Encryption Payment Channel: The Superconductor that Disrupts TradFi

By 2025, blockchain has constructed a payment ecosystem parallel to the TradFi system. The encryption payment channels carry a volume of $200 billion in stablecoins, as well as a trading volume of $5.62 trillion in stablecoins for 2024, which is almost equivalent to Mastercard's total annual transaction volume. According to the ARK Invest report, the annualized trading volume of stablecoins in 2024 will reach $15.6 trillion, approximately 119% and 200% of Visa and Mastercard, respectively.

The widespread application of encryption payments has become an indisputable fact, and Stripe's acquisition of the stablecoin service provider Bridge for $1.1 billion is a landmark event. Encryption payment channels are becoming the superconductors of the payment field, laying the foundation for parallel financial systems, providing faster settlements, lower fees, and seamless cross-border operation capabilities.

Nevertheless, the payment sector still faces many challenges:

• $16 trillion trading market
• 89 trillion USD in trade finance
• 4 trillion USD in remittance pre-funding
• The average fee rate for international transfers is close to 7%.
• 3-5 working days for the arrival time
• 1.4 billion people without bank accounts

This article will comprehensively analyze how blockchain-based encryption payment channels bring utility to TradFi from the perspective of traditional payments, and explore multiple real-world application scenarios and future predictions.

1. Existing Payment Channels

1.1 Credit Card Organization Network

Credit card payments involve four main participants:

1. Merchant
2. Cardholder
3. Issuing Bank
4. Acquiring Bank

Issuing banks provide customers with credit or debit cards and authorize transactions. Acquiring institutions collect payments on behalf of merchants and ensure that funds are received. Credit card organization networks provide channels and rules for transactions, connecting acquiring institutions with issuing banks, offering clearing functions, establishing participation rules, and determining transaction fees.

Credit card networks have two types: "open loop" and "closed loop". Open loop networks like Visa and Mastercard involve multiple parties, while closed loop networks like American Express are managed by a single company throughout the process. Open loop systems offer broader adoption but disperse control and revenue; closed loop systems provide more control and better profits, but have limited merchant acceptance.

The economics of payment is complex, with multiple layers of fees. The interchange fee is the primary fee charged by the issuing bank, typically paid by the acquiring bank and passed on to the merchant. Card networks also charge a card scheme fee to compensate for network services. Additionally, there are settlement fees paid to the acquiring institution.

1.2 Automatic Clearing House ( ACH )

ACH is one of the largest payment networks in the United States, jointly owned by participating banks. It is widely used for payroll, bill payments, and B2B transactions. ACH transactions mainly consist of two types: remittances and withdrawals, involving the originator, the originating depository financial institution ( ODFI ), the receiving depository financial institution ( RDFI ), and the ACH operator.

The ACH system is working to meet modern demands, launching the "same-day ACH" service in 2015. However, it still relies on batch processing rather than real-time transfers, and there are limitations such as transaction limits and inapplicability to international payments.

1.3 Wire Transfer

Wire transfers are the core of high-value payment processing, with two main systems in the United States: Fedwire and CHIPS. These systems handle urgent, guaranteed payments that require immediate settlement, such as securities transactions, major commercial transactions, and real estate purchases. Wire transfers are usually irreversible.

Fedwire uses a real-time gross settlement system ( RTGS ), allowing participating financial institutions to send and receive funds transfers instantly. CHIPS uses a net settlement system that can consolidate multiple payments between the same counterparties. SWIFT is a global financial information network that coordinates cross-border payment transactions.

2. Real-World Use Cases

Encryption payment channels are most effective in regions where traditional dollar usage is restricted but demand is strong, such as Argentina, Venezuela, Nigeria, Turkey, and Ukraine, which are countries with unstable economies, high inflation, or underdeveloped banking systems.

The advantages of encryption payments are most evident in the context of globalized payment scenarios. Currently, there are 92 RTGS systems operating worldwide, but they cannot "communicate with each other". Encryption payment channels can act as a glue between these systems and extend to countries lacking such systems.

Encryption payments are also particularly suitable for time-sensitive payments, such as cross-border supplier payments and foreign aid payments. Encryption payments are also helpful in cases of inefficiencies in the correspondent banking network.

2.1 Merchant Acquiring

Merchant acquiring is divided into two integration methods: front-end and back-end. The front-end method allows merchants to directly accept encryption payments, primarily from early adopters in emerging markets. The back-end method provides merchants with faster settlement and fund access, which can improve working capital management.

