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Encrypted Payment Channels: Why Have They Become the Superconductors of Traditional Payments?

Encrypted Payment Channels: Why Have They Become the Superconductors of Traditional Payments?

Fast forward to 2025, we have witnessed the convergence of several key innovations and developments that have made this vision inevitable: stablecoins have been widely adopted by consumers and businesses, market makers and OTC desks can now easily hold stablecoins on their balance sheets, DeFi applications have created robust on-chain financial infrastructure, there is a large amount of fiat on-ramps and off-ramps worldwide, block space is faster and cheaper, embedded wallets have simplified user experiences, and clearer regulatory frameworks have reduced uncertainty.

Today, we have the opportunity to build a new generation of payment companies that leverage the power of "crypto rails" to achieve better unit economics than traditional financial payment systems, which are constrained by multiple rent-seeking intermediaries and outdated infrastructure. These crypto rails are forming the backbone of a parallel financial system that operates 24/7 in real-time and is inherently global.

In this article, Dmitriy Berenzon will:

• Explain the key components of the traditional financial system;

• Outline the main current use cases of crypto rails;

• Discuss the barriers and challenges to continued adoption;

• Share predictions for the market landscape five years from now.

To further inspire this article, it is worth noting that there are more companies operating here than you might think—about 280 as of this writing.

Why Have Encrypted Payment Channels Become the Superconductors of Traditional Payments?

I. Existing Payment Channels

To understand the importance of crypto rails, it is first necessary to understand the key concepts of existing payment channels and the complex market structures and system architectures in which they operate. If you are already familiar with these, feel free to skip this section.

1.1 Card Networks

While the topology of card networks is complex, the main players in credit card transactions have remained unchanged for the past 70 years. Essentially, credit card payments involve four main participants:

1. The merchant;

2. The cardholder;

3. The issuing bank;

4. The acquiring bank;

The first two are straightforward, but the latter two deserve explanation.

The issuing bank or issuer provides customers with credit or debit cards and authorizes transactions. When a transaction request is made, the issuing bank decides whether to approve it by checking the cardholder's account balance, available credit, and other factors. Credit cards essentially lend the issuer's funds, while debit cards transfer directly from your account.

If a merchant wants to accept credit card payments, they need an acquirer (which can be a bank, payment processor, gateway, or independent sales organization), which is an authorized member of the card network. The term "acquirer" comes from its role in collecting payments on behalf of the merchant and ensuring that these funds reach the merchant's account.

The card network itself provides the rails and rules for credit card payments. They connect acquirers with issuing banks, provide clearing functions, set participation rules, and determine transaction fees. ISO 8583 remains the primary international standard, defining how credit card payment information (e.g., authorization, settlement, refunds) is structured and exchanged among network participants. In the network context, issuers and acquirers are like their distributors—issuers are responsible for getting more cards into users' hands, while acquirers are responsible for getting as many card terminals and payment gateways into merchants' hands so they can accept credit card payments.

Additionally, there are two types of card networks: "open-loop" and "closed-loop." Open-loop networks like Visa and Mastercard involve multiple parties: issuing banks, acquiring banks, and the card network itself. The card network facilitates communication and transaction routing but is more like a marketplace, relying on financial institutions to issue cards and manage customer accounts. Only banks are allowed to issue cards for open-loop networks. Each debit or credit card has a Bank Identification Number (BIN), provided by Visa to banks, while non-bank entities like PayFacs need a "BIN sponsor" to issue cards or process transactions.

In contrast, closed-loop networks like American Express are self-contained, with a single company handling all aspects of the transaction process—they typically issue their own cards, are their own bank, and provide their own merchant acquiring services. The general consideration is that closed-loop systems offer more control and better margins but at the cost of more limited merchant acceptance. Conversely, open-loop systems offer broader adoption but at the cost of shared control and revenue among participants.

