Author: Meng Yan & Shao Qing
As the end of 2024 approaches, blockchain payments suddenly accelerate. Many mainstream financial institutions have begun to increase their support for blockchain payments:
On September 26, BlackRock and Ethena cooperated to issue the US dollar stablecoin USDb.
On October 3, PayPal cooperated with Ernst & Young to complete the first stablecoin commercial remittance using its self-issued PYUSD.
On October 3, VISA announced the VTAP platform to help institutions independently issue and operate stablecoins.
Also on October 3, SWIFT announced that it would start digital currency and digital asset trading experiments in 2025.
On October 16, Internet payment giant Stripe announced a partnership with Paxos to support stablecoin payments.
On October 19, Societe Generale issued the euro stablecoin EUR CoinVertible.
On October 21, Stripe announced the acquisition of stablecoin payment startup Bridge for $1.1 billion.
On October 22, the BRICS Pay payment system, which competes with SWIFT, was announced at the BRICS Summit in Kazan, Russia.
On October 24, Coinbase and A16Z jointly invested in Skyfire, a blockchain payment company that integrates AI technology.
Such a high-density event cannot but attract attention. People still remember that after Meta's sprint to Libra failed in 2019 due to obstructions from all sides, blockchain payments, which were once regarded as having revolutionary potential, gradually faded out of sight. Two years ago, due to the collapse of the crypto asset market, most mainstream financial institutions avoided "digital currency" and "crypto assets" as much as possible, and the public gradually formed the impression that "blockchain has no future". Some people think that blockchain is useless, while others think that although blockchain is useful, it is too difficult to promote due to too much resistance in the real world. So what happened now that blockchain payment suddenly heated up? Will blockchain payment make a comeback and enter a fast-track of development?
Between 2014 and 2019, blockchain technology aroused curiosity and enthusiasm around the world and was once considered a revolutionary technology that could comprehensively upgrade the Internet and digital economy. The book "Blockchain Revolution" published by Don Tapscott in 2016 represented the pinnacle of this optimism. However, in the past decade of application, the application of blockchain has not achieved the expected success. On the contrary, most of the news about blockchain that the public gets from the media is negative, such as the failure of the highly anticipated Libra project, the failure of the blockchain logistics management system jointly developed by IBM and Maersk, and the failure of the blockchain transformation project of the Australian ASX Stock Exchange. In the Internet industry, many professionals believe that blockchain technology has not been able to find practical application scenarios for a long time and can only be used in some unorthodox ways. It is useless in the "real world" and has been falsified. The mass media associates blockchain digital currency with speculation, hype, fraud, money laundering and the transfer of illegal funds, which has seriously stigmatized this technology in the public mind.
But in fact, completely contrary to the public's impression, blockchain as a technology has actually achieved extremely amazing success and is currently the most advanced technology for cross-border value exchange and trusted data exchange.
To understand this, you must first understand "cross-border".
The so-called cross-border here does not refer to geographical boundaries or administrative boundaries, but to the trust boundaries between different financial systems, countries, organizations and individuals.
One of the main contradictions in the current digital economy is the contradiction between the high efficiency of the Internet in information transmission and the low efficiency of value exchange between different entities due to lack of trust. In other words, information can be transmitted at the speed of light, but value cannot cross the trust boundary. Not only that, as the incidents of Internet intermediary platforms violating user data sovereignty and privacy continue to be exposed, people's awareness of data sovereignty and privacy protection will be enhanced, and the trust boundary in the digital space will become more and more dense. If this problem cannot be solved, the operating efficiency of the digital economy will continue to decline, rather than continue to improve.
