The advent of blockchain and cryptocurrency technology has not only enabled the purchase of NFT digital art and interaction with players in the Metaverse, as well as earning through GameFi gameplay but has also provided fundamental decentralized peer-to-peer payment solutions. These fast and convenient Web3 payment solutions are changing our current payment methods and even the entire financial market.

Since PayPal introduced the stablecoin PayPal USD in August, we have seen numerous industry giants officially announce their expansion into Web3 payments or integrate Web3 payment channels, seemingly deploying their full force into Web3 payment services. We can see MetaMask’s deposit and withdrawal aggregation solution; X (formerly Twitter)’s payment license application; VISA USDC settlement blockchain payment network, and other actions by industry heavyweights on the production chain.

Understanding the widespread use cases and potential advantages of Web3 payments, which encompass almost all infrastructure in the industry including payments, stablecoins, wallets, custody, transactions, etc., is crucial for all participants in the Web3 ecosystem.

This article will briefly describe the concept and pathways of Web3 payments and then, from a business and legal regulatory perspective, explain why Web3 payments are poised to reshape the crypto market landscape. The article aims to be helpful in this regard and welcomes discussion and exploration. The full text is approximately 16,000 words, with an estimated reading time of 30 minutes.

TL; DR

Traditional and Web3 payments are not disjointed, but rather show a bidirectional convergence, with fiat and cryptocurrency continuously interacting and gradually merging into stablecoins and central bank digital currencies as practical use cases;

Bitcoin was designed to achieve a decentralized peer-to-peer electronic cash payment system, and Web3 payments evolved from this. Currently, Web3 payments can generally be divided into two categories: deposit and withdrawal payments, and cryptocurrency payments (on-chain, off-chain);

PayPal, Coinbase, MetaMask, and other industry giants are gradually opening/accessing Web3 payment services and scenarios, including wallets, custody, payments, transactions, and stablecoins, eventually covering their entire ecosystem and forming their own closed-loop ecosystems;

Web3 payment infrastructure is gradually taking shape, linking wallets, custody, stablecoins, but more importantly, how to build payment scenarios. Imagine how X (Twitter), Telegram, MetaMask, and PayPal will form their massive crypto ecosystems. Against such a backdrop, the existing landscape of the crypto market is bound to change;

Compliance is the foundation of the payment business, and the cross-regional, cross-scenario complexity of Web3 payment business poses great challenges to regulatory compliance. However, as crypto regulation becomes clearer, it is expected to further increase cryptocurrency adoption and promote the rapid development of the Web3 payment industry;

From a monetary system perspective, the BIS believes that after the digitalization of money, the key to development is tokenization, which can significantly enhance the capabilities of the monetary and financial system. The future monetary system is expected to unleash new economic growth through tokenization.

The biggest opportunity for cryptocurrencies might not be seeing them as cryptocurrencies but as a new payment method. Some believe that the killer application of Web3 has not yet arrived, but it might have quietly done so: it is payment!

I. Overview of Web3 Payments

Simply put, Web3 payments refer to a payment method based on blockchain and cryptocurrency technology, but due to the nature of blockchain and cryptocurrency, Web3 payments encompass more than just payment.

Cryptocurrencies like Bitcoin have multidimensional attributes; they are not only a form of payment but also an innovative technology, a store of value, and a financial infrastructure (a distributed ledger), while also serving as a unit of account in transactions to mark value.

Traditional and Web3 payments are not disjointed but show a bidirectional convergence, with fiat and cryptocurrency continuously interacting and gradually merging into practical use cases like stablecoins and central bank digital currencies. Web3 payments are redefining our payment methods and financial systems.

1.1 Traditional Payment Systems

Let’s start by examining traditional payment systems. Payment is the act of transferring money (or a monetary equivalent) or a claim from a payer to a payee. It is a process that completes the delivery of money and goods through the matching of information flow and capital flow. The essence of payment is the transfer of funds.

In a broader sense, payment methods include both cash (physical currency) and electronic money. There are generally four modes of fund transfer: cash payment; bank account transfers; debit card transactions; and credit card payments. Among these, the latter three, which are forms of electronic money, require a centralized financial system like banks to complete the transfer of funds. When banks are unable to directly facilitate a payment, third-party payment institutions may be involved.

Payments are also differentiated based on the currency used, into domestic and cross-border payments. Currently, Web3 payments on the blockchain, which facilitate transactions across different currencies (fiat vs. cryptocurrencies) and regions, can be categorized as a form of cross-border payment.

The cross-border payment industry chain involves numerous participants, including customers, commercial banks, third-party account/sales-side payment institutions, clearing institutions, merchants, etc. The entire industry chain can be broadly divided into three levels: The first level consists of users and merchants, representing the origin and terminal of payment; the second level includes payment service providers such as banks and third-party payers; the third level is the cross-border payment network, which is the foundational support for cross-border payments, like SWIFT and SEPA.

The architecture of cross-border payments is illustrated in the following diagram:

Cross-border payment services can be categorized based on the type of service provider into bank wire transfers, professional remittance companies, bank card payment processing institutions, and third-party payment institutions. The following examples contrast these with blockchain-based Web3 payments.

1.1.1 Interbank Cross-Border Payments

Initially, cross-border payments were primarily conducted through banks, such as the early bank wire transfers used for interbank transactions and international trade payments. This method, involving a complex network of banks, could take days or even weeks to complete. The process often involves multiple currency exchanges and relatively high fees.

Traditional bank cross-border payments rely heavily on the SWIFT network. SWIFT does not hold funds or manage accounts for users but provides a communication information network and exchanges standardized financial messages. SWIFT can be understood as a network connecting nearly all mainstream banks globally, with banks using a common language to complete foreign exchange transactions. However, a major drawback of SWIFT is that payments can be significantly delayed or even fail due to multiple intermediaries, anti-money laundering checks, and other issues such as currency conversion losses.

