The Dilemma and Future of Encryption Payments

The current payment sector is undergoing a critical transformation phase. Although existing products have made significant progress in design and user experience, there is still a long way to go to establish a complete and sustainable Web3 payment ecosystem. This immature state has instead become one of the focal points of market discussions.

The U card, as the latest form of encryption payment, is essentially a transitional mechanism. It is neither a traditional Web2 recharge card nor the ultimate form of future on-chain wallets or payment channels, but rather a product of the current compromise between on-chain payment and off-chain consumption demands.

U Card links blockchain accounts and stablecoin balances, providing a compliant offline consumption interface, combining the familiar experience of Web2 with the asset logic of Web3. The recent attention on this model stems from the user's ongoing expectation for everyday consumption of on-chain assets, as well as reflecting the extension of stablecoins from traditional advantageous areas to C-end retail and local payments.

However, the operation model of U Card relies heavily on the permissions of the traditional financial system, struggling to maintain itself between compliance pressure and thin profits, making it difficult to sustain in the long term. U Card is not a stable profit-making business model, but merely a service form that depends on external permissions.

The project party needs to rely on multiple layers of financial intermediaries to complete the clearing, and is merely the executor at the end of the chain. The greater challenge is that the operating cost of the U card is extremely high, essentially making it a losing business. The project party neither has stable fee income like exchanges nor can it wield influence like primary card issuers, yet it has to bear the pressure of user service.

To change this situation, there are two ways out: one is to join the account system and become a part of the ecological connection in the encryption industry, gaining a voice in the compliance mechanism; the second is to wait for the further improvement of the US stablecoin bill, bypassing the current cumbersome and inefficient clearing system, and seizing the new opportunities brought by the US dollar stablecoin.

For wallets and exchanges, the U Card is more of an auxiliary feature that enhances user stickiness rather than a primary source of profit. However, for Web3 startups lacking traffic entry points and experience in financial infrastructure, attempting to create a sustainable U Card project through subsidies and economies of scale is akin to a desperate struggle.

The Future of Encryption Payments: "New" Banks on the Blockchain or Underground Money Houses?

The core issue troubling encryption payments lies in the settlement system of traditional finance. However, there are different opinions in the market regarding what encryption payments are. Is it a complete imitation of daily life QR code payments, or is it about finding new meanings in anonymous networks? For the latter, the significance of payment is not in the transfer, but in the sedimentation. In this context, the essence of payment is not clearing, but circulation, which is an industry that has flourished in the gray area along with the development of blockchain.

Taking some underground money houses as examples, they have built a digital ecosystem based on relationships, trust, and asset circulation. The core of this digital money house is trust, and the flow of funds, the asset accumulation and circulation brought about by delayed settlement all rely on trust. This system requires introductions from acquaintances to join, eliminating the possibility of strangers using it, and there exists an invisible joint liability mechanism among individuals.

In this mechanism, payment is no longer a one-to-one relationship but a form of one-to-many-to-one that constantly circulates within the value network. Once funds flow in, it signifies entry into the market, not just for payment but also to gain trust. When non-payment funds continuously flow in, it creates a deposit. As the number of participants increases, it evolves into a slow settlement but high-frequency social payment network. The continuously circulating value flow will bring substantial returns.

In fact, this "digital bank"-style closed ecological structure has been operating on-chain for many years, effectively addressing some of the gray circulation issues of funds, but it has never been able to push "encryption payments" from niche markets to mainstream applications. On the contrary, what truly has global potential and is gradually approaching the user end is the on-chain settlement system built around USD stablecoins and relying on compliant networks.

Underground money laundering-style on-chain structures have long existed. Whether it is certain gray market arbitrage organizations in some regions or certain international settlements, digital assets have already developed quite mature means to bypass traditional financial systems and achieve free capital circulation.

The rise of certain blockchain networks is a reflection of this logic. According to reports from some on-chain security companies, over 40% of illicit on-chain fund flows occurred on specific networks between 2023 and 2024, with more than half being completed through some form of stablecoin.

These funds did not enter the exchange, but instead completed operations similar to underground banks' "mirror release" through forms such as OTC hedging, wallet "island hopping", and DEX diversion. This mode of operation is highly similar to certain overseas capital networks: it does not pursue the final certainty of the settlement layer, but relies on a distributed trust chain and cross-border personal networks to ensure liquidity.

However, these models are not designed for ordinary users. They do not address "how to get more people to use encryption for payments," but rather "how to enable a small number of people to make untraceable payments using encryption." Their starting point is to evade, not to connect; they serve scenarios that do not wish to be covered by regulation, rather than user groups that require legal protection.

Certain financial networks are able to build efficient "family-style transfer systems" between specific regions, but this does not mean that such a structure can be transformed into a globally scalable infrastructure. It resembles an efficient local area network, highly resilient in peripheral areas, yet difficult to interface with existing clearing systems in the global market.

From a systemic perspective, "funds are unwilling to leave" can indeed increase the platform's TVL and improve the capital utilization rate of the DeFi ecosystem. However, from the perspective of a payment system, a truly scalable system requires funds to be able to freely "enter and exit", rather than "able to come in, but unable to go out".