The core advantage of blockchain payment is to help entities with different interests establish trust and reach consensus, thereby crossing the trust boundary. For example, in cross-border payment scenarios, this means that trust can be established between different entities, thereby reducing reconciliation friction, improving efficiency and reducing costs. The traditional payment system requires multiple intermediaries to separately record, reconcile and clear and settle accounts. Each link may cause friction and delays, and once errors occur, it will be more cumbersome and time-consuming. Blockchain technology uses distributed ledgers to enable all parties to share the same set of data, update transaction information in real time, and avoid cumbersome reconciliation processes. This trust mechanism significantly improves the efficiency of cross-border payments and greatly reduces costs. In particular, the advantages of blockchain are particularly prominent in complex transactions involving multiple countries and multiple currencies. Blockchain payments not only reduce the reliance on intermediaries, but also reduce the friction caused by the lack of mutual trust between different financial systems.
Under the current economic situation, the advantages of blockchain in crossing trust boundaries are mainly reflected in cross-border payments. Since 2015, central banks, large commercial banks and financial institutions in many countries have quietly conducted experiments on blockchain cross-border payments, with amazing results. For example, the Bank for International Settlements' mBridge project[1] is a blockchain-based cross-border payment system that began in 2019. By 2023, the experimental results of mBridge show that blockchain has a huge advantage over traditional payment systems such as SWIFT, with cross-border payment time reduced from several days to seconds, and transaction costs close to zero. Another example that illustrates this point is the cross-border micropayment experiment conducted by a major commercial bank in Australia. They split $100,000 into hundreds of small transactions for cross-border remittances. Using the SWIFT system, they paid a total of $1,240 in fees. However, using the blockchain system, the same amount and batch of remittances only cost 30 cents in total fees. In fact, the Libra global payment network, which the public thought had failed, has achieved great technical success. Although the project was terminated due to many non-technical factors, the public chain systems Aptos and Sui developed based on the project have been launched and have excellent technical performance.
Feedback from users also illustrates this point. It is estimated that there are currently about 560 million users holding digital currencies worldwide, of which 82 million use blockchain directly[2]. Many individual users have said that once they start using blockchain for payments, they can never go back to traditional banks. In the past two or three years, stablecoin payments in the "retail" field using public chains have developed rapidly. According to VISA statistics[3], by the third quarter of 2024, the amount of stablecoin payments visible on the public chain alone will reach 1.8 trillion US dollars per month, and is accelerating. What is even more shocking is that the application scenarios of stablecoins are "breaking the circle" and are being used in a large number of non-speculative trading scenarios. According to statistics from Circle, the issuer of the second largest US dollar stablecoin USDC, since 2023, the usage rate of USDC in speculative scenarios has decreased by 90%, and the space vacated has been filled by real-world transfer payment scenarios. Especially in the blind spots and weak links of some traditional banking services, stablecoin payments as general payment and value storage tools are spreading like wildfire. Facts have prompted more and more people and institutions to put aside their prejudices and rethink the topic of blockchain payment.
Since blockchain payment has such great advantages and has made such great progress, why is the public not aware of it?
The first reason is that the current complex international political environment has caused some countries and economies to adopt short-sighted repressive and containment policies in the face of such a revolutionary technology as blockchain.
The United States has set a very bad example in this regard. It has not only strangled the Libra global payment network in its cradle, but has also actively interfered with the development of blockchain technology internationally. A typical example is the mBridge project of the Bank for International Settlements. The project was launched in 2019, before the outbreak of the Russian-Ukrainian war. But when the project was successful and the advantages of blockchain were confirmed, the Russian-Ukrainian war had already broken out, and the United States and the West launched financial sanctions to kick Russia out of the SWIFT system. Therefore, the results of mBridge are tantamount to announcing to the world that SWIFT is already a technologically backward system and should be replaced by blockchain. This is obviously not conducive to maintaining financial sanctions against Russia. In addition, since the US dollar is deeply bound to the existing international currency settlement system, the impact of an advanced, rule-based, and highly automated international settlement network on the US dollar is also a question that needs to be studied. Based on these considerations, the United States directly warned the Bank for International Settlements to be cautious in promoting the results of mBridge. This is an important reason why the results of the project have not been widely disseminated publicly. The Bank for International Settlements recently announced that it was considering withdrawing from the mBridge project[4]. This also sent a clear signal to the global public that today's United States is willing to suppress technological innovation in order to maintain the existing order. This is in stark contrast to the treatment AI has received. In fact, the impact of AI on the existing order may not be less than that of blockchain.