As depicted above, when the recipient’s bank and the payer’s bank have established commercial account relationships, the payment made by the user is directly transferred through the bank’s commercial accounts, with the bank charging a fee. Conversely, when there is no such relationship, intermediary banks are required to complete the transaction. Intermediary banks charge additional fees, and the payment’s arrival time is prolonged due to the increase in transaction parties.

Bank cross-border payments are highly regulated, with varying regulatory policies in different countries and regions, imposing certain limitations on cross-border payments. Additionally, these payments often have strict KYC/AML requirements and require users to open accounts, thus incurring higher costs.

1.1.2 International Card Organizations

Similar to SWIFT, international card organizations are a primary network for traditional cross-border payments, but they focus more on merchant acquiring scenarios (where merchants deduct payments from buyers’ accounts). These organizations offer diverse acquiring methods and directly complete the currency exchange process during payment, settling in the local currency for merchants.

Card organizations operate international regional payment information processing networks. Currently, there are six major global card organization networks: VISA, Mastercard, China UnionPay, American Express, JCB, and Discover. Cross-border payments processed through these organizations typically take T+1 day or longer to complete, meaning it takes at least T+1 day for the funds to reach the merchant’s account. The operations of these international card organizations are also license-dependent and are subject to various regulatory policies of different countries.

1.1.3 Third-Party Cross-Border Payments

With the development of e-commerce and network technology, electronic transfers have become a popular method for cross-border payments. These types of payments are generally offered by non-banking institutions (such as Alipay, Paypal, etc.) as third-party payment providers, delivering all or part of the funds transfer services. These third-party payment institutions play a significant role in cross-border e-commerce retail, remittances, import and export business, and overseas mobile payments.

Third-party cross-border payments require integration with international card organizations or banks for clearing and settlement to complete the transactions. The currency exchange process in cross-border payments is mainly carried out through banks. Third-party payments often have custodial functions, meaning the funds can be retained in the third-party payment account and transferred to the seller’s account after the transaction is confirmed.

As illustrated above, in a cross-border e-commerce scenario, the user’s side is the starting point of funds transfer. Third-party payment institutions link users’ bank accounts with the issuing bank’s credit/debit cards. After a user makes a purchase, the funds are transferred to the payment channel and connected with the card organization for clearing and settlement. Following clearing and settlement, the third-party payment institution transfers the funds to the merchant. In offline shopping scenarios, there’s a need for an acquiring agent to connect the merchant with the third-party payment institution.

Traditional payment systems, having developed over a long time, currently cover most application scenarios and offer a broad range of functions. However, cross-border payments face challenges such as high costs, slow speeds, limited access, and a lack of transparency. According to a survey by the Federal Reserve, users’ pain points mainly focus on two aspects: first, the need for faster payment speeds, as the current processing times do not meet user needs, with hopes for a 24/7/365 payment service; second, a strong demand for periodic real-time payment scenarios.

1.2 Web3 Payments

Although current payment methods are rapidly digitizing, the process of funds transfer is extremely cumbersome due to the involvement of numerous participants, leading to significant friction costs, and therefore, high expenses. The improvement of the payment experience has always been restricted by intermediaries, banks, technology companies, and other entities.

Bitcoin was originally designed to be a decentralized peer-to-peer electronic cash payment system. In 2008, against the backdrop of the global financial crisis, Satoshi Nakamoto published the Bitcoin whitepaper, aspiring to change the traditional bank-centered financial system and achieve complete financial decentralization. Since the birth of Bitcoin on January 9, 2009, it has kickstarted the widespread application of cryptocurrencies.

Bitcoin payments allow direct transfers between users, bypassing banks, clearing centers, and electronic payment platforms, thereby avoiding high fees and cumbersome transfer processes. Any user with a device connected to the internet can use it without needing permission.

As the acceptance of cryptocurrencies continues to rise, interactions between cryptocurrencies and fiat currencies in the real world are inevitable. Here, institutions providing deposit and withdrawal services act as banks in cross-border payments, facilitating the exchange between cryptocurrencies and fiat currencies.

Currently, Web3 payments can mainly be divided into two types:

1. Deposit and Withdrawal Payments (On Ramp & Off Ramp), which refer to payments in situations where cryptocurrencies and fiat currencies are exchanged.

2. Cryptocurrency Payments, which include:

   a. Native Asset Payments on the Cryptocurrency Blockchain, involving transactions between two addresses on the blockchain, or interactions between cryptocurrencies and on-chain assets (such as purchasing NFTs with cryptocurrencies or swapping between different cryptocurrencies).

   b. Traditional Off-Chain Cryptocurrency Payments, where cryptocurrencies are used as a monetary equivalent to purchase other goods/services.

Web3 payments link fiat currencies and cryptocurrencies through deposit and withdrawal payments, while cryptocurrency payments enable the circulation of digital assets, thereby forming a complete payment loop.

Since cryptocurrency payments are conducted on the blockchain, they are essentially not restricted by geographical limitations. Various jurisdictions are gradually improving their regulation of these payments. However, the deposit and withdrawal of funds involve fiat currency transactions and are thus subject to existing financial regulations.

1.3 Advantages of Web3 Payments Compared to Traditional Payment Methods

Traditional payment methods are based on an account system, where the transfer of value is recorded in the accounts of intermediary institutions such as banks and third-party payment companies. Due to the large number of participants, the process of transferring funds is very cumbersome and fraught with high friction costs, resulting in higher expenses.

