (such as Tether and Circle), or cryptocurrency-friendly banks (such as the now-defunct Silvergate Bank and Signature Bank). Liquidity providers are crucial in the entry and exit fund process, acting as a bridge between fiat currencies and cryptocurrencies.

2.1.2 Main Entry and Exit Fund Payment Methods

A. Centralized Exchanges

Since centralized exchanges also have the nature of currency transfer, their functions partially overlap with those of payment institutions. They apply for relevant cryptocurrency/payment licenses similar to those of payment institutions, so most centralized exchanges also have entry and exit fund payment functions.

Additionally, as centralized exchanges can also act as liquidity providers, most centralized exchanges have their own entry and exit fund payment business sections. Users can directly purchase cryptocurrencies using debit/credit cards or bank transfers, such as Binance Pay, Coinbase Pay, and other similar platforms.

Centralized exchanges provide a payment interface for the custody wallets of both buyers and sellers, allowing them to choose to use different accounts in the same custody wallet or non-custody wallets based on their needs. The fees for the former are lower as they do not involve gas.

Furthermore, in jurisdictions with stricter regulations, centralized exchanges may need to integrate independent entry and exit fund payment institutions as underlying payment channels to facilitate user entry and exit fund purposes. This operation also applies to decentralized exchanges, as Uniswap has integrated independent entry and exit fund payment institutions such as Moonpay and Paypal to support user entry and exit fund processes.

B. Independent Entry and Exit Fund Payment Institutions

Independent entry and exit fund payment institutions are payment institutions with cryptocurrency transfer capabilities (which may also include cryptocurrency-friendly banks) and need to obtain relevant licenses for cryptocurrency/payment operations in their operating jurisdictions.

Among them, MoonPay is currently a leading project in cryptocurrency entry and exit fund payments, positioning itself as the PayPal for Web3, with over 5 million registered users. In terms of coverage, MoonPay supports cryptocurrency payments in over 160+ countries and regions, and the exchange of over 80 cryptocurrencies and 30+ fiat currencies. It holds payment business licenses in most jurisdictions.

In terms of payment methods, MoonPay currently supports payments through credit cards, debit cards, mobile payments, and account-to-account transfers, where users input the on-chain address and cryptocurrency amount to complete the payment. Coinbase provides liquidity for MoonPay, and its comprehensive entry and exit fund functions and first-mover advantage have quickly captured the majority of the European and American markets where credit card usage is predominant, supporting a valuation of $3.5 billion.

Additionally, we have seen traditional payment giant Paypal, leveraging its strong payment channels, partnering with stablecoin issuer Paxos to launch the PYUSD stablecoin, aiming to enter the Web3 payment market. Previously, the collapsed Silvergate Bank and the forcibly closed Signature Bank, these cryptocurrency-friendly banks are also important entry and exit fund payment channels.

C. Other Entry and Exit Fund Payment Methods

Other entry and exit fund payment methods are essentially payment products based on the integration of the above two payment methods.

Aggregated payment products integrate multiple independent entry and exit fund payments, allowing users to access different rates and quotes from different independent entry and exit fund payments for payments. MetaMask is the most typical aggregated payment product, and other well-known projects include TransitSwap and KyberSwap.

Cryptocurrency retail terminal ATMs and POS. With the development of the cryptocurrency industry, in addition to online payments, cryptocurrency retail terminals have also emerged for cryptocurrencies. Cryptocurrency ATMs are used for direct cash purchases of cryptocurrencies offline, and ATM providers purchase liquidity from third-party providers and pay users. The characteristic of this payment method is its anonymity, as users almost do not need to provide identity verification or only need minimal personal information to purchase cryptocurrencies, but the drawback is the extremely high transaction fees (5%—20%). Bitcoin Depot is a leading project in this field.

Cryptocurrency payment POS is another channel for offline cryptocurrency payments, where users pay with cryptocurrencies through POS terminals, and merchants receive fiat currencies directly, achieving user exit fund payments through POS payments. This type of payment also requires licensing, but the exit fund fees are lower compared to ATMs. Pallapay is one of the projects providing such solutions.

(Source: Crypto | Money is evolving)

Overall, there are currently multiple ways for users to choose from in Web3 payments, but entry and exit fund payments involve the exchange of fiat currencies and cryptocurrencies, and operators generally need to apply for operating licenses based on their operating regions. The fees generated by payments vary slightly due to differences in payment method business models.