The Economics of Payments

The economics of payments are highly complex, with multiple layers of fees within the network. Interchange fees are part of the payment fees charged by issuing banks for providing access to their customers. While technically paid by the acquiring bank, the cost is typically passed on to the merchant. Card networks usually set interchange fees, which often constitute the majority of the total payment cost. These fees vary significantly across regions and transaction types. For example, in the U.S., consumer credit card fees range from ~1.2% to ~3%, while in the EU, the cap is 0.3%. Additionally, scheme fees are determined by card networks to compensate for connecting acquirers and issuers and acting as "rails" to ensure accurate transaction and fund flows. There are also settlement fees paid to acquirers, typically a percentage of the transaction settlement amount or volume.

While these are the most important participants in the value chain, the reality is that today's market structure is much more complex in practice:

Source: 22nd

In the above chain, there are several other important players:

• Payment Gateway: Encrypts and transmits payment information, connects payment processors and acquirers for authorization, and communicates transaction approval or rejection to businesses in real-time.

• Payment Processor: Processes payments on behalf of the acquiring bank. It forwards transaction details from the gateway to the acquiring bank, which then communicates with the issuing bank via the card network for authorization. The payment processor receives the authorization response and sends it back to the gateway to complete the transaction. It also handles settlement, the process by which funds actually enter the merchant's bank account. Typically, businesses send a batch of authorized transactions to the payment processor, which submits them to the acquiring bank to initiate the transfer of funds from the issuing bank to the merchant's account.

• Payment Facilitator (PayFac) or Payment Service Provider (PSP): Pioneered by PayPal and Square around 2010, these act as mini payment processors between merchants and acquiring banks. They bundle many smaller merchants into their systems, effectively acting as aggregators to achieve economies of scale and simplify operations by managing fund flows, processing transactions, and ensuring payments. PayFacs hold direct merchant IDs with card networks and assume responsibility for onboarding, compliance (e.g., anti-money laundering laws), and underwriting for the merchants they work with.

• Orchestration Platform: A middleware technology layer that simplifies and optimizes the payment process for merchants. It connects to multiple processors, gateways, and acquirers via a single API, improving transaction success rates, reducing costs, and enhancing performance by routing payments based on factors like location or fees.

1.2 Automated Clearing House (ACH)

The Automated Clearing House (ACH) is one of the largest payment networks in the U.S., effectively owned by the banks that use it. It was initially established in the 1970s but truly gained popularity when the U.S. government started using it to send Social Security payments, encouraging banks nationwide to join the network. Today, it is widely used for payroll processing, bill payments, and B2B transactions.

There are two main types of ACH transactions: credits and debits. When a user receives a salary or pays a bill online using a bank account, they are using the ACH network. The process involves multiple participants: the company or individual initiating the payment (the originator), their bank (ODFI), the receiving bank (RDFI), and the operator that facilitates all these transactions. In the ACH process, the originator submits the transaction to the ODFI, which then sends it to the ACH operator, which switches the transaction to the RDFI. At the end of each day, the operator calculates the net settlement amounts for its member banks (the Federal Reserve manages the actual settlement).

Source: The U.S. Payment System: A Guide for Payment Professionals

One of the most important things about ACH is how it handles risk. When a company initiates an ACH payment, its bank (ODFI) is responsible for ensuring everything is legitimate. This is especially important for debits—imagine if someone used your bank account information without permission. To prevent this, regulations allow disputes to be raised within 60 days of receiving a statement, and companies like PayPal have developed clever verification methods, such as making small test deposits to confirm account ownership.

The ACH system has struggled to meet modern needs. In 2015, they introduced "Same-Day ACH," which processes payments faster. Nonetheless, it still relies on batch processing rather than real-time transfers and has limitations. For example, you cannot send more than $25,000 in a single transaction, and it is not suitable for international payments.

1.3 Wire Transfers

Wire transfers are at the heart of high-value payment processing, with the two main systems in the U.S. being Fedwire and CHIPS. These systems handle time-sensitive, guaranteed payments that require immediate settlement, such as securities transactions, major business deals, and real estate purchases. Once executed, wire transfers are typically irrevocable and cannot be canceled or reversed without the recipient's consent. Unlike regular payment networks that process transactions in batches, modern wire transfers use Real-Time Gross Settlement (RTGS) systems, meaning each transaction is settled individually as it occurs. This is an important feature because the system handles hundreds of billions of dollars daily, making the risk of intraday bank failures under traditional net settlement too high.