In contrast, Web3 payments represent a system based on a value or token-based system, where the transfer of value is recorded in a distributed ledger stored on the blockchain by the users themselves. Web3 payments, anchored on blockchain network infrastructure, facilitate the transfer of cryptocurrencies between the sender and the receiver. This approach addresses issues prevalent in traditional payments, such as high costs, inefficiencies in cross-border transfers, and overall expensive operations.

What are the advantages of Web3 payments compared to traditional payments?

Firstly, relying on blockchain technology can effectively reduce the trust costs between transaction parties, making payments more direct, faster, and secure. The functionality of smart contracts enables programmable payments and automated execution, enhancing the efficiency and trustworthiness of payments.

Secondly, the timeliness of cryptocurrency payments currently has significant advantages over traditional payments, especially in cross-border transactions. This feature will be a key driver in the development of cryptocurrency payments and will also be a major force in promoting the upgrade of traditional cross-border payment technologies.

Additionally, based on its decentralized nature, Web3 payments simplify processes established on centralized clearing institutions, reducing friction costs, especially by greatly improving the efficiency of cross-border payments and accelerating settlement speed.

Various signs indicate that traditional cross-border payments and Web3 payments are not completely separate; both are forming a mutually advancing situation. On the one hand, this is reflected in the accelerated application of blockchain technology in the traditional payment industry. Apart from the Central Bank Digital Currencies (CBDCs) being experimented with in many countries, major players in traditional payments like SWIFT, VISA, and PayPal are exploring Web3 payment solutions. On the other hand, Web3 payment projects are actively collaborating with traditional financial institutions and third-party payment organizations, as well as exploring the accelerated application of compliant stablecoins.

Although Web3 payments still face challenges in technology, user acceptance, and security compliance, they hold significant importance for the cryptocurrency industry and the entire traditional financial sector.

II.The Main Pathways of Web3 Payments

Currently, Web3 payments can mainly be divided into two types:

1. On-Ramp and Off-Ramp payments;

2. Cryptocurrency payments (including on-chain native scenario payments, as well as payments between off-chain traditional entities).

Web3 payments connect fiat and cryptocurrencies through on-ramp and off-ramp payments, allowing the circulation of crypto assets and forming a complete payment loop.

Given the current limited scale of native assets in the crypto market and limited payment scenarios, most of the payments discussed in the Web3 sector are related to the exchange of fiat and cryptocurrencies through on-ramp and off-ramp.

2.1 On-Ramp and Off-Ramp Payments

On-ramp and off-ramp serve as crucial bridges connecting fiat and cryptocurrencies, forming a complete payment loop. Apart from OTC/P2P on-ramp and off-ramp methods, other processes involve the participation of third-party payment institutions.

2.1.1 On-Off Ramp Payment Process

The fund flow behind on-off ramp payments involves users transferring fiat currency via payment channels to liquidity providers (Crypto Liquidity Providers) behind third-party payment institutions. These providers, akin to merchants in traditional payment scenarios, transfer cryptocurrency ‘goods’ to users’ addresses on the blockchain, while supplying liquidity to these payment institutions. The reverse process applies to withdrawals. Common liquidity providers include centralized exchanges (e.g., Coinbase Prime, Binance, Kraken), stablecoin issuers (like Tether and Circle), or crypto-friendly banks (such as the now-defunct Silvergate and Signature banks). They play a crucial role in bridging fiat and cryptocurrencies in the on-off ramp stages.

2.1.2 Primary On-Off Ramp Payment Methods

A. Centralized Exchanges

Centralized exchanges, which also serve as money transmission channels, share functionalities with payment institutions, including the need for similar crypto/payment licenses. Most centralized exchanges offer on-off ramp payment services. Users can directly purchase cryptocurrencies via debit/credit cards or bank transfers through platforms like Binance Pay, Coinbase Pay, XXX Pay, etc. These exchanges provide an exchange-hosted wallet interface for buyers and sellers, who can choose between using different accounts within the same hosted wallet or non-custodial wallets, the former often being cheaper due to no gas fees.

In jurisdictions with stricter regulations, centralized exchanges must integrate independent on-off ramp payment institutions as underlying payment channels to facilitate user transactions. This applies to decentralized exchanges too; for instance, Uniswap has integrated independent payment services like Moonpay and Paypal to support user transactions.

B. Independent On-Off Ramp Payment Institutions

These are payment institutions with cryptocurrency transfer capabilities (including crypto-friendly banks) that must obtain relevant crypto/payment licenses in their operational jurisdictions. MoonPay, a leading player in cryptocurrency on-off ramping, positions itself as the PayPal for Web3, with over 5 million registered users. It supports crypto payments in over 160 countries and regions, converting over 80 cryptocurrencies and 30+ fiat currencies, holding payment business licenses in most jurisdictions. MoonPay supports various payment methods like credit/debit cards, mobile payments, and account-to-account transfers. Coinbase provides its liquidity, and with a comprehensive set of on-off ramp features and a first-mover advantage, it quickly dominated the credit card-centric European and American markets, supporting a valuation of 3.5 billion USD.

Recently, traditional payment giant Paypal, in collaboration with stablecoin issuer Paxos, launched the PYUSD stablecoin to venture into the Web3 payment market. The collapse of Silvergate Bank and the forced closure of Signature Bank, both crypto-friendly banks, were significant on-off ramp payment channels.

C. Other On-Off Ramp Payment Methods

These generally integrate the aforementioned payment methods into a single payment product. Aggregated payment products combine multiple independent on-off ramp payments, allowing users to benefit from different rates and quotes. MetaMask is a prime example of such aggregation, with others like TransitSwap and KyberSwap being notable projects.