In addition to entry and exit fund payments, some centralized exchanges and payment institutions issue debit and credit cards in cooperation with card organizations such as Visa and Mastercard, combining both entry and exit fund payments and cryptocurrency payments attributes.

2.2 Cryptocurrency Payments

As the acceptance of cryptocurrencies continues to rise, Web3 payments are also entering traditional markets such as e-commerce (for online shopping), gig economy (for contracts and freelancers), cross-border remittances, travel bookings, and online gaming (for in-game item exchanges). It uses cryptocurrencies for online consumption and remittances, rather than relying on outdated infrastructure from traditional banks or third-party payment institutions.

Currently, cryptocurrency payments are mainly divided into two categories: payments with traditional off-chain entities and on-chain native scenarios.

2.2.1 Cryptocurrency Payments - Payments with Traditional Off-Chain Entities

According to a report by PYNMTS and BitPay in 2022, which surveyed over 2,300 online merchants with annual sales exceeding $250 million, approximately 85% of large retailers (with annual revenues exceeding $1 billion) currently offer cryptocurrency as a payment method. Among all surveyed merchants, half already accept cryptocurrency payments, and among those not yet accepting cryptocurrency payments, 42% are planning to do so. The report also found that most merchants use non-native cryptocurrency wallets to support cryptocurrency payments, such as PayPal and Venmo.

To meet the growing demand for Web3 payments, leading payment giants such as Mastercard, Visa, PayPal, Stripe, and Venmo have partnered with cryptocurrency companies to offer cryptocurrency as a payment method to millions of users. Most major retailers, such as Overstock, Microsoft, Expedia, and Starbucks, have also integrated cryptocurrency payments, allowing their customers to directly use cryptocurrencies to purchase digital and physical goods. Other major companies include popular streaming platform Twitch, Norwegian Air, Etsy, and Burger King.

(Source: How Crypto Payment Solutions Have Changed the Market)

In terms of payments with traditional off-chain entities, we can simulate a scenario where a user makes a cryptocurrency purchase and the merchant receives fiat currency. In this scenario, the funds are first converted from cryptocurrency to fiat currency through entry and exit fund payments via a third-party payment institution, and then the fiat currency is used to pay the merchant.

The most common solution currently is the issuance of cryptocurrency bank cards. Centralized exchanges or wallet companies typically collaborate with card organizations such as Visa and Mastercard to issue cryptocurrency debit/credit cards. Users can use these cards for online and offline transactions as long as they hold cryptocurrencies in their platform accounts. During actual payments, the issuing company first converts the cryptocurrency into local fiat currency through an exit fund payment channel before paying the merchant. We can see that centralized exchange Crypto.com has issued the Crypto.com Visa Card in collaboration with Visa. In addition to fiat currency payments, it also provides users with on-chain cryptocurrency payment capabilities.

2.2.2 Cryptocurrency Payments - On-Chain Native Scenarios

In the context of on-chain native scenarios, users pay with cryptocurrencies and merchants accept cryptocurrencies. This method should not be simply understood as peer-to-peer payment transfers based on blockchain technology, but also needs to consider the trust issues encountered in real-world payment scenarios, which require the involvement of third-party payments.

For example, in a case of online shopping where trust is established (based on a trust chain between friends), transactions can be completed directly through peer-to-peer transfers on the blockchain, including user payment, merchant delivery, and user receipt. However, in an online platform shopping scenario without a basis of trust, who ensures that the merchant will deliver the goods after the transfer, and that the received goods match the actual order?

Similarly, while we can use blockchain networks for peer-to-peer transfers between family and friends, how do we handle transactions with strangers? Therefore, a set of account systems needs to be linked to the settlement system on the blockchain to facilitate off-chain goods circulation and on-chain payment settlement.

As a result, third-party payment institutions providing cryptocurrency payment products are needed to address the above issues. This includes the cryptocurrency payment protocols, payment core systems, front-end product interactions, and corresponding support modules as shown in the diagram. We can see that Ripple and Stellar are exploring in this area.

Visa recently provided a settlement solution based on the stablecoin USDC, applied in the case of Crypto.com. In the scenario where a user makes a cryptocurrency purchase and the merchant receives fiat currency, Crypto.com needs to convert the user's cryptocurrency payment into fiat currency and then pay the merchant through traditional payment channels. Settlement through traditional payment channels means an increase in participants, transaction fees, costs, complexity, and limits Crypto.com's ability to settle outside of banking hours.

