Author: Meng Yan, Shao Qing
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 the near future, payment will promote the large-scale implementation of blockchain applications in the commercial and consumer markets, stimulate innovation, and produce significant economic and technological consequences.
(The article is long, it is recommended to listen to the audio)
As we approach the end of 2024, blockchain payments have suddenly accelerated. Many mainstream financial institutions have begun to increase their support for blockchain payments:
- On September 26, BlackRock partnered with Ethena to issue the US dollar stablecoin USDb.
- On October 3, PayPal worked with EY 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 will launch 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 US$1.1 billion.
- On October 22, the BRICS Summit in Kazan, Russia announced the BRICS Pay payment system, which will compete with SWIFT.
- On October 24, Coinbase and A16Z jointly invested in Skyfire, a blockchain payment company that integrates AI technology.
Such a high density of events cannot but attract attention. People still remember that after Meta failed to sprint Libra in 2019 due to obstructions from all sides, blockchain payment, which was 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", 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, the resistance in the real world is too great to promote. So what happened now that blockchain payment suddenly heated up? Will blockchain payment make a comeback and enter a fast-track of development?
Secret success
Between 2014 and 2019, blockchain technology sparked curiosity and enthusiasm around the world, and was once considered a revolutionary technology that could comprehensively upgrade the Internet and the digital economy. The book "Blockchain Revolution" published by Don Tapscott in 2016 represented the pinnacle of this optimism. However, in the past decade of applications, the application of blockchain has not achieved the expected success. On the contrary, the news about blockchain that the public received from the media was mostly 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 has linked blockchain digital currency with speculation, hype, fraud, money laundering and the transfer of illegal funds, which has seriously stigmatized this technology in the minds of the public.
But in fact, 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, we 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 Internet intermediary platforms continue to infringe on user data sovereignty and privacy, people's awareness of data sovereignty and privacy protection will increase, 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 different stakeholders build trust and reach consensus, thus 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. Traditional payment systems require multiple intermediaries to perform accounting, reconciliation and clearing and settlement separately. Each link may cause friction and delays, and once errors occur, it will be more cumbersome and time-consuming. Blockchain technology, through distributed ledgers, allows all parties to share the same set of data, update transaction information in real time, and avoid the cumbersome reconciliation process. This trust mechanism significantly improves the efficiency of cross-border payments and greatly reduces costs, especially in complex transactions involving multiple countries and multiple currencies, the advantages of blockchain are particularly prominent. Blockchain payment not only reduces the dependence on intermediary links, but also reduces the friction caused by the lack of mutual trust between different financial systems.
In the current economic situation, the advantage of blockchain in crossing trust boundaries is 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 cross-border payment system based on blockchain that started in 2019. By 2023, the experimental results of mBridge showed 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 is a 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, and paid a total of $1,240 in fees. However, using the blockchain system, the total fee for the same amount and batch of remittances was only 30 cents. 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 as channels have developed rapidly. According to VISA statistics[3], by the third quarter of 2024, the amount of stablecoin payments visible on public chains alone will reach US$1.8 trillion per month, and is accelerating. 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 use 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 a general payment and value storage tool 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 primary reason is the current complex international political environment, which has caused some countries and economies to adopt short-sighted policies of suppression and containment in the face of a revolutionary technology like 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], which also sent a clear signal to the global public that the United States today 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 be no less than that of blockchain.
As the saying goes, there are also forces in commercial financial institutions that deliberately ignore and suppress the application of blockchain technology. The 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.
As the saying goes, there are also forces in commercial financial institutions that deliberately ignore and suppress the application of blockchain technology. The 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 mainstream media. In the past few years, mainstream media has been keen on spreading 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.
These factors have led to blockchain becoming the most criticized and least understood technology by the public since nuclear weapons.
The success of blockchain payments is unstoppable
Can the above factors block the development of blockchain in the long term or even permanently?
We think this 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 technology fashion, if a new technology has more than ten times the performance and cost advantages over 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 over existing existing technologies. For such a large technological advantage, power, money and public opinion can only temporarily delay its development, and absolutely cannot stop it for a long time.
Second, as people’s understanding of blockchain technology deepens and their understanding of its advantages becomes clearer, some concerns are eliminated. For example, financial regulators in various countries have generally worried that blockchain payments will lead to financial activities being out of regulation. However, with a series of blockchain innovation experiments in the past few years, people have gradually realized that blockchain actually provides stronger 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), regulators can monitor the compliance status of financial activities in real time and can 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 great care that the use of the US dollar is not mutually exclusive with mBridge, and 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 on the development of blockchain.