Some on-chain red envelope systems, as well as various on-chain points accounts, are doing one thing: transforming the entry behavior of payments into deposits. This is similar to the "Yu'e Bao-ization" logic of the Web2 era. This deposit model indeed has commercial value, but it cannot break the ecological barriers. Users cannot freely use these assets for cross-border payments, merchant payments, POS machine collections, and they cannot obtain a stable mapping with the real-world account system.

In other words, this "backyard cycle" model is not an infrastructure, but rather an ecological self-reinforcement mechanism. While it is indeed important to strengthen the use cases of funds in a closed system, it does not constitute the foundational logic of "payment" as a global service.

What truly drives Web3 payments from the "dark web" to the "main net" is the support of U.S. policy for stablecoin payment networks. In 2024, the U.S. Treasury officially promoted the GENIUS Act, and after Congress passed the Clarity for Payment Stablecoins Act, stablecoins were for the first time given the policy designation of "strategic payment infrastructure."

Multiple fintech companies are rapidly advancing the application of US dollar stablecoins in international settlements, merchant acquiring, and platform settlements. Data released by a major payment giant at the beginning of 2024 indicates that over 30 global payment institutions are integrating some form of stablecoin as a cross-border settlement asset; meanwhile, the issuance of various stablecoins and their use cases are also beginning to penetrate the retail sector.

These are not the circulation and sedimentation in the virtual economy, but the flow of funds between real goods and services, which is a settlement behavior protected by law and compliant with auditing. In contrast, the token payments in certain ecosystems and the "scan to pay" feature of some wallets still belong to local functions within a closed system, rather than global payment standards, before truly entering the corporate financial reporting system, multinational e-commerce platforms, and credit networks.

We cannot deny that the mechanism design of "digital money house" is enlightening. Proposals such as Intent and account abstraction are indeed upgrading traditional on-chain payments from "machine-to-machine" transfer behavior to "human intention-driven" fund coordination. This has a certain philosophical resonance with the application of "strong trust in relationships" mechanisms by traditional underground money houses. However, a systematic payment structure cannot be built solely on vague social trust and localized circulation logic; it must ultimately connect to regulation, allowing for traceability of user identity, transaction processes, and sources of funds.

At the same time, we must also look at the development direction of encryption payments from a more macro perspective: as the global monetary status of the US dollar faces structural challenges, the US fiscal and monetary system is attempting to construct a new dual-currency system of "dollar + dollar stablecoin." Whether it is to hedge against the expansion of RMB settlement, respond to the trend of emerging markets using euro/gold settlement, or stabilize its own financial influence in regions such as the Middle East and Southeast Asia, stablecoins are no longer a marginal financial innovation but rather a strategic tool proactively deployed by the US in international financial competition.

This is also why in the past two years we have seen a comprehensive acceleration in the promotion of USD stablecoins, from Congressional legislation to guidance from the Treasury Department, from the participation of traditional banks to the embedding of payment networks, deeply integrating into sovereign currencies and sovereign regulatory frameworks.

So the question arises: can a digital money house payment model support such a strategic system? Clearly not. The essence of the underground money house model lies in evading regulation, while what the United States aims to build is a globally integrated financial network with embedded regulation; the digital money house relies on community trust and arbitrage in gray areas, while the USD stablecoin system must be built on compliant financial institutions and a regulatory permission chain.

It is hard to imagine that the U.S. Treasury would entrust a critical payment infrastructure to a funding network that relies on non-KYC wallets, anonymous bridging, and OTC trading to dominate. Digital banks can address circulation issues in the margins, but they cannot form a currency governance structure at the level of sovereign states. Stablecoins are being assigned this role.

In other words, the future of the encryption industry will not be one that coexists with the gray industry. The gray industry played a supporting role in the dark side before the encryption industry matured. However, the approval of the Bitcoin ETF has ushered the encryption industry into a new cycle, which is a future of comprehensive integration and mutual embedding with traditional finance.

Whether it is certain large financial institutions launching digital currencies, certain asset management companies deploying related funds, certain payment giants integrating stablecoins, certain payment service providers accessing on-chain payments, or certain companies engaging in policy alignment with central banks in multiple countries around the world, these initiatives indicate that traditional finance is accelerating its entry into the on-chain world, and their standards are clear — compliance, transparency, and regulatory oversight. This set of standards inherently rejects the expansion of underground banking logic, and thus constitutes the fundamental limitation of the "digital bank" model as the main pathway for encryption payments.

The true future of Web3 payments lies in the network built on the foundation of USD stablecoins and compliant settlement channels. It can embrace the decentralized openness while leveraging the credit foundation of the existing fiat currency system. It allows for free movement of funds without being overly reliant on deposits; it emphasizes identity abstraction without evading regulation; it integrates user intent without straying from legal boundaries. In this system, funds can not only enter the Web3 world but also leave freely; it not only serves financial activities on the chain but also embeds itself within the global exchange of goods and services.

Digital banks are like water, formless and flowing with the trend. A drop of rain falls into it and becomes the ocean; the next stage of encryption payment should be like light, capable of merging with each other yet having its own origin. Tracing back, one can clearly find the way they came, not seeking to devour but focusing on illuminating.