With Visa's USDC settlement solution, the need for currency exchange in transactions and traditional payment steps is eliminated, allowing for real-time, global settlement 24/7/365 through the blockchain. This flexible settlement method, without the need for currency exchange, has opened up new business scenarios for Crypto.com, such as cryptocurrency payment gateways for merchants and blockchain-based cross-border payments.

Visa's USDC settlement solution can also be used for cross-border remittances. The cross-border remittance market, currently valued at nearly $1 trillion, is plagued by high costs associated with traditional payment methods, which charge up to 8% of the transaction amount to the sender. Web3 cross-border remittance products such as Strike's Send Globally, which utilize the Bitcoin Lightning Network, provide an affordable alternative to traditional cross-border remittances, with fees ranging from 0.01% to 0.1% of the transaction amount.

This settlement method, combined with the application of stablecoins, can reduce traditional cross-border payment costs by 80%. This means that for a $500 remittance, the transaction cost for on-chain cryptocurrency payments and entry and exit fund payments is only $4.8, much lower than the average cost of around $20 for cross-border remittances. In 2022, the remittances to cross-border workers were nearly $8 billion, and Web3-based remittances could save the industry $40 billion to $64 billion in costs annually.

Three, Industry Giants' Layout of Web3 Payments

Industry giants are gradually opening up/accessing Web3 payment businesses and scenarios around their core businesses such as transactions, payments, communications, and social networking, including wallets, custody, payments, trading, and stablecoins, ultimately covering their entire ecosystem and forming a logical loop. The following outlines the layout of Paypal, Coinbase, and MetaMask in this regard.

3.1 Paypal's Layout of Web3 Payments - Payments, Wallet Custody, and Stablecoins

In the previous article "Payment Giant Paypal's Stablecoin Expected to Lead the Cryptocurrency Industry into the Mainstream," we introduced the PYUSD stablecoin launched by Paypal on August 7, 2023. As the only stablecoin supported in the PayPal ecosystem, it will be used to connect Paypal's existing 431 million users, providing a seamless bridge between fiat currency and cryptocurrency for consumers, merchants, and developers in Web2.

3.1.1 Implementation Path of Entry and Exit Fund Business

By reviewing the Paypal CryptoCurrency user agreement, we can see the important role of the PYUSD stablecoin in bridging Web2 & 3 payments, Paypal accounts, and cryptocurrency custody wallet accounts.

As shown in the above image, Paypal uses the PYUSD stablecoin as a bridge for the exchange between fiat currency and cryptocurrency. Whether it's in the entry fund business, exit fund business, or cryptocurrency payment business, the process is completed through the USD - PYUSD - Crypto Asset link, and vice versa. For example, in a scenario where cryptocurrency is used to pay for merchant services, the Crypto Asset is first sold as PYUSD/USD and then used for payment to the merchant in PYUSD/USD.

The fiat currency payment business uses Paypal accounts, while for cryptocurrencies, Paypal creates a Cryptocurrencies Hub cryptocurrency wallet under the Paypal account. This wallet is custodied by Paxos, the issuer of PYUSD, meaning that users surrender their assets (private keys). The Paypal user agreement explicitly states: "You will not hold the digital Crypto Assets themselves in your Crypto Asset balance / You do not own any specific, identifiable, Crypto Asset."

Therefore, we can see that Paypal has completed the framework layout for Web3 payments by bridging the payment channels between fiat currency and cryptocurrency, issuing stablecoins as a medium of exchange, and building the Paypal account wallet system, forming a logical loop within its own ecosystem.

Based on this, Paypal can also leverage its advantages in the payment industry to support entry fund functions for external wallets such as MetaMask, Ledger, and centralized exchanges such as Kraken. Additionally, in the withdrawal function announced by Paypal on September 12, it can also support wallets, DApps, and NFT market platforms.

With channels, tools, and infrastructure in place, guiding Paypal's existing 431 million users into Web3 and leading Web3 towards mass adoption is crucial.

(Source: Buy and Sell Cryptocurrency | PayPal US)

3.1.2 Traditional Payment Companies Ready to Go

We can see that Paypal's approach is more suitable for traditional payment companies to replicate. Traditional payment companies such as Stripe and Square are already engaged in entry and exit fund and currency exchange businesses. For example, Stripe announced the provision of cryptocurrency entry fund services in December 2022, and Block (Square's parent company) offers BTC trading services in addition to basic peer-to-peer payment functionality through Cash App.

