Visa recently announced support for Bitcoin trades through custodian banks. See: Visa Signals Further Crypto Ambitions With API Pilot for Bank Customers to Buy Bitcoin. Visa joins PayPal and Square’s Cash App in offering Bitcoin trading through their familiar brand services. These firms (along with MasterCard) also offer bank cards that allow users to spend crypto balances using their branded cards and services. Some even offer cash-back or crypto-back awards to cardholders
We call these types of services CeDeFi, as explained below in Figure 1. Also see our research: What You Need to Know About Blockchain DeFi
Welcome, but Hardly a revolution; Skepticism
These card and payment company offerings certainly increase the technical rails between consumers, businesses and blockchains, and help prepare the transition to future payment infrastructure. But the offerings come from centralized financial companies who earn revenues today by charging transaction fees for centralized clearing, settlement, and payment services.
Companies we speak to are justifiably skeptical of these services. After all, the revolution of blockchain payments is that they execute peer-to-peer and eliminate central intermediaries and associated bank fees. Potential users are left to wonder if, in the future, they will have to pay these centralized services additional transaction fees for moving cryptocurrency across peer-to-peer blockchain networks, defeating the promise of blockchain.
Users are looking for an offering we haven’t yet seen in the market.
- Low cost on-chain payments using stablecoins pegged to fiat currency
- Easily accessible applications for executing stablecoin payments
- Lower payment acceptance fees than exist today in the card networks
- Transparent real time stablecoin payments (and settlements) on blockchain, tied to underlying information supporting the payment
- Card brand and bank protections for stablecoin funds sitting off chain in partner bank accounts.
In this scenario, the card brand or alternative payment company would issue such a stablecoin customers could use for transacting on blockchains. Stablecoin payments would be tied to the underlying records, e.g. what was purchased, and would be transparent and real time on the blockchain.
The card brands would provide the on and off ramps for payors and payees, adding functionality to the ramps already in place have today, but would not be involved in the actual payment that would occur on the blockchain.
Both the issuing and acquiring side would take advantage of current card brand services e.g. risk management, on boarding, protections for balances in the card brand/partner issuing and processing banks. But the payees/merchants would not incur the transaction fees associated with actual card payment transactions as they do today.
The card brands could still earn revenues from on and off ramp value-added services, and from interest on the reserves underlying the stablecoins.
The recent Visa announcement that they will support cryptocurrency (Bitcoin) buying and trading on their network is welcome in the industry. But Bitcoin is too volatile to be used for payments, and we don’t see that much potential adoption of this function unless the volatility issue is solved.
There is however a need for stablecoin payments on blockchains – especially in the B-to-B space — with connections to many thousands/millions of payors and payees. This is a value proposition the card brands and their alternatives (e.g. PayPal, Square) can offer, along with value added risk management, KYC/onboarding, and cash management services that are consolidated with existing fiat currency services.
Of course, this scenario would preclude the card brands and payment companies from earning transaction/interchange/merchant fees as is done today, but that is what blockchain payments are all about- i.e. removing the need for central clearing, and moving to a peer to peer structure.
Further down the road, the card brands and their alternatives could support other DeFi capabilities, beyond payments, for example stablecoin credit systems.
Technology is not the obstacle here. Business models are.
The question remains: will these centralized financial services companies go forward in line with the spirit of blockchain peer to peer payments at the risk of cannibalizing their existing central-clearing house based-revenue streams? The answer will depend on whether or not these firms have any practical choice.
Alternative emerging stablecoin payment networks will surely fill the market need if the legacy companies don’t move forward in their stead.
DeFi and CeDefi applications, where the ‘Ce’ is coming from Cryptocurrency exchanges like Binance and Gemini, are moving much faster than the average card brand.