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 winner. 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 shelve and abandon blockchain technology for a long time for the purpose of maintaining vested interests. On the contrary, out of competitive motivation, once one party starts the application of blockchain payment, the other party cannot afford to compete with it with a technology that is a thousand times behind. From the current situation, the unwritten tacit understanding formed since 2019 among the major economies of the world to collectively curb the application of blockchain finance is gradually loosening.
Fourth, the strong extension 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. Looking back to 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. But once users connect to the Internet on a large scale, a large number of innovative applications will emerge. 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. But once this level is broken, a large number of innovative applications will emerge, from the e-commerce consumer 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, with Trump being particularly active. According to Trump's campaign proposals, he will actively promote the development of digital assets and blockchain after taking office, especially 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 being used in scenarios other than non-speculative transactions, 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 stop this trend by force will inevitably be futile in the long run. Not only that, what is even more disadvantageous to traditional finance is that the more crypto finance develops, the greater the regulatory pressure on traditional finance, which in turn creates more trouble and friction for its customers, and makes it less popular with young people. 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, and trust is also rapidly eroding. 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 either embrace blockchain or be subverted.
Why blockchain payment suddenly rebounded
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, not only did they not adopt it, but decided to abandon it. Ordinary users are not even willing to try this new payment technology. After the initial excitement about blockchain in the financial technology industry, enthusiasm quickly declined. 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 gradually improved, its shortcomings have been made up, and its inherent "technological gene" advantages have been verified.
In terms of its "technical genes", blockchain payment is a revolutionary new generation 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 recording accounts and post-reconciliation, greatly improving payment and settlement efficiency.
However, due to the imperfect infrastructure of blockchain in the past, users often had to pay high transaction fees and wait for several minutes to dozens of minutes to complete the payment. This offset the inherent efficiency advantage of blockchain and made 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 demonstrated. Some high-performance blockchains that can execute thousands of transactions per second have been put into practical use. Facts show that due to improvements in technology and infrastructure, people's early speculation about the inherent advantages of blockchain payments has been confirmed. In the face of thousands of times the 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 consensus-based medium of exchange and measure of value.
In the early days of blockchain development, a hot topic about it was the source of value for digital currencies such as Bitcoin and Ethereum. Various monetary experts, economists, historians, and philosophers came out to participate in the discussion, completing the theoretical enlightenment of monetary banking for a generation in a short period of time. However, whether people agree or disagree with the positioning of Bitcoin as "digital gold", it cannot change the reality of its skyrocketing and plummeting prices. Whether an asset that has skyrocketed and plummeted has a solid value foundation is debatable, but it is indisputable that it cannot be used as a medium of transaction and a measure of value.
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 US$170 billion, supporting US$1.8 trillion in transactions per month, which is equivalent to all stablecoins circulating ten times a month. This is itself a proof of the superiority of blockchain technology.
Third, blockchain’s inherent low transaction cost advantage 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 costs 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 the event of disputes. The natural borderlessness of time and space, 7x24 all-weather borderless operation, reduces the friction of transaction time. It can be said that blockchain reduces friction in every aspect of the transaction, which makes blockchain, as a payment network, more lubricated than the traditional payment system.
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, manpower was used for coordination, investigation and law enforcement. In the new era, trust between 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 potential to bring 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 has a high entry threshold.
- There are still problems such as drastic fluctuations in transaction fees and difficulties in key management.
- Excessive transparency of data makes blockchain unable to adapt to many business scenarios that require privacy protection.
- Smart contracts pose high security risks in practice.
- A full set of supporting infrastructure is required, including digital identity, digital certificates, and new compliance frameworks.
However, with the continuous advancement of technology and the popularization of user education, these problems will be gradually solved in the future.
Supervision is a challenge, but also a breakthrough
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, the global regulatory system for blockchain payment has not yet been established. On the other hand, the inherent advantages brought by asset self-custody make the compliance responsibilities that were originally required to be borne by intermediaries invisible. Low regulation is in fact 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 be a good regulatory tool. However, the financial regulatory authorities in most countries in the world have responded very negatively to this issue. They have basically adopted a self-deceiving approach. Knowing that they have no ability to implement it, they have promulgated strict one-size-fits-all rules. As a result, normal innovation and application exploration have been blocked, but the vast majority of illegal transactions have been left alone and powerless. It is in this context that the FIT21 Act in 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 terms of 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 the outcome. 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 pattern, countries have very different attitudes towards blockchain technology. Some countries adopt open and supportive policies to attract blockchain companies and investors and promote the legalization and widespread application of related technologies; while other countries are cautious or repressive about 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, but it is also the most promising breakthrough. With the continuous advancement of technology and the popularization of user education, many countries and economies will have to re-examine their stance 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 policy may lose out in future financial competition.
Summarize
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, open 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