Fedwire is an RTGS system that allows participating financial institutions to send and receive same-day fund transfers. When a business initiates a wire transfer, its bank verifies the request, deducts the amount from the account, and sends a message to Fedwire. The Federal Reserve Bank then immediately deducts the amount from the sending bank's account and credits the receiving bank's account, which subsequently credits the final recipient's account. The system operates on business days from 9 PM the previous night to 7 PM Eastern Time and is closed on weekends and federal holidays.

CHIPS, owned by large U.S. banks through The Clearing House, is a private-sector alternative but is smaller and serves only a few large banks. Unlike Fedwire's RTGS approach, CHIPS is a netting settlement system, meaning it allows multiple payments between the same counterparties to be netted. For example, if Alice wants to send $10 million to Bob, and Bob wants to send $2 million to Alice, CHIPS would combine these into a single $8 million payment from Bob to Alice. While this means CHIPS payments take longer than real-time transactions, most payments are still settled intraday.

Complementing these systems, SWIFT is not actually a payment system but a global messaging network for financial institutions. It is a member-owned cooperative with shareholders representing over 11,000 member organizations. SWIFT enables banks and securities firms worldwide to exchange secure, structured messages, many of which initiate payment transactions across various networks. According to Statrys, SWIFT transfers take approximately 18 hours to complete.

In the general process, the sender instructs their bank to send a wire transfer to the recipient. The value chain below is a simple case where both banks belong to the same wire transfer network.

Source: The U.S. Payment System: A Guide for Payment Professionals

In more complex cases, particularly for cross-border payments, transactions need to be executed through a correspondent banking network, often using SWIFT to coordinate payments.

Source: Matt Brown

II. Real-World Use Cases

Now that we have a basic understanding of traditional payment rails, we can focus on the advantages of crypto payment rails.

Crypto payment rails are most effective in situations where traditional dollar usage is restricted but demand for dollars is high. Think of places where people need dollars to preserve wealth or as a bank alternative but cannot easily access traditional dollar bank accounts. These countries typically have economic instability, high inflation, currency controls, or underdeveloped banking systems, such as Argentina, Venezuela, Nigeria, Turkey, and Ukraine. Additionally, one could argue that the dollar is a superior store of value compared to most other currencies, and consumers and businesses often choose dollars because they can be easily used as a medium of exchange or converted into local fiat at the point of sale.

The advantages of crypto payment rails are also most apparent in scenarios of payment globalization, as blockchain networks are not constrained by national borders. They rely on existing internet connectivity to provide global coverage. According to the World Bank, there are currently 92 RTGS systems operating globally, each typically owned by their respective central banks. While they are ideal for processing domestic payments within these countries, the problem is that they cannot "talk to each other." Crypto payment rails can act as the glue between these different systems and also extend them to countries without such systems.

Crypto payments are also particularly suitable for payments with a certain degree of urgency or typically high time preference. This includes cross-border supplier payments and foreign aid disbursements. This is also helpful in scenarios where correspondent banking networks are particularly inefficient. For example, despite geographical proximity, sending money from Mexico to the U.S. is actually more difficult than sending money from Hong Kong to the U.S. Even in developed corridors like the U.S. to Europe, payments often need to pass through four or more correspondent banks.

On the other hand, crypto payment rails are less attractive for domestic transactions in developed countries, especially where credit card usage is high or real-time payment systems already exist. For example, intra-European payments flow smoothly through SEPA, and the stability of the euro eliminates the need for dollar-denominated alternatives.

2.1 Merchant Acceptance

Merchant acceptance can be divided into two distinct use cases: front-end integration and back-end integration. In the front-end approach, merchants can directly accept cryptocurrencies as a payment method from customers. While this is one of the oldest use cases, it historically has not seen much transaction volume because few people held cryptocurrencies, and even fewer wanted to spend them, while those who did had limited useful options. Today's market is different, as more people hold crypto assets (including stablecoins), and more merchants accept them as a payment option because it allows them to reach new customer segments and ultimately sell more goods and services.

