Encryption Payment Channel: The Superconductor of Traditional Payments

In 2025, blockchain has built a financial payment ecosystem parallel to the traditional financial system. The encryption payment channels carry a volume of 200 billion in stablecoins and a trading volume of 5.62 trillion dollars in stablecoins for 2024. This data is equivalent to Mastercard's annual transaction volume. According to a report by ARK Invest, the annualized trading volume of stablecoins in 2024 reaches 15.6 trillion dollars, approximately 119% and 200% of Visa and Mastercard, respectively.

The popularization and large-scale adoption of encryption payments has become an undeniable fact, with Stripe's acquisition of the stablecoin service provider Bridge for $1.1 billion being a typical case. Encryption payment channels form the basis of a parallel financial system, providing faster settlement times, lower fees, and the ability for seamless cross-border operations. This idea has developed over ten years, and now hundreds of companies are dedicated to turning it into reality. In the next decade, encryption channels will become the core of financial innovation, driving global economic growth.

There are still many issues that need to be resolved, including:

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

This article comprehensively discusses how blockchain-based encryption payment channels can bring utility to traditional payments from the perspective of traditional payment methods, and provides multiple real-world application scenarios and predictions for the future.

1. Existing Payment Channels

To understand the importance of encryption channels, it is first necessary to understand the key concepts of existing payment channels and their complex market structure and system architecture.

1.1 Card Organization Network

Although the topology of the credit card organization network is very complex, the main participants in credit card transactions have not changed 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 that funds reach the merchant's account.

The credit card organization network provides channels and rules for credit card payments, connecting acquiring institutions with issuing banks, providing clearing functions, formulating 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.

Credit card organizations have two types of networks: "open loop" and "closed loop". Open loop networks, such as Visa and Mastercard, involve multiple parties. Closed loop networks, like American Express, handle all aspects of the transaction process by a single company.

The economics of payments is very complex, with multiple layers of fees existing in the network. Mainly includes:

• Exchange Fee: Fees charged by the issuing bank
• Deck Fee: The fee charged by the card organization network
• Settlement Fee: Fee paid to the acquiring institution

The actual market structure is more complex than this, also including participants 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.

There are mainly two types of ACH transactions: remittances and withdrawals. The process involves multiple participants: the company or individual initiating the payment ( initiator ), their bank ( ODFI ), the receiving bank ( RDFI ), and the ACH operator.

The ACH system has been striving to meet modern demands. "Same-Day ACH" was launched in 2015, but it still relies on batch processing rather than real-time transfers and has limitations.

1.3 wire transfer

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

Wire transfers use a real-time gross settlement system ( RTGS ), with each transaction settled individually at the time it occurs. Fedwire is an RTGS system that allows participating financial institutions to send and receive same-day fund transfers. CHIPS is a private sector alternative that uses a net settlement system.

SWIFT is a global information network for financial institutions that enables banks and securities companies around the world to exchange secure structured information.

2. Real-World Use Cases

Encryption payment channels are most effective in countries where traditional US dollar usage is restricted but demand for the dollar is high, such as Argentina, Venezuela, Nigeria, Turkey, and Ukraine. The advantages of encryption payment channels are also most evident in the context of globalized payments, as blockchain networks are not limited by national borders.

2.1 Merchant Acquiring

Merchant acquiring can be divided into two use cases: front-end integration and back-end integration. The front-end method allows merchants to accept encryption directly as a payment method from customers. The back-end method can provide merchants with faster settlement times and funding access channels.

2.2 Debit Card

Linking debit cards directly to non-custodial smart contract wallets establishes a powerful bridge between blockchain space and the real world. In emerging markets, these cards are becoming the primary consumer tools.

2.3 remittance

Encryption payments can provide a faster and cheaper way to remit money overseas. The process of remitting using encryption payments typically includes: the sender accessing the PSP through various means, the PSP converting stablecoins into the recipient's local currency, and the PSP paying the fiat currency into the recipient's bank account or generating a non-custodial wallet.

2.4 B2B payment

Cross-border B2B payments are one of the most promising applications of encryption payments. The main use cases include:

• XB Supplier Payment
• XB Accounts Receivable
• Financial Operations
• Foreign Aid Payment

2.5 payslip

Encryption payments provide a more efficient way for freelancers and contractors to receive payments, especially in emerging markets. This use case also brings cost-effectiveness to businesses sending large-scale payments.

2.6 Currency Acceptance for Deposits and Withdrawals

Currency acceptance for deposits and withdrawals is the most critical part of the payment process. Building currency acceptance for deposits and withdrawals typically involves obtaining the necessary licenses, ensuring partnerships with local banks or PSPs, and connecting with market makers or OTC desks for liquidity. P2P channels are particularly common in regions such as Africa.

3. Regulatory Compliance Licenses

Obtaining regulatory approval is a necessary step to expand the scope of encryption payment applications. Startups can choose to collaborate with licensed entities or obtain licenses independently. Achieving global licensing coverage is highly challenging, as each region has its own unique currency transfer regulations.

4. Challenges

The popularization of encryption payments faces some challenges:

• The question of whether the chicken or the egg came first.
• The high failure rate of currency acceptance for deposits and withdrawals, user experience barriers, high costs, and inconsistent quality.
• Privacy issues
• Difficulties in establishing banking relationships
• Compliance has not reached the level of traditional payment companies.

5. Future Outlook

20 predictions about the state of the industry in the next 5 years:

1. The annual payment volume conducted through encryption channels is between 200 billion and 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.
4. Some cryptocurrency companies will acquire distressed fintech firms and banks.
5. Three encryption networks designed specifically for payment emerged.
6. 80% of online merchants will accept encryption as a payment method.
7. The card organization network will expand to cover approximately 240 countries and regions.
8. Most of the remittance volume from 15 global remittance channels will be processed through encryption payment channels.
9. On-chain privacy primitives will be adopted.
10. 10% of foreign aid expenditures will be sent through encryption payment channels.
11. The currency acceptance market structure for deposits and withdrawals will become rigid.
12. The number of P2P currency acceptance liquidity providers will increase significantly.
13. More than 10 million remote workers will receive service payments through encryption payment channels.
14. 99% of AI agency business will be conducted on-chain through encryption payment channels.
15. 25 well-known partner banks in the United States will provide support for encryption payment channel companies.
16. Financial institutions will attempt to issue their own stablecoins.
17. Large messaging platforms will integrate encryption payment channels
18. Loan and credit companies will start to collect and pay funds through encryption payment channels.
19. Several non-USD stablecoins will begin large-scale tokenization.
20. CBDC is still in the experimental stage.

6. Conclusion

The encryption channel is the superconductor of payments, forming the foundation of a parallel financial system. In the next decade, encryption channels will become the core of financial innovation, driving global economic growth. Hundreds of companies are working hard to turn this vision into reality.