Cryptocurrency retail terminals like ATMs and POS have emerged with the growth of the crypto industry. Crypto ATMs allow offline cash-to-crypto transactions, where ATM providers purchase liquidity from third parties and pay users. This method is marked by anonymity, requiring little to no personal information, but has high transaction fees (5%-20%). Bitcoin Depot is a leading project in this field.

Crypto POS terminals represent another offline payment channel where users pay in cryptocurrency, and merchants receive fiat currency, making it a user withdrawal method. This also requires licensing but generally has lower fees compared to ATMs. Pallapay is one such project providing these solutions.

Overall, the current Web3 payment landscape offers users a variety of choices. However, when it involves converting between fiat and cryptocurrencies, operators generally need to apply for operational licenses regionally. The costs associated with these payments vary slightly, depending on the business model of the payment method.

In addition to on/off-ramp payments, some centralized exchanges and payment institutions collaborate with card organizations like Visa and Mastercard to issue debit and credit cards. These cards possess dual attributes: facilitating on/off-ramp payments and enabling cryptocurrency transactions.

2.2 Cryptocurrency Payments

As the acceptance of cryptocurrency continues to grow, Web3 payments are increasingly penetrating traditional markets like e-commerce (for online shopping), the gig economy (for contracts and freelancers), cross-border remittances, travel bookings, and online gaming (for in-game item exchanges). These payments use cryptocurrencies for online purchases and remittances, instead of relying on outdated infrastructure of traditional banks or third-party payment institutions.

Currently, cryptocurrency payments fall into two main categories: payments between traditional off-chain entities and native on-chain scenario payments.

2.2.1 Cryptocurrency Payments—Traditional Off-Chain Physical Payments

According to a 2022 report by PYNMTS and BitPay, which surveyed over 2330 online businesses with annual sales exceeding $250 million, approximately 85% of large retailers (with annual revenues over $1 billion) now offer cryptocurrency as a payment method. Half of all surveyed businesses already accept cryptocurrency payments. Among those not yet accepting it, 42% are planning to. The report also found that most businesses use non-crypto-native wallets, like PayPal and Venmo, to support crypto payments.

To meet the growing demand for Web3 payments, leading payment giants such as Mastercard, Visa, PayPal, Stripe, and Venmo are partnering with cryptocurrency companies to provide crypto payment options to millions of users. Most major retailers, including Overstock, Microsoft, Expedia, and Starbucks, have integrated crypto payments, allowing their customers to directly purchase digital and physical goods with cryptocurrencies. Other major companies like the popular streaming platform Twitch, Norwegian Air, Etsy, and Burger King are also embracing this trend.

In terms of traditional off-chain physical payments, we simulate a scenario where a user pays in cryptocurrency and the merchant receives fiat currency. The flow of funds involves a third-party payment institution converting the cryptocurrency into fiat through on-ramp and off-ramp processes before paying the merchant.

The most common solution currently is the issuance of crypto bank cards. Centralized exchanges or wallet companies often collaborate with card organizations like Visa and Mastercard to issue crypto debit/credit cards. Users holding cryptocurrencies in platform accounts can make online purchases or offline card swipes. During payment, the card-issuing company first converts the cryptocurrency into local fiat currency through the off-ramp payment channel before paying the merchant. For instance, the centralized exchange Crypto.com has partnered with Visa to issue the Crypto.com Visa Card debit card, which offers both fiat currency payment functions and on-chain cryptocurrency payment capabilities.

2.2.2 Cryptocurrency Payments—On-Chain Native Payment Scenarios

In on-chain native payment scenarios, users pay in cryptocurrencies, and merchants also accept cryptocurrencies. This method involves more than just simple point-to-point transfers based on blockchain technology; it also addresses trust issues in real-world payment scenarios, necessitating the use of third-party payments.

Take online shopping as an example. In a trust-based scenario (like among friends), transactions can be directly completed through blockchain point-to-point transfers: user pays, merchant ships, user receives. However, in an online platform without an existing trust base, how can one ensure that the merchant will ship the goods after receiving payment, and that the goods received match what was promised?

Similarly, while point-to-point transfers between family and friends can be easily managed through blockchain networks, dealing with strangers requires a more robust system. Therefore, a linked account system and blockchain-based settlement system are needed to facilitate the exchange of physical goods and on-chain payment settlements.

In response to these challenges, third-party payment institutions providing cryptocurrency payment products are essential. They include cryptocurrency payment protocols, core payment systems, front-end product interactions, and supporting modules. Companies like Ripple and Stella are actively exploring in this area.

On-Ramp and Off-Ramp are crucial bridges connecting fiat currency with cryptocurrency, forming a complete payment loop. Apart from OTC/P2P methods, other on-off ramping processes require the involvement of third-party payment institutions.

Visa recently introduced a settlement solution based on the stablecoin USDC, applied in the case of Crypto.com. Previously, when users paid with cryptocurrency and merchants received fiat currency, Crypto.com had to convert the cryptocurrency into fiat and then pay the merchant through traditional payment channels. Settlement via traditional channels increased the number of participants, transaction costs, complexity, and limited Crypto.com’s ability to settle transactions outside of banking hours.

Visa’s USDC settlement solution eliminates the need for currency conversion and traditional payment steps in transactions, enabling real-time, global settlement 24/7/365 via blockchain. This flexible, conversion-free settlement method opens new business scenarios for Crypto.com, such as cryptocurrency payment gateways for merchants and blockchain-based cross-border payments.

This USDC settlement method can also be applied to international remittances. The nearly $1 trillion remittance market is plagued by high costs from traditional payment methods, charging up to 8% of the total transaction amount. Web3 cross-border remittance products like Strike’s Send Globally, using Bitcoin’s Lightning Network, offer an affordable alternative to traditional remittances, charging only 0.01% to 0.1% of the transaction amount.