From a geographical perspective, most transaction volume comes from businesses selling products to consumers in early adopter countries/regions, typically emerging markets like China, Vietnam, and India. From a merchant perspective, most demand comes from online gambling and retail stock brokerage firms looking to reach emerging markets, Web2 and Web3 markets (such as watch suppliers and content creators), and real-money gaming (such as fantasy sports and sweepstakes).

The "front-end" merchant acceptance process typically looks like this:

1. The PSP usually creates a wallet for the merchant after KYC/KYB;

2. The user sends cryptocurrency to the PSP;

3. The PSP converts the cryptocurrency into fiat via a liquidity provider or stablecoin issuer and sends the funds to the merchant's local bank account, potentially using other licensed partners.

The main challenge hindering further adoption of this use case is psychological, as cryptocurrency does not seem "real" to many people. Two major user roles need to be addressed: one that is completely indifferent to its value and wants to treat everything as magical internet money, and another that is pragmatic and directly deposits funds into a bank.

Additionally, consumer adoption of crypto payments is more difficult in the U.S. because credit card rewards essentially pay consumers 1%–5% cash back on purchases. There have been attempts to convince merchants to promote crypto payments directly to consumers as an alternative to credit cards, but so far, they have not succeeded. While lowering interchange fees is a good idea for merchants, it is not a problem for consumers. The Merchant Customer Exchange, launched in 2012 and failed in 2016, is a case in point—they could not get the consumer side of the adoption flywheel started. In other words, it is difficult for merchants to directly incentivize users to switch from credit card payments to crypto asset payments because payments are already "free" for consumers, so the value proposition should be addressed at the consumer level first.

In the back-end approach, crypto payments can provide merchants with faster settlement times and access to funds. Visa and Mastercard settlements can take 2–3 days, American Express takes 5 days, and international settlements take even longer, such as around 30 days in Brazil. In some use cases, such as marketplaces like Uber, merchants may need to prefund their bank accounts to make payments before settlement.

Conversely, one can effectively enter the crypto payment rail via a user's credit card, move funds on-chain, and ultimately send funds directly to the merchant's bank account in local currency. In addition to improving working capital due to reduced fund duration in the payment path, merchants can further enhance their treasury management by freely and instantly exchanging between digital dollars and yield-bearing assets like tokenized U.S. Treasuries.

Fast forward to 2025, we have witnessed the convergence of several key innovations and developments that have made this vision inevitable: stablecoins have been widely adopted by consumers and businesses, market makers and OTC desks can now easily hold stablecoins on their balance sheets, DeFi applications have created robust on-chain financial infrastructure, there is a large amount of fiat on-ramps and off-ramps worldwide, block space is faster and cheaper, embedded wallets have simplified user experiences, and clearer regulatory frameworks have reduced uncertainty.

Today, we have the opportunity to build a new generation of payment companies that leverage the power of "crypto rails" to achieve better unit economics than traditional financial payment systems, which are constrained by multiple rent-seeking intermediaries and outdated infrastructure. These crypto rails are forming the backbone of a parallel financial system that operates 24/7 in real-time and is inherently global.

In this article, Dmitriy Berenzon will:

• Explain the key components of the traditional financial system;

• Outline the main current use cases of crypto rails;

• Discuss the barriers and challenges to continued adoption;

• Share predictions for the market landscape five years from now.

To further inspire this article, it is worth noting that there are more companies operating here than you might think—about 280 as of this writing.

Why Have Encrypted Payment Channels Become the Superconductors of Traditional Payments?

I. Existing Payment Channels

To understand the importance of crypto rails, it is first necessary to understand the key concepts of existing payment channels and the complex market structures and system architectures in which they operate. If you are already familiar with these, feel free to skip this section.

1.1 Card Networks

While the topology of card networks is complex, the main players in credit card transactions have remained unchanged for the past 70 years. Essentially, credit card payments involve four main participants:

1. The merchant;

2. The cardholder;

3. The issuing bank;

4. The acquiring bank;

The first two are straightforward, but the latter two deserve explanation.

The issuing bank or issuer provides customers with credit or debit cards and authorizes transactions. When a transaction request is made, the issuing bank decides whether to approve it by checking the cardholder's account balance, available credit, and other factors. Credit cards essentially lend the issuer's funds, while debit cards transfer directly from your account.