Since traditional payment companies have already established compliance processes and licensing for local payment businesses, it is only a matter of time and pace for them to engage in Web3 payments. In contrast, new entrants like X (formerly Twitter) are actively applying for money transmission licenses (MTL) in various states in the United States to meet compliance requirements.

3.2 Coinbase's Layout of Web3 Payments - Trading, Custody, and Payments

As the most compliant centralized exchange globally, Coinbase's numerous compliance paths are worth emulating. Through its layout for Web3 payments, Coinbase can form a logical loop within its own ecosystem, including entry and exit fund payment channels, Commerce merchant payment solutions, stablecoin trading medium (USDC), cryptocurrency custody wallets and non-custodial wallets, and the core trading function of the exchange itself.

3.2.1 Trading as Core, Payments as Auxiliary

While the primary purpose of centralized exchanges obtaining payment licenses is for the compliance of their own trading business, the acquisition of these licenses also opens up entry and exit fund payment channels. Due to regulatory uncertainties, over-reliance on third-party entry and exit fund payment channels, such as the previously collapsed Slivergate Bank and the regulated bankruptcy of Signature Bank, may lead to business instability. Therefore, we see that many exchanges have their own payment business sections, such as Binance Pay, Coinbase Pay, XXX Pay, and others.

In Licenses & Disclosures, we see that Coinbase has obtained money transmission licenses (MTL) in most states in the United States. In particular, Coinbase obtained the Bitcoin license (BitLicense) from the New York State Department of Financial Services (NYDFS) in 2017, becoming the first regulated Bitcoin exchange in the United States to provide buying, selling, receiving, and storing Bitcoin services locally in New York State.

Outside the United States, Coinbase is actively expanding into overseas markets and has obtained EMI licenses in the UK, VASP licenses in Ireland and Germany, and DPT licenses in Singapore. Thus, Coinbase, through its trading business as an entry point, gradually covers entry and exit fund payment channels in numerous jurisdictions globally.

(Source: Coinbase Commerce)

In addition to obtaining compliance licenses, Coinbase has also launched the enterprise-level cryptocurrency payment service Coinbase Commerce. This is a blockchain-based merchant payment solution that helps online businesses accept cryptocurrency payments. The service allows merchants to accept payments in mainstream cryptocurrencies such as Bitcoin, Bitcoin Cash, DAI, and Ethereum. The goal of Coinbase Commerce is to help businesses quickly and flexibly conduct business with global customers.

According to a report on August 21, Coinbase is in the process of acquiring a stake in Circle Internet Financial, which means that Coinbase and Circle will have greater strategic and economic consistency in the future development of the cryptocurrency financial system, to counter competitors such as USDT and PYUSD. Additionally, Coinbase can also expand the application scenarios for USDC, no longer limited to cryptocurrency trading business, and potentially extend into areas such as forex and cross-border transfers through Web3 payments. Thus, USDC = USD Coinbase.

3.2.2 Custody Business and Non-Custodial Wallets

The Coinbase Custody Trust Company, LLC, regulated by the New York State Department of Financial Services, is the main company providing custody services for Coinbase. We can see that in the current competition for Bitcoin spot ETF applications, in addition to Blackrock and Coinbase confirming their collaboration for a Bitcoin spot ETF, other participants including Fidelity, VanEck, 21 Shares under ArkInvest, Valkyrie, and Invesco have submitted revised applications and designated Coinbase as their partner. Once the SEC approves these asset management companies' applications, their substantial assets will be custodied on Coinbase.

According to CoinGecko's data, in an analysis included in the ETF filing submitted by Blackrock, Nasdaq estimates that 56% of the $129 billion worth of Bitcoin trading in the United States is conducted on Coinbase. In the future, with the development of Bitcoin spot ETFs, this proportion is expected to further increase. Coinbase will benefit greatly from this and emerge as the biggest winner in this competition.

As for the non-custodial wallet Coinbase Wallet, since users independently control their assets (private keys) and interact directly with the payment system, Coinbase Wallet itself, like MetaMask, is not defined as a money services business (MSB) by FinCEN.