Following the trend from above, there are also forces in commercial financial institutions that deliberately ignore and suppress the application of blockchain technology. Blockchain payment experiments conducted in many commercial banks are often led by marginal financial innovation departments rather than core business departments. Just like when Tesla invented alternating current and was actively suppressed by Edison, innovators are suppressed by non-technical factors. The reason is still out of consideration for maintaining vested interests. The classic "agency problem" in economics is vividly reflected here.
Another important reason is the negative attitude of the mainstream media. In the past few years, the mainstream media has been keen to spread the negative image of blockchain, and has habitually adopted a questioning, cold and rejection attitude towards all positive news related to blockchain, causing most ordinary users to avoid blockchain payment.
All these factors have made blockchain the most controversial and least understood technology since nuclear weapons.
Can the above factors block the development of blockchain for a long time or even permanently?
We think it is impossible. There are five reasons.
First, the competitive advantages of blockchain in cross-border payment, social payment and other scenarios are too prominent to be concealed. In the fashion of science and technology, if a new technology has more than ten times the performance and cost advantages of the previous generation of technology, it is considered a revolutionary innovation. In the scenarios where blockchain payment is good at, it has thousands to tens of thousands of times the efficiency and cost advantages of existing existing technologies. For such a large technical advantage, power, money and public opinion can only temporarily delay its development, and it is absolutely impossible to stop it for a long time.
Second, as people's understanding of blockchain technology deepens and their understanding of its advantages becomes clearer and clearer, some concerns are eliminated. For example, financial regulatory authorities in various countries have generally worried that blockchain payment will lead to financial activities out of regulation. However, with a series of blockchain innovation experiments in the past few years, people have gradually realized that blockchain actually provides more powerful financial regulatory capabilities. For example, in the cross-border payment experiment conducted by Ample FinTech under the guidance of the Monetary Authority of Singapore (MAS), regulatory authorities can monitor the compliance status of financial activities in real time and directly enforce the law by changing the status of smart contracts, which is a thousand times more efficient than current technology [5]. In addition, the impact of blockchain payments on the monetary and economic systems is also being more clearly assessed. At the Financial Street Forum held on October 23, 2024, Zhou Xiaochuan, former governor of the People's Bank of China, analyzed the value of the mBridge project in promoting economic and trade exchanges between various regions in Asia, and pointed out with good intentions that the use of the US dollar and mBridge are not mutually exclusive. Whether the US dollar can continue to be a reserve currency and international trade settlement currency depends mainly on the United States itself [6]. These new understandings help to remove the shackles of blockchain development.
Third, the complex international political and economic landscape has created favorable conditions for the implementation of blockchain payments. The current international political and economic competition and confrontation have intensified, and technological competition is regarded by all parties as an important factor in determining the outcome. After the outbreak of the Russian-Ukrainian war, speculation that the US dollar and the SWIFT system could be weaponized as tools of economic and financial warfare was confirmed. In such a new pattern, there is no force or coordination mechanism in the world that can keep blockchain technology on the shelf for a long time for the purpose of maintaining vested interests. On the contrary, out of competition, once one party starts the application of blockchain payment, the other party cannot afford the cost of competing with it with a technology that is a thousand times behind. From the current situation, the unwritten tacit understanding of the world's major economies to collectively curb the application of blockchain finance since 2019 is gradually loosening.
