Encryption Payment Channel: The Superconductor of Future Financial Innovation

In 2025, the blockchain has built a financial payment ecosystem parallel to the traditional financial system. The encryption payment channel carries a volume of 200 billion stablecoins and a trading volume of 5.62 trillion dollars in stablecoins for 2024, which is close to Mastercard's annual transaction volume. According to statistics, the annualized trading volume of stablecoins in 2024 reaches 15.6 trillion dollars, approximately 119% and 200% of Visa and Mastercard, respectively.

The widespread adoption of encryption payments has become an undeniable fact, especially represented by Stripe's acquisition of the stablecoin service provider Bridge for 1.1 billion dollars. Encryption payment channels form the foundation of a parallel financial system, providing faster settlement times, lower fees, and the ability for seamless cross-border operations. This idea has gradually matured over ten years of development, and now hundreds of companies are dedicated to making it a reality. In the next decade, encryption channels will become the core of financial innovation, driving global economic growth.

There are still many challenges that need to be addressed, including:

• $16 trillion trading market
• 89 trillion dollars in trade finance
• 400 billion dollars in remittance pre-funding
• The average fee rate for international transfers is nearly 7%.
• 3-5 working days for funds to arrive
• 1.4 billion people without bank accounts

This article will comprehensively analyze how blockchain-based encryption payment channels bring utility to traditional payments from the perspective of traditional payment, providing multiple real-world application scenarios and future predictions.

1. Existing Payment Channels

To understand the importance of encryption channels, we first need to grasp the key concepts of existing payment channels and their complex market structure and system architecture.

1.1 Card Organization Network

Although the network structure of credit card organizations is complex, the main participants in credit card transactions have remained largely unchanged over the past 70 years. Credit card payments mainly involve four participants:

1. Merchant
2. Cardholder
3. Issuing Bank
4. Acquiring Bank

The issuing bank provides customers with credit or debit cards and authorizes transactions. The acquiring institution collects payments on behalf of the merchant and ensures the funds reach the merchant's account.

Credit card networks provide channels and rules for credit card payments, connecting acquirers with issuing banks, offering clearing functions, establishing participation rules, and determining transaction fees. ISO 8583 is the main international standard that defines how credit card payment information is constructed and exchanged among network participants.

Card organization networks are divided into two types: "open loop" and "closed loop". Open loop networks like Visa and Mastercard involve multiple parties. Closed loop networks like American Express handle the entire transaction process by one company.

The economics of payment is quite complex, with multiple layers of fees existing in the network. The main ones include:

• Exchange fee: A fee charged by the issuing bank, usually borne by the merchant.
• Deck Fee: The fee charged by the card organization network
• Settlement fee: Fee paid to the acquiring institution

In addition to the main participants, there are also important roles such as payment gateways, payment processors, payment service providers, and orchestration platforms.

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 widely used for payroll processing, bill payments, and B2B transactions. ACH transactions mainly consist of two types: remittances and withdrawals, involving multiple participants such as initiators, ODFI, and RDFI.

The ACH system has been working hard to meet modern demands. The "Same Day ACH" launched in 2015 can process payments faster, but it still relies on batch processing rather than real-time transfers, and there are limitations such as single transaction limits.

1.3 wire transfer

Wire transfers are at the core of high-value payment processing, with the two main systems in the United States being Fedwire and CHIPS. These systems handle urgent, secure payments that require immediate settlement, such as securities transactions, significant commercial transactions, and real estate purchases.

Fedwire uses a real-time gross settlement system ( RTGS ), where each transaction is settled individually as it occurs. CHIPS, on the other hand, utilizes a net settlement system that allows multiple payments between the same parties to be consolidated.

SWIFT is a global information network for financial institutions, enabling banks and securities companies around the world to exchange secure structured information, much of which initiates payment transactions across various networks.

2. Real-World Use Cases

Encryption payment channels are most effective in situations where the use of traditional US dollars is restricted, but the demand for dollars is strong, such as in economically unstable countries with high inflation, currency controls, or underdeveloped banking systems, like Argentina, Venezuela, Nigeria, Turkey, and Ukraine.

The advantages of encryption payment channels are most evident in the context of globalized payments, as blockchain networks are not constrained by national borders. It can serve as a glue between different RTGS systems and can also extend to countries without these systems.

Encryption payments are particularly suitable for time-sensitive payments, such as cross-border supplier payments and foreign aid payments. This is also helpful in scenarios where the agent banking network is particularly inefficient.

On the other hand, the attraction of encryption payment channels for domestic transactions in developed countries is relatively low, especially in places with high credit card usage or where real-time payment systems already exist.