Thus, we can see that Coinbase, based on its compliance advantages in trading business, has bridged the entry and exit fund payment channels, stablecoin trading medium (USDC), cryptocurrency custody wallets and non-custodial wallets, and the core trading function of the exchange itself, thereby achieving a logical loop within its own ecosystem.

The key to Web3 payment services for Coinbase is its exchange's core business and profit contribution.

3.3 MetaMask's Web3 Payment Layout - Wallet and Aggregation

We can see that over the past year, MetaMask has continuously introduced new features. The current MetaMask Portfolio DApp has aggregated functions such as Sell, Buy, Stake, Dashboard, Bridge, and Swap, helping users manage assets conveniently and perform unified on-chain asset operations. Additionally, MetaMask recently launched the Snaps version, integrating third-party blockchain plugins.

MetaMask's natural advantage lies in its nearly 30 million monthly active users. According to data disclosed by Consensys, MetaMask's total user base has reached 100 million users, associated with 17,000 DApps, and daily interactions reaching 244,000 times. According to a report by CoinGecko, as of August this year, MetaMask's downloads have reached 22.66 million times.

In the foreseeable future, we can expect MetaMask to aggregate into a super wallet traffic entry point, allocate wallet traffic, and distribute it to various DApps, offering significant commercial potential.

3.3.1 Introduction of Sell to Bridge Entry Fund Function

On September 5, MetaMask introduced the latest feature "Sell," allowing users to exchange cryptocurrencies for fiat currency through the MetaMask Portfolio and send funds to a bank account. For compliance purposes, this feature is currently only available in the United States, the UK, and some European regions, and only supports the exchange of USD, EUR, and GBP. MetaMask stated that initially, it only supports ETH on the Ethereum mainnet and plans to expand to other native tokens on Layer2 networks in the short term.

(Source: MetaMask Portfolio)

After selecting the region, users input the amount of ETH to be sold, choose a quote from multiple service providers, and connect a bank account. According to the official introduction, MetaMask has established partnerships with cryptocurrency exit fund service providers such as MoonPay, Sardine, and Transak. However, currently, only MoonPay and Transak provide services, and KYC verification is required.

The "Sell" exit fund function was introduced five months after the launch of the "Buy" entry fund function on MetaMask. The entry fund function allows users to use bank accounts, PayPal, debit cards, and credit cards for entry fund.

Non-custodial wallets like MetaMask, where users independently control their assets (private keys) and interact directly with the payment system, only provide communication or network access services to support currency transfer services and are not regulated as MSBs by FinCEN. Moonpay, which provides payment channels for MetaMask, is classified as an MSB.

3.3.2 Independent Third-Party Payment Company Moonpay

MoonPay is currently a leading project for cryptocurrency entry and exit fund, with a registered user base exceeding 5 million. In terms of coverage, MoonPay supports cryptocurrency payments in over 160 countries and regions, and the exchange of over 80 cryptocurrencies and 30+ fiat currencies. In terms of payment methods, MoonPay currently supports payment channels such as credit and debit cards, mobile payments, and account-to-account payments. Uniswap has previously included Moonpay as one of its entry fund channels.

By aggregating independent third-party payment companies like Moonpay, MetaMask can realize entry and exit fund payment channels, non-custodial wallets, and various trading functions aggregated on its portfolio page (Swap, Bridge, Stake, etc.), essentially forming a logical loop.

3.3.3 Snaps Version

On September 13, MetaMask released its Snaps version, which supports wallet integration for non-EVM (Ethereum Virtual Machine) chains including Solana, Sui, Aptos, Cosmos, and Starknet. Currently, 34 Snaps are in the testing phase. In simple terms, MetaMask has open-sourced a set of Snaps API access specifications, allowing third-party blockchain wallet providers to independently overcome technical challenges to integrate with MetaMask. MetaMask is only responsible for auditing the integration, while other development work is carried out by third-party developers.

As a result, users only need to download the MetaMask wallet and install third-party blockchain plugins to freely navigate various blockchain networks, with a significantly enhanced level of security. This is a very clever move in ecosystem integration, once again consolidating its leading position in plugin wallets.

MetaMask's natural advantage lies in its nearly 30 million monthly active users. In the foreseeable future, we can expect MetaMask to aggregate into a super wallet traffic entry point, allocate wallet traffic, and distribute it to various DApps, offering significant commercial potential.