This settlement method, combined with the use of stablecoins, can reduce traditional cross-border payment costs by 80%. This means for a $500 remittance, the transaction cost for on-chain cryptocurrency and on-off ramp payments is only about $4.8, significantly lower than the average cross-border remittance cost of around $20. In 2022, cross-border remittances by laborers were nearly $800 million, and Web3-based remittance payments could save the industry between $40 billion and $64 billion annually.

III. Industry Giants in Web3 Payments

Industry giants are gradually opening up/accessing Web3 payment services and scenarios around their core businesses of trading, payment, communication, and social networking. This includes wallets, custody, payment, trading, and stablecoins, eventually covering their entire ecosystem to form a logical loop. Below is an overview of the strategies of Paypal, Coinbase, and MetaMask in this area.

3.1 Paypal’s Web3 Payment Layout – Payment, Wallet Custody, and Stablecoin

In the article “Payment Giant Paypal’s Stablecoin Could Lead the Crypto Industry Mainstream,” we introduced PYUSD, a stablecoin launched by Paypal on August 7, 2023. As the only supported stablecoin in the PayPal ecosystem, PYUSD aims to seamlessly connect Paypal’s existing 431 million users with fiat and cryptocurrency, serving as a bridge for Web2 consumers, merchants, and developers.

3.1.1 Implementation Path for On-Off Ramp Services

By reviewing the Paypal CryptoCurrency user agreement, we can see the crucial role of PYUSD stablecoin in bridging Web2&3 payments, Paypal accounts, and crypto custody wallet accounts.

As shown in the diagram, PayPal uses the PYUSD stablecoin as a bridge for exchanging between fiat currency and cryptocurrency. Whether it’s for deposit, withdrawal, or crypto payment services, the process follows the USD - PYUSD - Crypto Asset chain, and vice versa. For instance, in scenarios where crypto is used to pay for merchant services, the Crypto Asset is first sold for PYUSD/USD, which is then used to make payments in PYUSD/USD to merchants.

Fiat currency payments use PayPal accounts, while for cryptocurrencies, PayPal creates a Cryptocurrencies Hub wallet under the PayPal account. This wallet is managed by PYUSD issuer Paxos, meaning users surrender their assets (private keys). The PayPal User Agreement clearly states, “You will not hold the digital Crypto Assets themselves in your Crypto Asset balance / You do not own any specific, identifiable, Crypto Asset.”

From this, we see that PayPal has built a framework for Web3 payments by bridging fiat and cryptocurrency payments, issuing stablecoins as transaction mediums, and establishing the PayPal account wallet system, thus forming a logical loop within its ecosystem.

On this foundation, PayPal can also leverage its advantages in the payment industry. It can extend its deposit function to external entities like MetaMask and Ledger, as well as centralized exchanges like Kraken. Moreover, in its withdrawal function announced on September 12, PayPal supports wallets, DApps, and NFT market platforms.

With channels, tools, and infrastructure in place, the key lies in guiding PayPal’s existing 431 million users towards Web3 and leading Web3 towards true mass adoption.

3.1.2 Traditional Payment Companies Poised to Act

We observe that PayPal’s approach is highly replicable for traditional payment companies like Stripe and Square, which are already engaged in on and off-ramp services and currency exchange. For instance, in December 2022, Stripe announced its cryptocurrency deposit service, and Block (parent company of Square) offers BTC trading services through its Cash App, in addition to its basic peer-to-peer payment functionality. Given that traditional payment companies have already established compliance processes and qualifications for local payment services, the question of when and how they will implement Web3 payments is simply a matter of timing and pace. In contrast, newcomers like Company X (formerly Twitter) are vigorously applying for Money Transmitter Licenses (MTL) across the United States to meet compliance requirements for payments.

3.2 Coinbase’s Web3 Payment Strategy: Trading, Custody, and Payments

As the world’s most compliant centralized exchange, Coinbase offers many regulatory pathways worth emulating. We see that through its Web3 payment strategy, Coinbase can form a logical loop within its ecosystem, encompassing payment channels for on and off-ramp services, Commerce merchant payment solutions, stablecoin trading mediums (like USDC), both custodial and non-custodial wallets, and the core trading functionality of the exchange itself.

3.2.1 Trading as Core, Payment as Supplement

Although centralized exchanges primarily seek payment licenses for compliance with their own trading operations, obtaining these licenses also facilitates the on-ramp and off-ramp services as well as payment channels. Due to regulatory uncertainties, over-reliance on third-party payment channels for fund transfers, like the previously collapsed Slivergate Bank and Signature Bank forced into bankruptcy by regulators, may lead to business instability. Consequently, numerous exchanges have developed their own payment business segments, such as Binance Pay, Coinbase Pay, and XXX Pay.

In the Licenses & Disclosures section, we see that Coinbase has acquired Money Transmission Licenses (MTL) in most U.S. states. Notably, Coinbase obtained the BitLicense from the New York State Department of Financial Services (NYDFS) in 2017, making it the first regulated Bitcoin exchange in the U.S., authorized to offer services like buying, selling, receiving, and storing Bitcoin in New York State.

Outside the United States, Coinbase actively expands in international markets, successively obtaining the EMI License in the UK, VASP License in Ireland, VASP License in Germany, and DPT License in Singapore. Through this, Coinbase, starting with its trading operations, has gradually expanded its trading and payment channels across numerous legal jurisdictions worldwide.