Fourth, the strong extension application of blockchain technology will also urge or even force all parties to join the competition. At present, it is generally believed that the application of blockchain is concentrated in the financial field, but in fact, with the continuous development of cryptographic innovation, blockchain can greatly change the way we store, transmit, verify and use data. In some ways, blockchain is somewhat similar to the Internet. The main cost is to establish a connection. Once connected, it will unlock a wide range of application scenarios. Recalling the 1990s, to access the Internet, it was necessary to lay infrastructure such as networks and routers, and users needed to install special equipment such as network cards or modems to connect to the network. This access cost is the main obstacle for users to use the Internet. However, once users are connected to the Internet on a large scale, a large number of innovative applications will emerge. The blockchain is similar. The biggest obstacle to promoting its application is to let each user establish their own digital identity and connect to the blockchain through a digital wallet. This is not easy and involves a lot of user education and market promotion. However, once this barrier is overcome, a large number of innovative applications will emerge, from the e-commerce consumption field to data management, from organizational collaboration to military applications, and the paradigm of people's use of the Internet will change. Due to this strong extension, all competing parties cannot afford the risk of long-term inaction.
Fifth, the support of young people. In the 2024 US election, candidates from both parties have expressed their support for blockchain technology, and Trump is particularly active. According to Trump's campaign proposals, he will actively promote the development of digital assets and blockchain after taking office, especially to promote the rapid passage of the "21st Century Financial Innovation and Technology Act", the famous FIT21 Act [7], to establish a new regulatory framework for the development of blockchain and digital assets. Why has encrypted digital assets become a topic of the election? Because both parties want to win over young people. Whether it is young people in Africa who cannot open bank accounts or e-commerce business operators in Southeast Asia who need to quickly settle payments between each other, once they cross the entry threshold and experience the advantages of blockchain payment, they will never get tired of it. Therefore, the real trend now is that stablecoin payments on blockchain are increasingly used outside of non-speculative trading scenarios, and their development speed and scale have exceeded original expectations. Once many young people overcome their initial unfamiliarity and master the basic operations of blockchain payment, they will never want to return to the traditional financial system. Any attempt to block this trend by coercive means will inevitably be futile in the long run. Not only that, what is even more disadvantageous for traditional finance is that the more crypto finance develops, the greater the regulatory pressure faced by traditional finance, and the more troubles and frictions it creates for its customers, the less popular it is with young people, and this vicious cycle is difficult to break. Today in many countries and regions, the service quality of traditional banks is rapidly declining, ordinary users' complaints about bank services are accumulating at an accelerated rate, and trust is also rapidly lost. In the long run, no country can permanently suppress the application of blockchain financial technology in order to maintain the existing financial management model. Traditional financial institutions must either embrace blockchain or be disrupted.
Therefore, we believe that although the application of blockchain has taken a detour in the past decade, the path to large-scale application of blockchain has gradually become clear with payment as the breakthrough point. In a short period of time, payment will promote the large-scale implementation of blockchain applications in the commercial and consumer markets, and stimulate innovation and produce significant economic and technological consequences.
Blockchain payment has taken a curve of opening high and closing low. After 2015, when the central banks of some countries built a new generation of payment systems such as CBDC, they once favored blockchain technology, but after repeated inspections, they not only did not adopt it, but decided to abandon it. Ordinary users are not even willing to try this new payment technology. After the initial excitement of the financial technology community about blockchain, the enthusiasm quickly decreased. After 2021, mainstream financial professionals rarely actively participated in the research and development of blockchain payments. In this case, the rapid counterattack of blockchain payment "resurrection" in the past year is unexpected. Why did this happen? We believe that there are the following main reasons:
First, the blockchain infrastructure has been gradually improved, and its shortcomings have been made up, so that its inherent "technical gene" advantages can be verified.
Blockchain payment, in terms of its "technical gene", is a revolutionary new generation of technology that fundamentally surpasses the current mainstream payment system. Its biggest advantage is the trinity of transfer, clearing and settlement, which completely eliminates the delays and frictions caused by multiple ledgers and subsequent reconciliation, greatly improving the efficiency of payment and settlement.