4. Regulatory Compliance for Web3 Payments

Due to the openness and innovation of cryptocurrencies, it is difficult to uniformly define their attributes, and most jurisdictions do not yet have a comprehensive regulatory framework specifically for cryptocurrencies. In practice, regulatory oversight of Web3 payments not only requires compliance with cross-border payment and currency transfer businesses but also with cryptocurrency-related businesses. Additionally, the natural global circulation of cryptocurrencies presents exceptionally complex compliance challenges for Web3 payments across multiple global jurisdictions, posing a significant challenge for regulatory authorities.

Nevertheless, some jurisdictions are actively exploring Web3 payments. For example, crypto-friendly countries like Switzerland have clearly defined "Payment Tokens," and Singapore has also defined "Payment Tokens" and recently released a stablecoin regulatory framework. The EU's MiCA regulation also provides a clear definition of "Electronic Money Tokens." These evolving regulatory definitions will give cryptocurrencies a legitimate and effective status, further driving the development of the Web3 payment industry and leading the Web3 industry towards mass adoption.

Compliance is the foundation for traditional giants, so we see that when they engage in Web3 payment business, they initially limit their operations to specific regions. For example, MetaMask's Sell exit fund service (supported by Moonpay) is currently only available in the US, UK, and some European regions, and Paypal's stablecoin is currently limited to US users. Although participation in Web3 payment projects is subject to significant barriers, as project participants can only engage in Web3 payment business in compliance with standards after meeting licensing, qualifications, and permit requirements.

Due to the involvement of cryptocurrencies, payments, asset custody, stablecoins, and anti-money laundering/counter-terrorism financing, Web3 payments are exceptionally complex in terms of legal compliance. The following will briefly outline the legal regulations related to Web3 payments in major jurisdictions to see how giants are building legal compliance barriers.

4.1 United States

The main regulatory agency for Web3 payments in the United States is the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury. FinCEN is primarily responsible for supervising and implementing anti-money laundering (AML), combating the financing of terrorism (CFT), and customer due diligence (KYC) aspects, as well as collecting and analyzing financial transaction information to track suspicious individuals and activities.

FinCEN's authority comes from the Bank Secrecy Act (BSA), which considers cryptocurrencies as "currency." In 2019, FinCEN issued guidance (Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies), providing provisions related to cryptocurrency payments.

The 2019 guidance defines "money transmission" as the act of receiving currency (or the value of other alternative currencies) from one party and transmitting all or part of it to another party. The definition of "currency substitutes" includes money orders, stored value cards, and cryptocurrencies. In most cases, any "company" engaged in money transmission business to US users will meet the definition of "Money Service Business" (MSB) under the BSA and must comply with relevant regulations and obligations from both the BSA and FinCEN.

Summary of the 2019 guidance's criteria for determining MSB status:

Control of user assets (private keys): Centralized exchanges and custodial wallet providers that offer services to US users, as they can control user assets (private keys), are considered MSBs. Non-custodial wallets like MetaMask and decentralized exchanges that allow users to independently control assets (private keys) and interact directly with the payment system, or only provide communication or network access services to support currency transfer services, are not considered MSBs.

Nature of business in money transmission: Payment companies providing services to US users, such as Moonpay, Paypal, Stripe, and Square, are engaged in money transmission business and are considered MSBs.

"Companies" classified as MSBs not only need to comply with relevant regulations and obligations from the BSA and FinCEN but also need to obtain money transmission licenses (MTL) from various states in accordance with state money transmission laws. While obtaining an MSB license in the US is relatively easy, obtaining an MTL license takes a long time and requires substantial legal consultation fees, typically taking about two years and costing millions of dollars to obtain MTL licenses in various US states.

BitLicense, created by the New York State Department of Financial Services under the New York Financial Services Law, is a cryptocurrency license used to regulate cryptocurrency businesses and related trust companies (a New York State limited purpose trust company). License holders must comply with the regulatory framework of BitLicense, including consumer protection, AML compliance, and cybersecurity guidelines. Previous entities that obtained BitLicenses include XRP II, Circle Internet Financial, Gemini Trust Company, and itBit Trust Company.

This is why we see news that X (formerly Twitter) is actively applying for money transmission licenses (MTL) in various US states. X wants to become like WeChat, and a robust payment system is essential for that. For payment companies that have already obtained licenses in various states, this will be a core barrier for them to operate Web3 payment businesses in the US.