If a merchant wants to accept credit card payments, they need an acquirer (which can be a bank, payment processor, gateway, or independent sales organization), which is an authorized member of the card network. The term "acquirer" comes from its role in collecting payments on behalf of the merchant and ensuring that these funds reach the merchant's account.

The card network itself provides the rails and rules for credit card payments. They connect acquirers with issuing banks, provide clearing functions, set participation rules, and determine transaction fees. ISO 8583 remains the primary international standard, defining how credit card payment information (e.g., authorization, settlement, refunds) is structured and exchanged among network participants. In the network context, issuers and acquirers are like their distributors—issuers are responsible for getting more cards into users' hands, while acquirers are responsible for getting as many card terminals and payment gateways into merchants' hands so they can accept credit card payments.

Additionally, there are two types of card networks: "open-loop" and "closed-loop." Open-loop networks like Visa and Mastercard involve multiple parties: issuing banks, acquiring banks, and the card network itself. The card network facilitates communication and transaction routing but is more like a marketplace, relying on financial institutions to issue cards and manage customer accounts. Only banks are allowed to issue cards for open-loop networks. Each debit or credit card has a Bank Identification Number (BIN), provided by Visa to banks, while non-bank entities like PayFacs need a "BIN sponsor" to issue cards or process transactions.

In contrast, closed-loop networks like American Express are self-contained, with a single company handling all aspects of the transaction process—they typically issue their own cards, are their own bank, and provide their own merchant acquiring services. The general consideration is that closed-loop systems offer more control and better margins but at the cost of more limited merchant acceptance. Conversely, open-loop systems offer broader adoption but at the cost of shared control and revenue among participants.

The Economics of Payments

The economics of payments are highly complex, with multiple layers of fees within the network. Interchange fees are part of the payment fees charged by issuing banks for providing access to their customers. While technically paid by the acquiring bank, the cost is typically passed on to the merchant. Card networks usually set interchange fees, which often constitute the majority of the total payment cost. These fees vary significantly across regions and transaction types. For example, in the U.S., consumer credit card fees range from ~1.2% to ~3%, while in the EU, the cap is 0.3%. Additionally, scheme fees are determined by card networks to compensate for connecting acquirers and issuers and acting as "rails" to ensure accurate transaction and fund flows. There are also settlement fees paid to acquirers, typically a percentage of the transaction settlement amount or volume.

While these are the most important participants in the value chain, the reality is that today's market structure is much more complex in practice:

Source: 22nd

In the above chain, there are several other important players:

• Payment Gateway: Encrypts and transmits payment information, connects payment processors and acquirers for authorization, and communicates transaction approval or rejection to businesses in real-time.

• Payment Processor: Processes payments on behalf of the acquiring bank. It forwards transaction details from the gateway to the acquiring bank, which then communicates with the issuing bank via the card network for authorization. The payment processor receives the authorization response and sends it back to the gateway to complete the transaction. It also handles settlement, the process by which funds actually enter the merchant's bank account. Typically, businesses send a batch of authorized transactions to the payment processor, which submits them to the acquiring bank to initiate the transfer of funds from the issuing bank to the merchant's account.

• Payment Facilitator (PayFac) or Payment Service Provider (PSP): Pioneered by PayPal and Square around 2010, these act as mini payment processors between merchants and acquiring banks. They bundle many smaller merchants into their systems, effectively acting as aggregators to achieve economies of scale and simplify operations by managing fund flows, processing transactions, and ensuring payments. PayFacs hold direct merchant IDs with card networks and assume responsibility for onboarding, compliance (e.g., anti-money laundering laws), and underwriting for the merchants they work with.

• Orchestration Platform: A middleware technology layer that simplifies and optimizes the payment process for merchants. It connects to multiple processors, gateways, and acquirers via a single API, improving transaction success rates, reducing costs, and enhancing performance by routing payments based on factors like location or fees.

1.2 Automated Clearing House (ACH)

The Automated Clearing House (ACH) is one of the largest payment networks in the U.S., effectively owned by the banks that use it. It was initially established in the 1970s but truly gained popularity when the U.S. government started using it to send Social Security payments, encouraging banks nationwide to join the network. Today, it is widely used for payroll processing, bill payments, and B2B transactions.