In addition to obtaining compliance licenses, Coinbase has launched Coinbase Commerce, an enterprise-level cryptocurrency payment service. This blockchain-based merchant payment solution aids online businesses in accepting cryptocurrency payments. Merchants can receive payments in major cryptocurrencies like Bitcoin, Bitcoin Cash, DAI, and Ethereum. The aim of Coinbase Commerce is to empower businesses to rapidly and flexibly serve global customers.

According to a report on August 21, Coinbase is acquiring a stake in Circle Internet Financial. This move signifies a strategic and economic alignment between Coinbase and Circle in the future development of the crypto-financial system, positioning them to counter competitors like USDT and PYUSD. Furthermore, Coinbase can expand the application of USDC beyond cryptocurrency trading, potentially extending to Web3 payments, foreign exchange, and cross-border transfers. This development effectively equates USDC with USD on Coinbase.

In terms of custody services and non-custodial wallets, the Coinbase Custody Trust Company, LLC, regulated by the New York State Department of Financial Services, is the primary entity for Coinbase’s custody services. In the race for Bitcoin spot ETFs, apart from Blackrock’s confirmed collaboration with Coinbase, firms like Fidelity, VanEck, ArkInvest’s 21 Shares, Valkyrie, and Invesco have submitted revised applications, designating Coinbase as their partner. Once the SEC approves these applications, the massive assets managed by these companies will be custodied on Coinbase.

Data from CoinGecko shows that, according to an analysis in BlackRock’s submitted ETF documents, Nasdaq estimated that 56% of the $129 billion Bitcoin trading in the U.S. occurs on Coinbase. This percentage is expected to grow with the development of Bitcoin spot ETFs, potentially benefiting Coinbase significantly and making it a major winner in this competition.

Regarding the non-custodial wallet, Coinbase Wallet, users independently control their assets (private keys) and interact directly with the payment system. Therefore, similar to MetaMask, Coinbase Wallet is not defined as a Money Services Business (MSB) by FinCEN.

In this context, Coinbase, leveraging its compliance advantage in trading, has established a payment channel for on/off-ramp services. It integrates stablecoin trading mediums (like USDC), cryptocurrency custodial wallets, non-custodial wallets, and the core functionalities of its exchange, thereby creating a logical closed loop within its ecosystem. The profitability and contribution of Coinbase’s Web3 payment services to its main exchange business are crucial.

3.3 MetaMask’s Web3 Payment Strategy – Wallet Integration and Aggregation

Over the past year, MetaMask has continuously introduced new features. Its current Portfolio DApp aggregates various functions such as Sell, Buy, Stake, Dashboard, Bridge, and Swap, helping users manage assets conveniently and perform unified chain-based asset operations. Recently, MetaMask launched the Snaps version, integrating third-party blockchain plugins.

MetaMask’s natural advantage lies in its nearly 30 million monthly active users. According to data disclosed by Consensys, MetaMask has reached 100 million users, connecting to 17,000 DApps with a daily interaction count of 244,000. CoinGecko reports that as of August this year, MetaMask’s downloads have reached 22.66 million.

In the foreseeable future, MetaMask is expected to evolve into a super wallet gateway, directing wallet traffic for distribution to various DApps, opening up significant commercial possibilities.

3.3.1 Introduction of the ‘Sell’ Feature to Facilitate On-Ramp and Off-Ramp Functions

MetaMask launched a new feature called “Sell” on September 5th, allowing users to exchange cryptocurrency for fiat currency through MetaMask Portfolio and transfer the funds to their bank accounts. For compliance reasons, this feature is currently limited to the United States, the United Kingdom, and some parts of Europe, and only supports exchanges in US dollars, Euros, and British Pounds. MetaMask has stated that at launch, the service only supports ETH on the Ethereum mainnet but plans to expand to other native tokens on Layer2 networks in the short term.

Users, after selecting their region, input the amount of ETH they wish to sell and choose a quote from multiple service providers, linking their bank account. According to official sources, MetaMask has established partnerships with cryptocurrency withdrawal service providers like MoonPay, Sardine, and Transak. However, currently, only MoonPay and Transak offer this service, and it requires KYC verification.

The “Sell” withdrawal function was introduced on MetaMask five months after the “Buy” deposit function, which allows users to deposit funds using bank accounts, PayPal, debit, and credit cards.

Non-hosted wallets like MetaMask, where users independently control their assets (private keys) and interact directly with the payment system, merely provide communication or network access services to support currency transfer services. They are not considered MSBs (Money Services Businesses) under FinCEN regulations. However, MoonPay, which provides a payment channel for MetaMask, is classified as an MSB.

3.3.2 Independent Third-Party Payment Company MoonPay

MoonPay is a leading project in cryptocurrency On Ramp & Off Ramp, with over 5 million registered users. In terms of coverage, MoonPay supports crypto payments in over 160 countries and regions, facilitating exchanges with over 80 types of cryptocurrencies and more than 30 fiat currencies. Regarding payment methods, MoonPay currently supports credit and debit cards, mobile payments, and account-to-account payments. Uniswap has also adopted MoonPay as one of its deposit channels.

After integrating independent third-party payment companies like Moonpay, MetaMask can facilitate on-off ramp payments, non-custodial wallets, and various trading features (Swap, Bridge, Stake, etc.) on its portfolio page, essentially creating a logical loop.

3.3.3 Snaps Version

On September 13, MetaMask released its Snaps version, supporting wallet integration for non-EVM (Ethereum Virtual Machine) chains, including Solana, Sui, Aptos, Cosmos, and Starknet. Currently, 34 Snaps are in beta testing. Simply put, MetaMask has open-sourced some functionalities, allowing third-party developers to extend the MetaMask wallet as they see fit, aiming to offer users a more personalized or diverse trading experience.

