Stablecoins restructure payment systems: traditional financial models ushered in fundamental changes
By Rob Hadick, Dragonfly Partner
Compiled by AidiDiaoJP, Foresight News
Original title: The traditional payment model is about to collapse, and a trillion-dollar stablecoin finance company is about to be born?
Stablecoins are not meant to improve existing payment networks, but to completely disrupt traditional payment networks. Stablecoins enable businesses to completely bypass traditional payment channels; in other words, these traditional payment channels are likely to be completely replaced one day in the future.
When payment networks are based on stablecoins, all transactions are just digital changes in the ledger. Currently, many emerging companies have begun to promote the restructuring of capital flow methods.
Recently, many people are discussing how stablecoins can become bank-as-a-service (BaaS) online platforms, connecting existing payment channels, from the issuing bank to merchant acceptance, and everything in between. Although I agree with these views, when I think about how companies and agreements will create and accumulate value in the future under a new paradigm, seeing stablecoins simply as a platform to connect to existing payment channels is actually underestimating their true potential. Stablecoin payments are a gradual improvement that represents the possibility of reimagining payment channels from the bottom up.
To understand where the future is going, we need to look back at history, because history reveals an obvious path of evolution.
The evolution of modern payment channels
The origins of modern payment systems date back to the early 1950's. Diners Club, founded by Frank McNamara, introduced the first multi-purpose bookkeeping card. This type of debit card introduces a closed-loop credit model, and Diners Club acts as a payment intermediary between merchants and cardholders. Prior to Diners Club, almost all payments were made directly between merchants and customers via cash or proprietary bilateral credit agreements.
Following the huge success of Diners Club, Bank of America (BofA) saw a huge opportunity to expand its credit business and reach a wider customer base, and launched the first consumer credit card for the mass market. Bank of America has mailed middle-class consumers more than 2 million unsolicited, pre-approved credit cards that can be used at more than 20,000 merchants in California. Due to regulatory restrictions at the time, BofA began licensing its technology to other banks in the US and even expanded to international markets, resulting in the first credit card payment network. But with that came huge operational challenges and raised serious credit risks, and the overdue rate soared to more than 20%. At the same time, along with rampant fraud, the entire project almost collapsed.
People are beginning to realize that the challenges and chaos in the banking network can only be solved by forming a true cooperative organization that will set the rules for managing the system and provide the infrastructure. Organization members can compete on product pricing, but they need to follow uniform standards. This organization later became the Visa we know today. Another organization founded by the Bank of California to compete with Bank of America later became Mastercard. It was the birth of our modern global payment model and has become the dominant structure of the global payments industry.
From the 1960s to the early 21st century, almost all innovation in the field of payments revolved around enhancing, complementing, and digitizing current global payment models. After the internet boomed in the 1990s, many innovations moved to software development.
E-commerce was born in the early 1990s, and buying a Sting CD on NetMarket was the first online payment. PizzaNet then became the first national retailer to accept online payments. Well-known e-commerce companies such as Amazon, eBay, Lotte, and Alibaba were established one after another within the next few years. The boom in e-commerce companies has in turn spawned many early independent payment gateway and processor companies. The most famous ones are Confinity and X.com, which were founded in late 1998 and early 1999, respectively, and merged to become today's PayPal.
Digital payments have spawned many well-known companies with a market capitalization of hundreds of billions of dollars. These companies connect offline merchants to online retail, including payment service providers (PSPs) and payment aggregators (PayFACs) such as Stripe, Adyen, Checkout.com, Square, etc. They solve problems on the merchant side by bundling gateways, processing, reconciliation, fraud compliance tools, merchant accounts, and other value-added software and services. But apparently they haven't disrupted traditional financial payment networks.
Although some startups focus on disrupting traditional bank payment networks and card issuing infrastructure, well-known companies such as Marqeta, Galileo, Lithic, and Synapse are mainly focused on introducing new companies into existing banking networks and infrastructure and disrupting existing payment networks. Yet many companies find that simply adding a layer of software to their existing infrastructure won't achieve real explosive growth.
Some businesses are well aware of the limitations of traditional payment methods and anticipate that they can build payment solutions that are completely independent of traditional banking infrastructure through native internet-based currencies, the most famous of which is PayPal. Many early 21st-century startups focused on the development of digital wallets, peer-to-peer transactions, and alternative payment networks. It completely bypasses banks and card issuing alliances to give end customers some monetary autonomy. These companies include PayPal, Alipay, M-Pesa, Venmo, Wise, Airwallex, Affirm, and Klarna.
They initially focused on providing a better user experience, product portfolio, and cheaper deals to groups overlooked by traditional finance, but gradually began to seize more and more market share. Traditional financial payment companies felt threatened by these alternative payment methods (APMs). Subsequently, Visa and Mastercard launched Visa Direct and Mastercard Send respectively, and also focused on providing real-time payment services for peer-to-peer transactions. Although these models have been significantly improved, they are still plagued by existing infrastructure limitations. These companies are still required to deposit funds or bear foreign/credit risk, and they also need to counterbalance their own capital pools with each other, and cannot achieve instant and transparent settlement.
Essentially, the evolutionary path of modern payments is: closed loop + trusted intermediary → open loop + trusted intermediary → open loop + partial personal autonomy. However, opacity and complexity still dominate, resulting in a worse user experience and rent extraction at every link in the entire network.
Evolution of merchant payments
Businesses can bypass some or all of the technical infrastructure of traditional payment networks through stablecoins. Below is a simplified merchant payment diagram:
As well as the responsibilities of each part of the stablecoin payment network:
Today, Stripe can handle a large part of the work on the payment merchant side, even providing account providers and various software to run a business and accept payments. However, they have not formed their own card issuing organizations or issuing payment cards.