However, due to the imperfect infrastructure of the blockchain before, users often pay high handling fees when using it, and have to wait for several minutes to dozens of minutes before they can complete the payment, which offsets the inherent efficiency advantage of the blockchain and makes ordinary users feel inefficient.
In recent years, with the development of high-performance public chains and second-layer network technologies, blockchain infrastructure has made great technological progress, and efficiency and cost advantages have been fully reflected. Some high-performance blockchains that can execute thousands of transactions per second have been put into practical application. Facts show that due to the improvement of technology and infrastructure, people's early speculation on the inherent advantages of blockchain payment has been confirmed. In the face of thousands of times of performance and cost advantages, all doubts about whether blockchain is useful are meaningless.
Second, stablecoins provide a pragmatic answer to the question of "source of value" and become a transaction medium and value scale with consensus.
In the early days of blockchain development, a hot topic about it was the source of value of digital currencies such as Bitcoin and Ethereum. Various monetary experts, economists, historians and philosophers came out to participate in the discussion, and completed the theoretical enlightenment of monetary banking for a generation in a short period of time. However, whether people recognize or not recognize the positioning of Bitcoin as "digital gold", it cannot change the reality of its skyrocketing and plummeting prices. Whether an asset that soars and plummets has a solid value foundation is debatable, but it is certainly not a transaction medium and value scale, which is indisputable.
Stablecoins bypass the philosophical debate on the source of value, solve this problem with a pragmatic attitude, and reconcile the contradictions between the crypto asset community, supervision and the traditional financial industry, becoming a transaction medium and value scale with broad consensus, and becoming the mainstream "currency" in blockchain payments. At present, there are more than 180 stablecoins in circulation, and 26 countries and regions have issued stablecoin regulatory frameworks. The total scale of stablecoins exceeds 170 billion US dollars, supporting 1.8 trillion US dollars in transactions per month, which is equivalent to all stablecoins circulating ten times a month. This is a proof of the superiority of blockchain technology.
Third, the inherent low transaction cost advantage of blockchain strengthens the network effect.
The multiple characteristics of blockchain have reduced the transaction costs of blockchain payments in all aspects. Among them, autonomous accounts have greatly reduced the threshold for joining the network. User assets are self-custodied, which greatly reduces trust friction. Smart contracts reduce the cost of transaction negotiation, drafting and contract execution. Transaction records are transparent and cannot be tampered with, which reduces the cost of evidence collection and arbitration in disputes. Naturally without time and space boundaries, 7x24 all-weather borderless operation reduces the friction of transaction time. It can be said that blockchain reduces friction in every link of the transaction, which makes blockchain, as a payment network, its lubrication level is far beyond the reach of traditional payment systems.
Fourth, geopolitical conflicts force blockchain to accelerate its development.
In recent years, international geopolitical conflicts have intensified, the pattern of globalization has been broken, the barriers to international trade and exchanges have become increasingly clear, and the boundaries of trust have become increasingly dense. In the original era of globalization, various entities signed international agreements and maintained basic trust with each other. On this basis, once an abnormality was discovered, human resources were used for coordination, investigation and law enforcement. In the new era, the trust between the various entities has been greatly weakened, and abnormal situations have occurred frequently. Continuing to maintain the manual supervision model has not only overwhelmed the regulators themselves, but also brought increasingly unbearable friction to the vast majority of law-abiding and compliant enterprises and individuals. The application of new technologies has become unstoppable. Blockchain is currently the only relatively mature new technology that has the hope of bringing breakthroughs in this field.
Of course, we must also see that due to the immaturity of technology and other reasons, blockchain payment still faces many challenges, such as:
The user experience is very different from traditional Internet applications, and there is a high entry threshold.
There are still problems such as drastic fluctuations in handling fees and difficulties in key management.
The excessive transparency of data makes blockchain unable to adapt to many business scenarios that require privacy protection.