4.2 United Kingdom

Companies wishing to conduct Web3 payment business in the UK need to obtain an Electronic Money Institution (EMI) license issued by the Financial Conduct Authority (FCA). For example, Coinbase obtained an EMI license in 2018 and operates its crypto business in the EU region.

Interestingly, the London-based decentralized lending platform Aave also obtained an EMI license in 2020. This move was made to attract more users to DeFi and possibly to comply with the UK's stringent consumer protection requirements.

Before Brexit, holders of EMI licenses in the UK were not subject to restrictions on time or activity areas in the European Economic Area (EEA) and could provide any form of service. After Brexit, more companies are turning their attention to the more neutral-friendly Ireland.

4.3 Ireland/European Union

In 2021, Ireland introduced a registration system for Virtual Asset Service Providers (VASPs), with the Central Bank of Ireland reviewing companies to ensure they can meet AML/CTF requirements. After Coinbase obtained an EMI license authorized by the Central Bank of Ireland, Coinbase Ireland Limited obtained a VASP license in Ireland in 2022, allowing Coinbase to issue electronic money, provide electronic payment services, and process electronic payments for third parties.

Similarly, after obtaining the EMI license in the UK, Moonpay obtained VASP registration from the Central Bank of Ireland in 2023. The CEO stated, "We believe that registering as a VASP in Ireland first and ultimately applying for registration under the EU's MiCA will provide the company with a significant competitive advantage for compliant entry into the EU market."

The European Union's Markets in Crypto-Assets Regulation (MiCA) has been approved by the European Parliament and is expected to come into effect in 2024. In general, MiCA applies to all entities involved in the issuance of crypto-assets and the provision of crypto-asset-related services in the EU, including various types of crypto-assets issuers (such as E-Money Tokens, Asset-Referenced Tokens, and other Tokens) and crypto-asset services and service providers (such as wallet custody services, fund transfer services, exchange services, asset management services, investment advisory services, etc.).

MiCA fills the gaps in the current EU financial regulatory framework and, once implemented, will establish a unified crypto-asset regulatory framework within the EU, directly impacting a crypto-asset market covering 27 countries and 450 million EU citizens. Since obtaining a VASP license in one EU member state allows operations throughout the entire EU region, regions with the most lenient cryptocurrency regulatory policies, such as Lithuania, have attracted the registration of many centralized exchanges and payment institutions.

4.4 Hong Kong

With the introduction of the VASP system in Hong Kong, all centralized crypto-asset exchanges operating in Hong Kong or actively promoting their services to Hong Kong investors, regardless of whether they provide security token trading services, will need to obtain a license from the Securities and Futures Commission of Hong Kong and be subject to its supervision.

Additionally, the VASP system imposes the requirement for "prudent custody of client assets" on the operation of centralized exchanges, requiring platform operators to hold client funds and crypto-assets in trust through a wholly-owned subsidiary (TCSP trust license). This means that a TCSP license is required for independent custody of investor assets to prevent misappropriation.

The full name of the TCSP license is Trust or Company Service Providers. Since traditional banks can only hold fiat currency assets, custody of crypto-assets can currently only be done in trust accounts, providing new business scenarios for TCSP trust licenses.

The Hong Kong High Court has previously ruled on crypto-assets as "property" in the case of Re Gatecoin Ltd [2023] HKCFI 914, and has explicitly stated that they are "capable of being held on trust." Therefore, any company engaged in crypto-asset custody business needs to apply for a TCSP license. Exchanges such as OSL, Hashkey Group, and Gate.io have their own TCSP trust companies. Additionally, wallet infrastructure and digital asset custody service provider Liminal recently obtained a TCSP license.

Under the Anti-Money Laundering Ordinance, any entity operating or intending to operate a currency service in Hong Kong must apply to the Hong Kong Customs for a Monetary Service Operator license (MSO). For Web3 payment businesses, service providers offering crypto-related services such as currency exchange or remittance services in Hong Kong need to obtain an MSO license issued by Hong Kong Customs.

4.5 Singapore

The Monetary Authority of Singapore (MAS) is the central bank and comprehensive financial regulatory authority of Singapore, responsible for regulating the Web3 industry. Referring to the "Guide to Digital Token Offerings" released by MAS in May 2020, it clearly states that security tokens and payment tokens are regulated by two specific regulations, while utility tokens are not regulated.