Previously, users had to download specific wallet plugins to interact with various public chains, which was not only a poor user experience but also increased security risks. Now, MetaMask has released a set of Snaps API standards, allowing third-party public chain wallet providers to overcome technical challenges for integration. MetaMask is responsible for audit of the integration, while the development work is completed by third-party developers.

This allows users to freely navigate different public chain networks by downloading MetaMask and installing third-party public chain plugins, enhancing security. This smart move in ecosystem integration further cements MetaMask’s leadership in plugin wallets.

MetaMask’s inherent advantage is its nearly 30 million monthly active users. In the foreseeable future, it’s expected that MetaMask will become a super wallet traffic portal, allocating wallet traffic to various DApps, offering substantial business potential.

IV.Web3 Payment Regulation and Compliance

Due to the openness and innovation of crypto assets, it’s challenging to uniformly define their nature, and most jurisdictions lack a complete regulatory framework for them. In practice, the regulation of Web3 payments not only requires compliance with cross-border payments and money transfer services but also with crypto asset businesses. Coupled with the natural global circulation of crypto assets, Web3 payments face complex compliance challenges in multiple legal jurisdictions, posing a significant challenge for regulators.

Despite this, some jurisdictions are actively exploring Web3 payments. For example, Switzerland has clearly defined “Payment Tokens,” and Singapore has also defined “Payment Tokens” and recently released a stablecoin regulatory framework. The EU’s MiCA bill also clearly defines “E-Money Tokens.” These clearer regulatory definitions will give crypto currencies a legitimate and effective status, further driving the development of the Web3 payment industry and leading to true mass adoption.

Compliance is the foundation for traditional giants, so they initially limit their Web3 payment services to specific regions, like MetaMask’s Sell withdrawal service (supported by Moonpay) covering only the U.S., UK, and parts of Europe, and Paypal’s stablecoin service limited to U.S. users. Compliance requirements, such as licenses, qualifications, and permissions, are major barriers for participants in Web3 payment projects.

Web3 payment involves complex legal compliance in various areas, including crypto assets, payments, asset custody, stablecoins, and anti-money laundering/counter-terrorism financing. Below is a brief overview of the legal regulations related to Web3 payments in major jurisdictions, showing how giants build legal compliance barriers.

4.1 United States

The main regulatory body for Web3 payments in the U.S. is the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. FinCEN oversees and implements anti-money laundering (AML), counter-terrorist financing (CFT), and customer due diligence (KYC) tasks, and collects and analyzes financial transaction information to track suspicious individuals and activities.

FinCEN’s authority comes from the Bank Secrecy Act (BSA), treating cryptocurrencies as “currency.” In 2019, FinCEN issued guidelines (Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies), making regulations related to crypto asset payments.

The 2019 guidelines define “money transmission” as the act of receiving currency (or value of other currency substitutes) from one party and sending it all or in part to another party. The term “currency substitute” includes checks, stored value cards, and cryptocurrencies. In most cases, any “business” engaging in money transmission activities meets the definition of a “Money Service Business” (MSB) under the BSA, requiring compliance with BSA and FinCEN regulations and fulfilling compliance obligations.

The 2019 guidelines for determining if a business is an MSB:

(1) Custody of user assets (private keys): Centralized exchanges and custodial wallet providers serving U.S. users, having custody of user assets (private keys), are MSBs. Non-custodial wallets like MetaMask, and DEXs offering only matchmaking trades where users control assets (private

We see in the news that X (formerly Twitter) is actively applying for Money Transmission Licenses (MTL) in various U.S. states. For X to emulate WeChat, it inevitably needs a payment system akin to WeChat’s. For payment companies already holding state licenses, this forms a core barrier in operating Web3 payment services in the U.S.

4.2 United Kingdom

Companies wishing to conduct Web3 payment services in the UK must obtain an E-Money Institution (EMI) license from the Financial Conduct Authority (FCA). For instance, Coinbase acquired an EMI license in 2018, expanding its crypto operations in the EU.

Interestingly, the London-based decentralized lending platform Aave also obtained an EMI license in 2020. This move is seen as Aave’s compliance effort to attract more users to DeFi, possibly also driven by the UK’s stringent consumer protection requirements.

Before Brexit, UK EMI license holders could offer any form of services in the European Economic Area (EEA) without time or activity restrictions. Post-Brexit, more companies have shifted their focus to the more neutral and friendly Ireland.

4.3 Ireland / European Union

In 2021, Ireland introduced a registration system for Virtual Asset Service Providers (VASP), overseen by the Central Bank of Ireland to ensure compliance with AML/CTF requirements. After obtaining the EMI license authorized by the Central Bank of Ireland, Coinbase Ireland Limited received the Irish VASP license in 2022, enabling Coinbase to issue electronic money, provide electronic payment services, and process electronic payments for third parties.

Similarly, after obtaining the UK EMI license, Moonpay registered for a VASP license with the Central Bank of Ireland in 2023. Its CEO stated that registering as a VASP in Ireland and ultimately applying under the EU’s MiCA would provide a significant competitive advantage for the company to comply with the EU market.

The EU’s Markets in Crypto-Assets Regulation (MiCA) has been passed by the European Parliament and is expected to take effect in 2024. MiCA will apply to all entities in the EU involved in the issuance of crypto-assets and providing related services, including issuers of various crypto-assets (e.g., E-Money Tokens, Asset-Referenced Tokens, and other Tokens), and providers of crypto-asset services (e.g., wallet custody, on/off-ramp services, exchange services, asset management, investment advisory, etc.).

MiCA fills the gap in the existing EU financial regulatory framework, creating a unified regulatory framework for crypto assets within the EU, covering 27 countries and a population of 450 million. A VASP license registered in one EU member state allows business operations across the EU, making Lithuania, with its lenient crypto regulation policies, a popular choice for centralized exchanges and payment institutions.

