While payments were the primary focus in the original Bitcoin whitepaper in 2008, recent advancements have made blockchain-based payments not only viable but increasingly preferable over traditional methods. Over the past decade, billions of dollars have been invested in developing blockchain infrastructure, resulting in systems capable of operating at a scale suitable for global payments.

Advancements in Blockchain Technology

Blockchain technology is experiencing a “Moore’s Law”-like trajectory in terms of cost and performance improvements. The cost of storing data on blockchains has dramatically decreased in recent years. Following Ethereum’s Dencun Upgrade (EIP-4844), Layer 2 solutions like Arbitrum and Optimism have reduced transaction costs to approximately $0.01, with alternative Layer 1 blockchains approaching fractions of a cent per transaction.

Rise of Stablecoins

Stablecoins have seen explosive and sustained growth, becoming a significant trend in the otherwise volatile crypto industry. Visa’s launch of its stablecoin dashboard, Visa Onchain Analytics, showcases this growth, highlighting the use of stablecoins and blockchain infrastructure for global payments. Stablecoin transaction volumes have increased by approximately 3.5 times year-over-year. When focusing on consumer and business-initiated transactions, Visa estimates that stablecoin transaction volumes over the last 30 days are around $265 billion, equating to an annualised run rate of approximately $3.2 trillion. This volume is roughly double PayPal’s payment volume in 2023 and comparable to the GDP of India or the UK. These figures underscore the significant potential of blockchain technology in the future of payments.

Payments Industry Context

To understand the drivers of growth in the crypto payments market, it’s essential to consider the historical context. The current global payments infrastructure, including systems like ACH and SWIFT, was built in the 1970s. While revolutionary at the time, these systems are now outdated, expensive, and inefficient, relying on limited banking hours and numerous intermediaries.

The Need for Modernisation

The lack of a global payments standard hinders seamless international transactions, creating complexities and inefficiencies. Real-time settlement systems like UPI in India and PIX in Brazil have demonstrated the potential for modernised payment systems. In the US, initiatives like Same Day ACH, RTP by the Clearing House, and FedNow by the Federal Reserve aim to introduce real-time settlements. However, adoption has been slow, and fragmentation among various stakeholders remains a significant challenge.

Fintech Solutions

Fintech companies have attempted to improve the user experience on top of legacy infrastructure. Companies like Wise, Nium, and Thunes enable customers to pool liquidity in global accounts, making transactions feel instant. However, these solutions do not address the fundamental limitations of the underlying payment rails and lack capital efficiency.

Complexities of Cross-Border Payments

Cross-border payments exemplify the challenges of the current system:

• Multiple Intermediaries: Transactions often involve local and correspondent banks, clearing houses, FX brokers, and payment networks, adding complexity, delays, and costs.

• Lack of Standardisation: Varying regulatory requirements, payment systems, and messaging standards across countries and institutions create inefficiencies.

• Manual Processing: Legacy systems lack automation, real-time processing, and interoperability, leading to delays and manual intervention.

• Lack of Transparency: Limited visibility into transaction status, processing times, and fees complicates tracking and reconciliation.

• High Costs: Cross-border payments incur high fees, exchange rate markups, and intermediary charges.

Cross-border payments can take up to five business days to settle and cost an average of 6.25%. Despite these challenges, the B2B cross-border payments market is enormous and growing. FXC Intelligence estimates the market size was $39 trillion in 2023 and will grow to $53 trillion by 2030.

Blockchain as a Solution

Blockchain technology offers a solution to these challenges:

• Near-Instantaneous Settlement: Blockchain transactions can settle almost instantly worldwide.

• Lower Costs: Eliminating intermediaries and leveraging advanced technology reduces costs.

• Higher Visibility: Blockchains provide transparency and ease of tracking fund movements.

• Global Standard: Blockchains offer a universal “high-speed rail” accessible to anyone with an internet connection.

Adoption of Crypto Payments

Stablecoin-enabled payments address the complexities of cross-border transactions, offering near-instantaneous settlement, lower costs, greater visibility, and a global standard. As of May 2024, the aggregate stablecoin supply is approximately $161 billion, with USDT and USDC representing significant portions of the market. These stablecoins account for around 60% of on-chain transaction value.

Crypto Payments Stack Overview

The crypto payments stack consists of four primary layers:

1. Settlement Layer: Layer 1 blockchains like Bitcoin, Ethereum, and Solana, along with Layer 2 environments like Optimism and Arbitrum, compete on speed, cost, scalability, security, and distribution.

2. Asset Issuers: Entities that create, maintain, and redeem stablecoins, often using balance sheet-driven business models similar to banks.

3. On/Off-Ramps: Providers that connect stablecoins to fiat rails and bank accounts, capturing a small take rate on transaction volumes.

4. Interfaces/Applications: Customer-facing software that facilitates crypto-enabled payments, often generating revenue through platform and transaction fees.

Emerging Trends

Several trends are shaping the intersection of crypto and payments:

Cross-Border Payments as a Battleground

Cross-border transactions are complex and costly, making them a prime area for blockchain-based solutions. Companies like Layer2 Financial integrate with various crypto and fiat partners to offer seamless, compliant experiences. These solutions can settle cross-border payments in as little as 90 minutes, significantly faster than traditional methods.

Supporting Payment-Grade Infrastructure

The crypto ecosystem’s infrastructure is evolving to support real-time payments. New custody and key management systems, like Turnkey, enable rapid transaction signing and enhanced automation. Liquidity partners are also retooling for more frequent settlements.

Onchain Yield

The introduction of yield-generating digital fiat currency on blockchains is transforming onchain finance. New stablecoin issuers and tokenised US Treasury products are offering yield onchain, creating a marketplace of yield-bearing assets that can revolutionise financial services globally.

Increased Stablecoin Utility

Stablecoins are gaining acceptance in traditional finance. Stripe’s support for stablecoin payments and Visa’s expansion of stablecoin settlement capabilities are significant developments. As stablecoins become more widely accepted and spendable, they are likely to become ubiquitous alongside traditional currencies.

The advancements in blockchain technology and the rise of stablecoins are driving significant changes in the payments landscape. Blockchain-based payments offer a compelling alternative to traditional methods, providing faster, cheaper, and more transparent transactions. As infrastructure and utility continue to improve, blockchain technology has the potential to revolutionise global payments.