Smart contracts cause high security risks in practice.
A full set of supporting infrastructure such as digital identity, digital certificates, and new compliance frameworks are required.
However, with the continuous advancement of technology and the popularization of user education, these problems will be gradually solved in the future.
One issue that must be mentioned is that blockchain payment currently has the "advantage" of low regulation, which is caused by two reasons. On the one hand, it is because the global regulatory system for blockchain payment has not yet been established. On the other hand, it is because the inherent advantages brought by asset self-custody have eliminated the compliance responsibilities that were originally required to be borne by intermediaries. Low regulation is actually an important reason for many people to use blockchain payment. However, blockchain payment technology does not naturally exclude regulation. On the contrary, smart contracts themselves can become a good regulatory tool. However, the financial regulators in most countries around the world have responded very negatively to this issue. They have basically adopted a self-deceiving approach. They have promulgated strict one-size-fits-all rules when they know that they have no ability to implement them. As a result, they have blocked normal innovation and application exploration, but have left most illegal transactions alone and are powerless. It is in this context that the FIT21 Act of the United States has attracted special attention. The Act has taken a positive attitude, combining blocking and dredging, focusing on dredging, and incorporating blockchain and digital assets into a new framework for reasonable guidance. If it is implemented, it may open up a new situation for innovation in the value Internet.
Although blockchain payment has made significant progress, the key to its future development lies in the attitudes of various countries in regulation and policy. Competition between different countries and economies in the field of blockchain payment is becoming increasingly fierce, and regulation and policy have become the key factors that determine victory or defeat. Those countries that can actively promote the development of blockchain payment will occupy a favorable position in the future financial system.
Under the international competition landscape, countries have very different attitudes towards blockchain technology. Some countries have adopted open and supportive policies to attract blockchain companies and investors and promote the legalization and widespread application of related technologies; while other countries have adopted a cautious or repressive attitude towards blockchain payments, causing them to gradually lag behind in technology development and industrial layout. Take the United States as an example. In the 2024 US election, candidates from both parties expressed their support for blockchain, which marks a positive shift in regulatory policies. Russia, Brazil and other countries are actively exploring blockchain payment systems independent of SWIFT through projects such as BRICS Pay to break free from the constraints of the traditional financial system.
Policy and regulatory uncertainty is the biggest obstacle to the development of blockchain payments at present, but it is also the most potential breakthrough. With the continuous advancement of technology and the popularization of user education, many countries and economies will have to re-examine their positions on blockchain payments. Active and enlightened regulatory policies will promote the popularity of blockchain payments around the world, while those countries that take a wait-and-see or repressive attitude in policies may fall behind in future financial competition.
Blockchain payment is going through a critical stage from exploration to application, and its core advantages are gradually being recognized by financial institutions and users in various countries. As discussed in this article, blockchain payment is becoming a force that cannot be ignored in the global financial system with its ability to cross trust boundaries, greatly improved efficiency, reduced costs, and broad support from the younger generation. Although there are still challenges, in the long run, enlightened and proactive policies and regulations will be the key to promoting the comprehensive development of blockchain payment, and the potential of this technology will continue to be released, leading the transformation of the future digital economy and the Internet.
[1] https://en.wikipedia.org/wiki/MBridge
[2] https://kruschecompany.com/blockchain-sector-statistics-and-facts/
[3] https://visaonchainanalytics.com/
[4] https://www. reuters.com/business/finance/bis-leave-cross-border-payments-platform-project-mbridge-2024-10-31/
[5] https://fintechnews.sg/80309/singapore-fintech-festival-2023/project-desft-to-empower-msmes-in-global-trade-with-blockchain-based-credentials/
[6] https://mp.weixin.qq.com/s/e52cqAH-VLeOjqvj0CLLoA
[7] https://en.wikipedia.org/wiki/Financial_Innovation_and_Technology_for_the_21st_Century_Act
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