Blockchain Payment Channel: Building the Foundation of a Parallel Financial System

By 2025, the Blockchain has built a financial payment ecosystem parallel to the traditional financial system. The crypto payment channels carry a stablecoin volume of 200 billion, as well as a stablecoin transaction volume of 5.62 trillion in 2024, a figure that is close to Mastercard's annual transaction volume. According to statistics, the annualized transaction volume of stablecoins reached 15.6 trillion in 2024, accounting for approximately 119% and 200% of the transaction volumes of Visa and Mastercard, respectively.

The widespread adoption of cryptocurrency payments has become an undeniable fact, with Stripe's acquisition of stablecoin service provider Bridge for $1.1 billion being a typical example. Cryptocurrency payment channels are becoming the superconductor of payments, creating a parallel financial system with faster settlement times, lower fees, and seamless cross-border operations. This idea has matured after ten years of development, and now hundreds of companies are working to make it a reality. In the next decade, cryptocurrency channels will be at the core of financial innovation, driving global economic growth.

Cryptocurrency payments still face many challenges, such as the scale of the trading market, trade financing, remittances, high fees for international transfers, and long processing times. This article will comprehensively analyze how blockchain-based cryptocurrency payment channels can bring utility to traditional payments from the perspective of traditional payment systems, and explore multiple real-world application scenarios and future predictions.

1. Existing Payment Channels

1.1 Card Organization Network

Credit card payments mainly involve four participants: merchants, cardholders, issuing banks, and acquiring banks. The issuing bank provides the customer with a credit or debit card and authorizes the transaction. The acquiring institution collects payments on behalf of the merchant and ensures that the funds reach the merchant's account.

The card organization network provides channels and rules for payments, connecting acquiring institutions with issuing banks, offering clearing functions, establishing participation rules, and determining transaction fees. ISO 8583 is the main international standard that defines the construction and exchange of credit card payment information.

The card organization network is divided into "open loop" and "closed loop" systems. Open loop networks like Visa and Mastercard involve multiple parties, while closed loop networks like American Express are handled entirely by a single company. Open loop systems offer broader adoption but have less control and revenue sharing. Closed loop systems provide more control and better profits, but have limited merchant acceptance.

The economics of payment is very complex, with multiple layers of fees. The interchange fee is the main fee charged by the issuing bank, usually borne by the merchant. The card scheme fee is determined by the card organization network and is used to compensate for network operations. The settlement fee is paid to the acquiring institution, usually a percentage of the transaction amount.

1.2 Automatic Clearing House ( ACH )

ACH is one of the largest payment networks in the United States, owned by the banks that use it. It is primarily used for payroll, bill payments, and B2B transactions. ACH transactions are divided into two types: credit transfers and debit transfers, involving multiple participants such as the originator, ODFI, RDFI, and ACH operators.

The ACH system uses batch processing rather than real-time transfers, which has some limitations. For example, the single transaction limit is $25,000, and it is not suitable for international payments. In recent years, ACH has been working to improve to meet modern needs, such as the introduction of "same-day ACH" to speed up processing.

1.3 wire transfer

Wire transfers are at the core of high-value payment processing, with two main systems in the United States: Fedwire and CHIPS. Wire transfers are typically used for urgent, secure payments that require immediate settlement, such as securities transactions and major commercial deals. Once executed, wire transfers are usually irreversible.

Fedwire uses a real-time gross settlement system ( RTGS ), while CHIPS is a net settlement system. SWIFT is not a payment system, but a global financial institution information network used to exchange secure structured information.

The wire transfer process usually involves the sender of the funds, their bank, the receiving bank, and the final recipient. Cross-border payments may need to be executed through a network of correspondent banks, typically using SWIFT to coordinate the payment.

2. Real-world Use Cases

Cryptocurrency payment channels are most effective in countries with high demand but limited use of traditional US dollars, such as Argentina, Venezuela, and Nigeria, where the economy is unstable or the banking system is underdeveloped. It also has advantages in the globalization of payments, serving as a glue between different RTGS systems.

Cryptocurrency payments are particularly suitable for urgent payments, such as cross-border vendor payments and foreign aid payments. They are also helpful in scenarios where the network of correspondent banks is inefficient. In contrast, cryptocurrency payments have less appeal for domestic transactions in developed countries, especially in places with high credit card usage or existing real-time payment systems.

2.1 Merchant Acquisition

Merchant acquiring is divided into two integration methods: front-end and back-end. The front-end method allows merchants to directly accept cryptocurrency payments, mainly targeting consumers in early adopter countries for cryptocurrencies, such as China, Vietnam, and emerging markets like India. Demand mainly comes from online gambling, retail stock brokerage firms, and other businesses looking to reach emerging markets and Web3 users.

The backend method provides merchants with faster settlement times and funding access channels. Traditional payment settlements may take 2-30 days, while crypto payments can achieve faster settlements. Merchants can also improve fund management by freely exchanging between digital dollars and yield assets.