There are two main types of ACH transactions: credits and debits. When a user receives a salary or pays a bill online using a bank account, they are using the ACH network. The process involves multiple participants: the company or individual initiating the payment (the originator), their bank (ODFI), the receiving bank (RDFI), and the operator that facilitates all these transactions. In the ACH process, the originator submits the transaction to the ODFI, which then sends it to the ACH operator, which switches the transaction to the RDFI. At the end of each day, the operator calculates the net settlement amounts for its member banks (the Federal Reserve manages the actual settlement).

Source: The U.S. Payment System: A Guide for Payment Professionals

One of the most important things about ACH is how it handles risk. When a company initiates an ACH payment, its bank (ODFI) is responsible for ensuring everything is legitimate. This is especially important for debits—imagine if someone used your bank account information without permission. To prevent this, regulations allow disputes to be raised within 60 days of receiving a statement, and companies like PayPal have developed clever verification methods, such as making small test deposits to confirm account ownership.

The ACH system has struggled to meet modern needs. In 2015, they introduced "Same-Day ACH," which processes payments faster. Nonetheless, it still relies on batch processing rather than real-time transfers and has limitations. For example, you cannot send more than $25,000 in a single transaction, and it is not suitable for international payments.

1.3 Wire Transfers

Wire transfers are at the heart of high-value payment processing, with the two main systems in the U.S. being Fedwire and CHIPS. These systems handle time-sensitive, guaranteed payments that require immediate settlement, such as securities transactions, major business deals, and real estate purchases. Once executed, wire transfers are typically irrevocable and cannot be canceled or reversed without the recipient's consent. Unlike regular payment networks that process transactions in batches, modern wire transfers use Real-Time Gross Settlement (RTGS) systems, meaning each transaction is settled individually as it occurs. This is an important feature because the system handles hundreds of billions of dollars daily, making the risk of intraday bank failures under traditional net settlement too high.

Fedwire is an RTGS system that allows participating financial institutions to send and receive same-day fund transfers. When a business initiates a wire transfer, its bank verifies the request, deducts the amount from the account, and sends a message to Fedwire. The Federal Reserve Bank then immediately deducts the amount from the sending bank's account and credits the receiving bank's account, which subsequently credits the final recipient's account. The system operates on business days from 9 PM the previous night to 7 PM Eastern Time and is closed on weekends and federal holidays.

CHIPS, owned by large U.S. banks through The Clearing House, is a private-sector alternative but is smaller and serves only a few large banks. Unlike Fedwire's RTGS approach, CHIPS is a netting settlement system, meaning it allows multiple payments between the same counterparties to be netted. For example, if Alice wants to send $10 million to Bob, and Bob wants to send $2 million to Alice, CHIPS would combine these into a single $8 million payment from Bob to Alice. While this means CHIPS payments take longer than real-time transactions, most payments are still settled intraday.

Complementing these systems, SWIFT is not actually a payment system but a global messaging network for financial institutions. It is a member-owned cooperative with shareholders representing over 11,000 member organizations. SWIFT enables banks and securities firms worldwide to exchange secure, structured messages, many of which initiate payment transactions across various networks. According to Statrys, SWIFT transfers take approximately 18 hours to complete.

In the general process, the sender instructs their bank to send a wire transfer to the recipient. The value chain below is a simple case where both banks belong to the same wire transfer network.

Source: The U.S. Payment System: A Guide for Payment Professionals

In more complex cases, particularly for cross-border payments, transactions need to be executed through a correspondent banking network, often using SWIFT to coordinate payments.

Source: Matt Brown

II. Real-World Use Cases

Now that we have a basic understanding of traditional payment rails, we can focus on the advantages of crypto payment rails.

Crypto payment rails are most effective in situations where traditional dollar usage is restricted but demand for dollars is high. Think of places where people need dollars to preserve wealth or as a bank alternative but cannot easily access traditional dollar bank accounts. These countries typically have economic instability, high inflation, currency controls, or underdeveloped banking systems, such as Argentina, Venezuela, Nigeria, Turkey, and Ukraine. Additionally, one could argue that the dollar is a superior store of value compared to most other currencies, and consumers and businesses often choose dollars because they can be easily used as a medium of exchange or converted into local fiat at the point of sale.