For payment tokens, according to the Payment Services Act, which came into effect in January 2020, providing digital payment token (DPT) services in Singapore, including direct trading services for DPT (such as buying, selling, fiat currency exchange, and crypto-to-crypto exchange) and services facilitating the trading of DPT (such as exchanges, custody providers, wallet services, etc.), requires a license.

The application for this license is relatively challenging, and in recent years, there has been a particularly cautious attitude towards the crypto field. However, Singapore offers an indefinite exemption period for DPT operations, allowing operations to proceed without a license. In 2022, institutions such as Circle, Paxos, Blockchain.com, Coinbase, Luno, Digital Treasures Center, Crypto.com, and Genesis have successively obtained DPT licenses.

Five, Vision for the Future of Web3 Payments

From a market perspective, this is still a promising blue ocean market. According to statistics, there are currently 1.7 billion people worldwide without bank accounts but in need of financial services. Countries with high inflation, a lack of banking services for the majority of the population, or unreliable traditional financial systems have witnessed a surge in crypto payments due to these innovations. The number of over 420 million cryptocurrency owners globally is enough to show that the cryptocurrency industry is not just a speculative industry but a thriving and rapidly growing one.

From the perspective of innovative development, to meet the growing demand for cryptocurrencies, Layer 2 continues to innovate and optimize scalability solutions, stablecoins address the volatility of cryptocurrencies, compliant asset management solutions from wallet service providers and custody institutions address asset security issues, and Web3 payment companies provide deposit and payment solutions to address merchant receipts and mobile payment issues. These thriving technological innovations have laid a solid foundation for Web3 to move towards mass adoption.

Looking back at the implementation paths of giants such as Paypal, Coinbase, and MetaMask in Web3 payments, as well as their strong traffic and scene entry points, and imagining the exclusive advantages of players such as X (Twitter) and Telegram who are all in, it is easy to see that after establishing the basic functions of wallets, custody, stablecoins, and payments, giants will each form their own vast Web3 crypto ecosystems. In this context, the existing pattern of the cryptocurrency market, mainly dominated by exchanges, is bound to change.

In addition to the vast Web3 crypto ecosystems of the giants, the external compatibility of Web3 products is also a point of change. Taking Web3 wallets as an example, Web3 wallets are tools closely integrated with the DApp ecosystem, providing direct access and usage of DApps. Currently, users of the OKX Web3 wallet can access over 5,500 DApps, and the wallet has integrated over 500 DApps. Not to mention MetaMask, with nearly 30 million monthly active users, and its MetaMask Portfolio DApp, which has aggregated functions such as Sell, Buy, Stake, Dashboard, Bridge, and Swap.

(Source: From Crypto Hub to Crypto Node, Examining Singapore's Web3 Regulatory Framework)

From the perspective of the monetary system, the BIS stated in the "Blueprint for the Future Monetary System" that the current monetary system is on the verge of another major leap. After digitization, the key to the development of the monetary system is tokenization—the process of digitally representing claims of rights on a programmable platform, which can be seen as the next logical step in digital record-keeping and asset transfer.

The future monetary system will use tokenization to improve the old monetary system and support the new monetary system. By using new intermediaries (a unified ledger) to serve end-users, it eliminates the artificial intervention and reconciliation resulting from the separation of traditional message transmission, clearing, and settlement, thereby eliminating delays and uncertainties. Tokenization can significantly enhance the capabilities of the monetary and financial systems, and the future monetary system is expected to unleash new economic growth potential through tokenization, which is unrealistic in the inherent friction of the current monetary system.

This tokenization is not only the recent hot trend of Real World Asset (RWA) tokenization but can also be the tokenization of the currency itself. Tokens not only define assets but also encapsulate payment logic through the programmability of tokens, thereby defining what assets can be used for.

(Source: Blueprint for the future monetary system: improving the old, enabling the new)

Six, Conclusion

Undoubtedly, in the near future, Web3 payments will become commonplace and may completely replace existing payment methods, both within enterprises and between individuals. At the same time, traditional finance will also be interconnected through Web3 payment finance and trade, highlighting the efficiency advantages of asset expression, circulation, trading, programming, and regulation.

The greatest opportunity for cryptocurrencies may not be as cryptocurrencies but as a new payment method. Some believe that the killer application of Web3 has not yet arrived, but it may have quietly arrived: it is payments!

Digitization and tokenization will give new value to the traditional monetary system, overcoming boundaries that were previously impossible to break. The world economy may be forever changed as a result.

-END-

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