2.1 Merchant Acquiring

Merchant acquiring can be divided into two use cases: front-end integration and back-end integration.

Frontend methods allow merchants to directly accept cryptocurrency as a payment method from customers. The demand for this use case primarily comes from businesses selling products to consumers in countries/regions that are early adopters of cryptocurrency, as well as online gambling and retail stock brokerage firms.

Backend methods can provide merchants with faster settlement times and funding channels. Traditional payment systems may take 2-30 days for settlement, while encryption payments can achieve T+0 settlement.

2.2 Debit Card

Linking debit cards directly to non-custodial smart contract wallets establishes a powerful bridge between the blockchain and the real world. In emerging markets, these cards are becoming a primary consumer tool. Even in currency-stable countries, consumers are gradually accumulating dollar savings by utilizing these debit cards linked to encryption.

2.3 remittance

Encryption payments can provide a faster and cheaper way for overseas remittances. According to World Bank data, the total global remittances in 2023 are approximately $656 billion. The costs of traditional remittance systems are very high, with an average fee of 6.4% of the remittance amount, and certain channels even reaching as high as 47.6%.

The main channels for encryption remittances are from the United States to Latin America (, especially Mexico, Argentina, and Brazil ), as well as from the United States to India and from the United States to the Philippines. An important factor driving this trend is non-custodial embedded wallets, which provide users with a Web2-level user experience.

2.4 B2B payment

Cross-border B2B payments are one of the most promising applications of encryption payments. Traditional payment systems are inefficient, and payments through correspondent banking systems can take weeks to settle. Encryption payments can significantly shorten settlement periods and free up a large amount of working capital.

The main use cases for B2B payments include:

1. XB Supplier Payment: Mainly refers to importers making payments to suppliers.
2. XB Accounts Receivable: Helping businesses with global customers to collect funds faster.
3. Financial Operations: Improve financial operations and accelerate global expansion
4. Foreign Aid Payment: Send funds faster to eligible individuals or organizations

2.5 payslip

Encryption payments are particularly suitable for freelancers and contractors, especially in emerging markets. These users can earn more income and hold it in the form of digital dollars. This use case also provides cost-effectiveness for businesses sending large-scale payments, which is especially useful for crypto-native companies that already hold most of their funds in the form of encryption.

2.6 Currency Acceptance for Deposits and Withdrawals

Currency acceptance for deposits and withdrawals is a highly competitive market, but it is also the most critical part of the payment process. Building currency acceptance for deposits and withdrawals typically involves obtaining the necessary licenses, ensuring local bank partnerships or PSPs, and connecting with market makers or OTC desks for liquidity.

P2P channels rely on a network of "agents" who provide liquidity for fiat currency and stablecoins. These agents are particularly common in Africa, and their main motivation is economic incentives. The exchange rates for P2P channels are often more competitive, sometimes being 7%-25% cheaper than bank rates.

3. Compliance Regulatory License

Obtaining regulatory approval is a necessary step to expand the application of encryption payments. Startups can choose to collaborate with licensed entities or obtain a license independently. Independent licensing may take months or even years, with costs ranging from hundreds of thousands to millions of dollars.

Achieving global licensing coverage is highly challenging, as each region has its own unique currency transfer regulations. In the United States alone, a project needs a currency transfer license for each state (MTL), a BitLicense for New York, and to register as a money service business (MSB) with the Financial Crimes Enforcement Network.

4. Challenges

The main challenges facing encryption payment channels include:

1. The chicken or egg problem of the popularization of payment methods.
2. The high failure rate of currency acceptance for deposits and withdrawals, obstacles to user experience, high costs, and inconsistent quality.
3. Privacy Issues
4. The difficulty of establishing banking relationships
5. Compliance has not yet reached the level of traditional payment companies.

5. Future Outlook

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

1. The annual payment volume conducted through encryption channels reaches between 200 billion to 500 billion dollars.
2. More than 30 new banks globally have launched natively on encryption payment channels.
3. Dozens of encryption-native companies have been acquired by financial technology companies.
4. 3 payment-focused encryption networks have emerged
5. 80% of online merchants will accept encryption as a payment method.
6. Most of the remittance volume through the 15 major global remittance channels will be conducted via encryption payment channels.
7. 10% of all foreign aid expenses will be sent through the encryption payment channel.
8. Over 10 million remote workers, freelancers, and contractors will receive service payments through encryption payment channels.
9. 99% of AI agency business will be conducted on-chain through encryption payment channels.
10. Financial institutions will attempt to issue their own stablecoins to facilitate global real-time settlement.

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