The advantages of crypto payment rails are also most apparent in scenarios of payment globalization, as blockchain networks are not constrained by national borders. They rely on existing internet connectivity to provide global coverage. According to the World Bank, there are currently 92 RTGS systems operating globally, each typically owned by their respective central banks. While they are ideal for processing domestic payments within these countries, the problem is that they cannot "talk to each other." Crypto payment rails can act as the glue between these different systems and also extend them to countries without such systems.

Crypto payments are also particularly suitable for payments with a certain degree of urgency or typically high time preference. This includes cross-border supplier payments and foreign aid disbursements. This is also helpful in scenarios where correspondent banking networks are particularly inefficient. For example, despite geographical proximity, sending money from Mexico to the U.S. is actually more difficult than sending money from Hong Kong to the U.S. Even in developed corridors like the U.S. to Europe, payments often need to pass through four or more correspondent banks.

On the other hand, crypto payment rails are less attractive for domestic transactions in developed countries, especially where credit card usage is high or real-time payment systems already exist. For example, intra-European payments flow smoothly through SEPA, and the stability of the euro eliminates the need for dollar-denominated alternatives.

2.1 Merchant Acceptance

Merchant acceptance can be divided into two distinct use cases: front-end integration and back-end integration. In the front-end approach, merchants can directly accept cryptocurrencies as a payment method from customers. While this is one of the oldest use cases, it historically has not seen much transaction volume because few people held cryptocurrencies, and even fewer wanted to spend them, while those who did had limited useful options. Today's market is different, as more people hold crypto assets (including stablecoins), and more merchants accept them as a payment option because it allows them to reach new customer segments and ultimately sell more goods and services.

From a geographical perspective, most transaction volume comes from businesses selling products to consumers in early adopter countries/regions, typically emerging markets like China, Vietnam, and India. From a merchant perspective, most demand comes from online gambling and retail stock brokerage firms looking to reach emerging markets, Web2 and Web3 markets (such as watch suppliers and content creators), and real-money gaming (such as fantasy sports and sweepstakes).

The "front-end" merchant acceptance process typically looks like this:

1. The PSP usually creates a wallet for the merchant after KYC/KYB;

2. The user sends cryptocurrency to the PSP;

3. The PSP converts the cryptocurrency into fiat via a liquidity provider or stablecoin issuer and sends the funds to the merchant's local bank account, potentially using other licensed partners.

The main challenge hindering further adoption of this use case is psychological, as cryptocurrency does not seem "real" to many people. Two major user roles need to be addressed: one that is completely indifferent to its value and wants to treat everything as magical internet money, and another that is pragmatic and directly deposits funds into a bank.

Additionally, consumer adoption of crypto payments is more difficult in the U.S. because credit card rewards essentially pay consumers 1%–5% cash back on purchases. There have been attempts to convince merchants to promote crypto payments directly to consumers as an alternative to credit cards, but so far, they have not succeeded. While lowering interchange fees is a good idea for merchants, it is not a problem for consumers. The Merchant Customer Exchange, launched in 2012 and failed in 2016, is a case in point—they could not get the consumer side of the adoption flywheel started. In other words, it is difficult for merchants to directly incentivize users to switch from credit card payments to crypto asset payments because payments are already "free" for consumers, so the value proposition should be addressed at the consumer level first.

In the back-end approach, crypto payments can provide merchants with faster settlement times and access to funds. Visa and Mastercard settlements can take 2–3 days, American Express takes 5 days, and international settlements take even longer, such as around 30 days in Brazil. In some use cases, such as marketplaces like Uber, merchants may need to prefund their bank accounts to make payments before settlement.

Conversely, one can effectively enter the crypto payment rail via a user's credit card, move funds on-chain, and ultimately send funds directly to the merchant's bank account in local currency. In addition to improving working capital due to reduced fund duration in the payment path, merchants can further enhance their treasury management by freely and instantly exchanging between digital dollars and yield-bearing assets like tokenized U.S. Treasuries.