2.2 Debit Card

Linking debit cards directly to non-custodial smart contract wallets establishes a powerful bridge between the blockchain and the real world. In emerging markets, these cards are becoming the primary consumer tool. High net worth individuals are also increasingly using cryptocurrency-linked debit cards as a tool for global consumption of USDC.

2.3 remittance

Remittances refer to the funds that overseas workers send back to their home country. The total amount of global remittances in 2023 is approximately $656 billion. Traditional remittance systems are costly, with an average fee of 6.4%, but there is significant variation. Encryption payments can provide a faster and cheaper way for overseas remittances.

2.4 B2B payment

Cross-border B2B payments are one of the most promising applications of encryption payments. Traditional payment systems are inefficient, and payments through correspondent banking systems can take weeks to settle. Encryption payments can significantly reduce settlement time and lower transaction costs.

B2B payments mainly include:

• XB Supplier Payment: Importer pays the supplier
• XB Accounts Receivable: Corporate collections from global clients
• Financial Operations: Improve the company's financial operations and accelerate global expansion
• Foreign aid payments: NGOs remit funds to local agencies

2.5 payslip

Encryption payments are particularly suitable for freelancers and contractors, especially in emerging markets. It allows more funds to go into their pockets instead of flowing to intermediaries. This method is also advantageous for crypto-native companies that already hold most of their funds in the form of cryptocurrencies.

2.6 Currency acceptance for deposits and withdrawals

Currency acceptance for deposits and withdrawals is a highly competitive market. They can be used as standalone products or as a key part of the payment process. Building currency acceptance for deposits and withdrawals typically involves obtaining the necessary licenses, ensuring partnerships with local banks or PSPs to access local payment channels, and connecting with market makers or OTC desks to obtain liquidity.

P2P channels rely on a network of "agents" to provide liquidity for fiat currencies and stablecoins, which is particularly common in Africa. The foreign exchange rates in P2P channels are often more competitive, offering exchange rates that are about 7% cheaper than bank rates.

3. Compliance Regulatory License

Obtaining regulatory approval is a necessary step to expand the application range of encryption payments. Startups can choose to partner with licensed entities or obtain licenses independently. Collaborating with partners can bypass high costs and lengthy timelines, but will reduce profit margins. Obtaining licenses independently requires a significant upfront investment, but can provide a more comprehensive product.

Global licensing coverage is extremely challenging, with unique currency transfer regulations in each region. In the United States alone, a project requires money transfer licenses for each state, New York's BitLicense, and MSB registration. Non-custodial startups that do not handle fund flows can often circumvent immediate licensing requirements.

4. Challenges

The popularization of encryption payments faces many challenges:

• The chicken or the egg dilemma: requires consumers or merchants to adopt on a large scale first.
• Issues such as high failure rates in currency acceptance for deposits and withdrawals, user experience barriers, high costs, and inconsistent quality still exist.
• Privacy Issues: As encryption payments become a primary business mechanism, privacy will become an important consideration.
• Difficulty in establishing banking relationships: encryption payments are still regarded as "high-risk activities"
• Compliance needs improvement: including AML/KYC, travel rule compliance, OFAC screening, etc.

5. Future Outlook

In the next 5 years, the encryption payment industry may see the following developments:

1. The annual payment volume reaches 200 billion to 500 billion USD, mainly driven by B2B payments.
2. More than 30 new banks worldwide have launched natively on the encryption payment channel.
3. Dozens of encryption-native companies have been acquired by fintech companies.
4. Three encryption networks designed specifically for payments have emerged.
5. 80% of online merchants accept encryption currency payments
6. Card organization network expanded to approximately 240 countries and regions
7. 15 major remittance corridors globally completed through encryption payments
8. On-chain privacy primitives adopted by enterprises and nations
9. 10% of foreign aid expenditure is sent through encryption payment channels.
10. Each country will have 2-3 major currency acceptance suppliers for deposits and withdrawals.
11. Over 10 million remote workers receive payments through encryption payment channels.
12. 99% of AI agency business is conducted through encryption payment channels.
13. More than 25 well-known partner banks in the United States support encryption payment companies.
14. Financial institutions attempt to issue their own stablecoins.
15. Large messaging platforms integrate encryption payment features
16. Loan and credit companies receive and pay through encryption payment channels.
17. Large-scale tokenization of non-USD stablecoins, giving rise to on-chain foreign exchange markets
18. CBDC is still in the experimental stage and has not yet reached commercial scale.

Conclusion

Encryption payment channels are becoming the superconductors of the payment field, laying the foundation for parallel financial systems. They offer faster settlement times, lower fees, and seamless cross-border operational capabilities. In the next decade, encryption channels will become the core of financial innovation, driving global economic growth.