4.4 Hong Kong

With the passage of the VASP regime in Hong Kong, all centralized crypto asset exchanges operating or actively promoting their services to Hong Kong investors, regardless of whether they offer security token trading services, must be licensed and regulated by the Hong Kong Securities and Futures Commission.

The VASP regime also imposes requirements on centralized exchanges for the “safe custody of client assets,” meaning operators must hold client funds and crypto assets in trust through a wholly-owned subsidiary with a Trust or Company Service Provider (TCSP) license. This mandates a TCSP license for the independent custody of investor assets to prevent conflicts of interest.

TCSP licenses, short for Trust or Company Service Providers, are necessary as traditional banks can only hold fiat currency assets, and crypto asset custody is currently only feasible in trust accounts. This has created new business scenarios for TCSP licenses.

The Hong Kong High Court previously classified crypto assets as “Property” capable of being held in trust in the case of Re Gatecoin Ltd [2023] HKCFI 914. Therefore, companies engaged in crypto asset custody must apply for a TCSP license. Exchanges like OSL, Hashkey Group, Gate.io, and wallet infrastructure and digital asset custody service provider Liminal have recently obtained TCSP licenses.

Under the Anti-Money Laundering Ordinance, any entity operating or intending to operate money services in Hong Kong must apply for a Monetary Service Operator (MSO) license from the Hong Kong Customs. For Web3 payment services in Hong Kong, if the company’s related crypto operations include currency exchange or remittance services, the service provider needs to obtain an MSO license.

4.5 Singapore

The Monetary Authority of Singapore (MAS), Singapore’s central bank and integrated financial regulator, also oversees the Web3 industry. According to the “A Guide to Digital Token Offerings” published by MAS in May 2020, security tokens and payment tokens are regulated under two specific laws, while utility tokens are not regulated

V. Future Prospects of Web3 Payments

Regarding the future of Web3 payments, from a market perspective, this remains a highly desirable blue ocean market. Statistics show that globally, 1.7 billion people lack bank accounts but urgently need financial services. Countries with high inflation, limited or inadequate banking services, or where the traditional financial system is deemed unreliable, have witnessed a surge in crypto payments due to these innovations. The sheer number of over 420 million cryptocurrency owners worldwide indicates that the crypto industry is not just speculative but a thriving and rapidly growing sector.

From the perspective of innovation and development, the industry is currently innovating and optimizing Layer 2 solutions to meet the growing demand for cryptocurrencies. These innovations address cryptocurrency volatility with stablecoins, asset security with compliant asset management solutions from wallet providers and custodians, and merchant payment and mobile payment solutions with Web3 payment companies. Such technological advancements lay a solid foundation for Web3’s mass adoption.

Looking at the implementation paths of giants like PayPal, Coinbase, and MetaMask in Web3 payments, and considering their strong traffic and scene entrances, the monopolistic advantages of players like X (Twitter) and Telegram become evident. After establishing foundational functions like wallets, custodianship, stablecoins, and payments, these giants will form their vast Web3 crypto ecosystems. In this context, the current crypto market landscape, dominated by exchanges, is bound to change.

Besides the vast Web3 crypto ecosystems of these giants, the external compatibility of Web3 products is also a point of transformation. Take Web3 wallets, for instance. These are tools closely integrated with the DApp ecosystem, providing direct access to and use of DApps. Currently, users of the OKX Web3 wallet can access over 5,500 DApps, and the wallet has already integrated more than 500 DApps. Not to mention MetaMask, with nearly 30 million monthly active users, and the MetaMask Portfolio DApp, which has aggregated functions like Sell, Buy, Stake, Dashboard, Bridge, and Swap.

From the perspective of the monetary system, the Bank for International Settlements (BIS) in its “Blueprint for the Future Monetary System” states that the current monetary system is on the brink of another significant leap. Following digitalization, the key to the evolution of the monetary system is tokenization — the process of representing claims of ownership in a digital format on programmable platforms. This can be seen as the next logical step in digital record-keeping and asset transfer.

The future monetary system will leverage tokenization to enhance the old system and support new ones. By utilizing new intermediaries (unified ledgers) to serve end-users, it eliminates manual intervention and reconciliation caused by the separation of traditional message transmission, clearing, and settlement, thereby eradicating delays and uncertainties. Tokenization could significantly boost the capabilities of currency and financial systems. The future monetary system is expected to unleash new economic growth drivers through tokenization, which is impractical within the inherent frictions of the current system.

This tokenization is not limited to the recently popular Real-World Asset (RWA) tokenization but also extends to the tokenization of currency itself. Tokens not only define assets but also, through their programmability, incorporate the logic of payment into the tokens, thereby defining what the assets can be used for.

VI. Concluding Thoughts

Undoubtedly, in the near future, Web3 payments are set to become commonplace, potentially replacing existing payment methods, whether within businesses or between individuals. Traditional finance will also be interlinked through Web3, encompassing the expression, circulation, trading, programming, and regulation of assets as its core value propositions, emphasizing efficiency advantages.

The greatest opportunity for cryptocurrencies may not lie in viewing them as cryptocurrencies, but in considering them as a new payment system. While some believe that the killer application of Web3 has not yet arrived, it may have already made a quiet entrance: as a payment solution!

Digitalization and tokenization will imbue the traditional monetary system with new value, breaking boundaries that were once deemed unbreakable. Consequently, the world economy may be forever transformed.

Disclaimer：

1. This article is reprinted from [techflowpost]. All copyrights belong to the original author [Will 阿望；Diane Cheung]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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