Payments + Blockchain: A Catalyst for Financial Transformation
The use cases we think could change the game
March 13, 2024
Blockchain technology promises to transform the payments industry due to its speed, security, global coverage, and low cost. In addition to blockchains payments properties, the emergence of stablecoins that are backed 1:1 to the USD offers the additional benefit of allowing easy access to low volatility assets for cross-border payments. In 2022, as highlighted in a Brevan Howard Digital report, there were $11 trillion in onchain stablecoin transactions, compared to Visa's $11.6 trillion. If things continue on their current trajectory, it is likely payments using blockchain will become the default mechanism for cross-border payments at some point in the next decade.
The value of blockchain for payments
Blockchains are poised to power key use cases such as streamlining cross-border transactions and facilitating real time settlement. There are also other payment flows that blockchains are poised to provide more value for, including remittances, marketplace payouts, B2B payments, invoicing, and more.
Streamlining cross-border transactions
The global economy demands efficient and cost-effective solutions for cross-border transactions. Traditional international payments are often slow and laden with high fees due to the involvement of multiple intermediaries. Blockchain facilitates direct transactions between parties, irrespective of geographical boundaries, significantly reducing transaction times and costs. This streamlined approach not only benefits businesses engaged in international trade but also supports the people sending money to others globally, which is particularly valuable for migrants sending remittances home. Blockchain payments can be 5000x cheaper than wires, saving billions in fees. Transaction fees average just $6 on Ethereum vs 2-3% for credit cards, according to Coinbase’s State of Crypto report.
Facilitating real-time settlement
Blockchain transactions settle in minutes, compared to days for checks or wires. This increase in speed and efficiency is particularly valuable for trade finance and other global business interactions, as well as interpersonal finance and payments. For example, J.P. Morgan has begun to integrate blockchain technology by developing its own blockchain-based payment system. Liink by J.P. Morgan aims to improve the payment process, including cross-border transactions, by facilitating the secure and rapid transfer of financial information and payments between participating banks and institutions. It's designed to address challenges in the banking sector, such as delays in payment processing and transaction settlements.
Stablecoins are catching up to established settlement networks. In the space of 6 years, stablecoins have gone from ~0 to near parity with Visa. (Source: Castle Island Ventures)
Stablecoins can drive financial inclusion
Stablecoins have the potential to profoundly improve financial inclusion globally. Startups and established organizations already incorporate stablecoins into their operations, protecting users' savings from hyperinflation. $136 billion worth of stablecoins have been issued to date, but the opportunity is much greater. According to Y Combinator’s Brad Flora, only about seven million people have transacted with stablecoins thus far, but more than half a billion live in countries with 30%+ inflation.
An estimated 1.7 billion adults worldwide are unbanked, lacking access to traditional banking services. Stablecoins, accessible via mobile phones, paired with improved payments systems, can offer these individuals a gateway into the financial system. By lowering the barriers to entry, blockchain has the potential to democratize access to financial services, enabling everyone, regardless of their socio-economic status, to participate in the global economy. There are a number of companies that are executing well on this concept in emerging markets.
For instance, Sinbad is a stablecoin payment app built to protect you from hyperinflation in the MENA region. Velo enables Brazilian users to use Pix to convert Reais to dollars in the cheapest and fastest way possible, starting with as little as 1 BRL.
Services like USD accounts in Latin America and international money transfers are a growing segment of crypto-enabled apps. Users can send stablecoins, like PayPal’s stablecoin PYUSD, to people in other countries, and that can be saved as PYUSD or exchanged for local currency. With PayPal’s 430 million global users and record of processing well over $1 trillion in payments in a year, the growth potential is tremendous.
Conclusion
The intersection of payments and blockchain technology is more than just a merging of two industries; it's a catalyst for widespread financial transformation. By offering enhanced security, global coverage, efficiency, and speed, blockchain is not just redefining how transactions are conducted but also who can participate in the financial system. As regulatory frameworks evolve to support this innovation, the potential for blockchain only grows. The journey towards a blockchain-powered payment ecosystem is still in its early stages, but the path forward is clear: a more secure, efficient, and inclusive financial future awaits.