Now imagine a world where Stripe becomes the central bank, issues its own stablecoin, and is backed by the GENIUS Act with approved collateral. Stablecoins enable atomic settlement between consumer and merchant accounts through a transparent open source ledger (blockchain). You no longer need a payment card bank and billing bank; Stripe (or any other issuer) only needs one (or a few) banks to host collateral for issuing stablecoins. They transact directly on the blockchain through their wallet, or by initiating a mint/redemption request to Stripe (issuer/central bank) and then settle on the blockchain. The clearing and settlement of funds is done through a series of smart contracts that can handle refunds and disputes (see Circle's Refund Agreement). Similarly, payment routing and even exchange operations for other currency/products can be implemented programmatically. Using stablecoins and blockchain technology, data transfer standards from banks to gateways, processors, and networks have become easier. With data transparency and fewer stakeholders, fees and billing have become simpler.
In a world like this, Stripe seems to have almost completely replaced the current payment model — with a complete infrastructure providing accounts, cards, credit, payment services, and networks, all built on better technology, reducing middle links and giving wallet holders almost complete control over the flow of funds.
Simon Taylor: “If you use stablecoins as a base, every transaction is just a numerical change in the ledger. Merchants, gateways, PSP, and banks are required to reconcile different ledger entries before. And with stablecoins, anyone operating with stablecoins is also a gateway, PSP, and receiving bank; all transactions are just digital changes in the ledger.”
This sounds like science fiction. Does reality have many issues related to fraud, compliance, stablecoin availability, liquidity/cost, etc.? Will there be incremental steps between today and this potential future? Technologies such as real-time payments (RTPs) also have flaws. The programmability and interoperability of cross-border remittances are problems that RTP cannot solve.
At any rate, the future is dawning step by step, and some companies are preparing for it. Top issuers such as Circle, Paxos, and withaUSD are expanding their products, and the payments-focused blockchains Codex, Sphere, and PlasmaFDN are also moving closer to end consumers and businesses. Future payment networks will drastically reduce intermediaries, increase autonomy, transparency, interoperability, and bring more value to customers.
Cross-border payments
B2B cross-border payments are currently one of the areas where stablecoin applications are growing significantly.
Matt Brown wrote an article about cross-border payments last year, and you can see from this post:
In many cases, there are multiple banks in the middle of a cross-border transaction. They all use SWIFT to communicate information. SWIFT itself is not a problem, but communication back and forth between banks causes additional time costs, and usually involves other clearing parties. In fact, the liquidation process usually takes 7-14 days to complete, which certainly poses significant risks and costs, and the process is extremely opaque. For example, it is not uncommon for J.P. Morgan Chase to “lose” millions of dollars over a long period of time when transferring capital from its parent company in the US to a foreign subsidiary. In addition, there was foreign exchange risk between multiple counterparties, which increased the average transaction cost by 6.6%. Also, when a company's capital flows across borders, it's almost impossible to make a living.
So it's no surprise that Stripe recently announced the launch of stablecoin-based financial accounts. This allows businesses to access stablecoin-backed dollar financial accounts, mint/redeem stablecoins directly through Bridge, and transfer funds to other wallet addresses through the Stripe dashboard. Use the Bridge API for fiat currency deposits and withdrawals, issue payment cards backed by stablecoin balances (depending on region; currently using Lead Bank), exchange other currencies, and finally directly exchange for interest-bearing products for fund management. Although many functions currently still rely on traditional systems as temporary solutions, the sending, receiving, issuance, and exchange of stablecoins and tokenized assets do not rely on traditional systems. Fiat deposit and withdrawal solutions are similar to the current state of alternative payment methods (APMs). For example, companies such as Wise and Airwallex have essentially created their own banking networks, which can store funds in different countries and make net settlements at the end of the day. Airwallex co-founder Jack Zhang correctly pointed this out last week, but he didn't consider how the world would change if fiat deposits and withdrawals were no longer required.
If you only buy tokenized assets through stablecoins and don't need to exchange them for fiat currency, then you've basically completely bypassed the traditional agency banking model. This will greatly reduce users' reliance on third parties that actually hold and send assets, thereby allowing customers to capture more value and reduce everyone's payment costs. Startups such as Squads Protocol, Rain Cards, and Stablesea are all working to enable the possibility of directly trading tokenized assets through stablecoins, and all companies operating in this field will eventually expand to the entire network.
But if you want to exchange stablecoins for fiat currency, Conduit Pay can directly cooperate with the largest foreign exchange banks in the local market to enable seamless, inexpensive, and almost instant on-chain cross-border transactions. Wallets become accounts, tokenized assets become products, and blockchain becomes a network, thereby significantly improving the user experience. If fiat deposits and withdrawals are not required, the cost can be lower. All of this can be achieved with better technology, and can provide simpler reconciliation, more autonomy, greater transparency, greater speed, greater interoperability, and even lower costs.
So what does all this mean?
This means that a native world of payments that exists on-chain and is based on stablecoins (changes in numbers on the ledger) is coming. It will not only connect to current payment models, but will gradually replace them. That's why we're about to see the first trillion-dollar stablecoin-based fintech company born soon.
I know this post will elicit a lot of legitimate criticism, like I didn't consider certain issues. But please understand that I and many entrepreneurs starting up in this field are aware of these issues and are working to resolve them. Innovation is just that; building incrementally on an old system never really brings about a brand new system, because vested interests will always prevent this from happening.
Closed loop + trusted intermediary → open loop + trusted intermediary → open loop + partial personal autonomy → truly open digital native system. Everyone can compete in the entire payment network, and customers exercise autonomy through an open network.
This article only represents the author's subjective opinions and is not necessarily the opinion of Dragonfly or its affiliates. Dragonfly may have invested in the ones mentioned in this article