2.2 Debit Card

Directly linking a debit card to a non-custodial smart contract wallet has created a strong bridge between the Blockchain and the real world. In emerging markets, these cards are becoming a primary consumer tool. Even in countries with stable currencies, consumers are using these cards to accumulate dollar savings and avoid foreign exchange fees.

The advantage of debit cards over credit cards lies in fewer regulatory restrictions and lower fraud risk. In the long run, mobile payment cards linked to cryptocurrency wallets may be the best anti-fraud method, as biometric verification can be utilized.

2.3 Remittance

The total amount of remittances worldwide in 2023 is approximately $656 billion. Traditional remittance systems are costly, with an average fee of 6.4%, but there is significant variation. Cryptocurrency payments can offer a faster and cheaper way for overseas remittances. An important factor driving this trend is non-custodial embedded wallets, which provide users with a Web2-level user experience.

The main challenges of cryptocurrency remittances include: the need for high incentives to encourage users to switch from existing channels; friction still exists in interactions with traditional banking institutions; customized payment gateways occupy the largest profit margin.

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) 2.4 B2B payment

Cross-border B2B payments are one of the most promising applications of cryptocurrency payments due to the inefficiency of traditional systems. Payments through the correspondent banking system can take weeks to settle and incur high costs. Cryptocurrency payments can significantly shorten the cycle and free up a large amount of working capital.

B2B payments can make progress on encrypted channels, primarily because merchants care more about costs than consumers. Reducing transaction costs by 0.5% to 1% significantly impacts businesses with large transaction volumes and low profit margins. In addition, companies are more tolerant of a poorer user experience.

The main B2B payment use cases include:

• XB Supplier Payment: Importers pay suppliers, usually buyers are in the United States, Latin America, or Europe, and suppliers are in Africa or Asia.
• XB Accounts Receivable: Enterprises with global customers can collect funds faster.
• Financial Operations: The company can hold US dollar balances and use local currency deposit and withdrawal channels to reduce foreign exchange risks and accelerate global expansion.
• Foreign aid payment: Non-governmental organizations can transfer funds to local agents faster through encrypted channels.

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) 2.5 Pay Slip

For freelancers and contractors, the value of crypto payments lies in more funds ultimately ending up in their pockets rather than flowing to intermediaries. This is particularly useful for crypto-native companies that have held most of their funds in cryptocurrency.

2.6 Currency Acceptance for Deposits and Withdrawals

The currency acceptance for deposits and withdrawals is a highly competitive market that has matured in recent years. Building currency acceptance for deposits and withdrawals typically involves obtaining the necessary licenses, ensuring partnerships with local banks or PSPs, and connecting with market makers or OTC desks for liquidity.

P2P channels rely on a network of "agents", which is especially common in regions like Africa. The main motivation for these agents is economic incentives, earning money through transaction fees and foreign exchange spreads. The foreign exchange rates for P2P channels are usually more competitive, offering rates that are 7%-10% cheaper than banks.

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3. Compliance Regulatory License

Obtaining regulatory approval is a necessary step to expand the application of cryptocurrency payments. Startups can choose to collaborate with licensed entities or obtain a license independently. Obtaining a license independently requires a significant investment of time and resources, but it can provide a more comprehensive product.

Achieving global licensing coverage is highly challenging, as each region has unique money transfer regulations. In the United States alone, it requires a money transfer license for each state )MTL(, New York's BitLicense, and MSB registration. Startups that are non-custodial and do not touch the flow of funds can often bypass immediate licensing requirements.

IV. Challenges

The widespread adoption of cryptocurrency payments faces the following main challenges:

• The question of whether the chicken or the egg came first: requires both consumers and merchants to adopt simultaneously.
• Lack of necessary use cases: There have not yet been any use cases where using stablecoins for payment is particularly advantageous or necessary.
• Issues with currency deposit and withdrawal acceptance: high failure rates, user experience barriers, high costs, inconsistent quality.
• Privacy Issues: As cryptocurrency payments become mainstream, privacy will become a serious concern.
• Difficulty in establishing banking relationships: Cryptocurrency payments are still classified as "high-risk activities".
• Insufficient compliance: Improvements are still needed in areas such as AML/KYC and travel rule compliance.

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5. Future Outlook

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

1. 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 crypto payment channel.
3. Dozens of crypto-native companies have been acquired by fintech companies.
4. Three cryptocurrency networks designed specifically for payments have emerged.
5. 80% of online merchants accept cryptocurrency payments.
6. The card organization network has expanded to approximately 240 countries and regions.
7. Most of the 15 major remittance channels globally are completed through cryptocurrency payments.
8. On-chain privacy primitives are being adopted, driven by enterprises and nations.
9. 10% of foreign aid expenditure is sent through a cryptocurrency payment channel.
10. Each country has 2-3 main currency exchange service providers.
11. Over 10 million remote workers are paid through encrypted channels.
12. 99% AI agency business is conducted on-chain through encrypted channels.
13. 25 well-known partner banks in the United States support cryptocurrency payment companies.
14. Financial institutions attempt to issue their own stablecoins.
15. Large messaging platforms integrate encrypted payments for P2P payments and remittances.
16. Loan and credit companies improve payments through encrypted channels.