On October 17, 2024, 137Labs, together with Polyflow, Ample FinTech, and Fiat24, co-hosted an X Space event with the theme of [PayFi - a trillion-dollar track, a new force in the transformation of the global financial landscape? ] This event brought together many experts and senior industry practitioners from the Web3 field to discuss in depth the future development direction and innovation opportunities of the PayFi track.
Preface
As a new concept in the field of financial technology, PayFi is gradually reshaping the global payment and financial landscape by combining decentralized finance (DeFi), encrypted payment, privacy protection and other technologies. In this discussion, Will from PolyFlow, Bocai from Ample FinTech, Fiat24 co-founder 902 and Zuo Ye shared their insights on encrypted payment, the game between government digital currency (CBDC) and stablecoin, and the balance between privacy and compliance.
The guests discussed the technological innovations, future challenges and opportunities for ordinary users in the PayFi ecosystem. Through discussions on cutting-edge technologies such as Layer 2, privacy technology, and cross-border payment solutions, this event provided us with in-depth analysis and revealed how PayFi can gain a place in the global financial ecosystem.
Through this article, you will learn how PayFi, as an important force in the future financial technology field, can achieve breakthroughs under technological innovation and global regulatory frameworks, and bring more participation opportunities and change possibilities to ordinary users and enterprises.
The following is the content of this Space
Q1
What are the global acceptance and usage scenarios of stablecoins? What are the advantages of stablecoins in cross-border payments and remittances?
902 (Fiat24 Co-founder) stated that stablecoins have technical advantages in global applications, especially in cross-border payments and remittances. Through blockchain technology, payment efficiency is significantly improved, and it has theoretical unlimited scalability without requiring a lot of manpower maintenance.
However, the global acceptance of stablecoins is still low. Currently, only a few US dollar stablecoins (such as USDT, USDC) have reached global scale, while non-US dollar stablecoins (such as the euro) are far behind the US dollar in market share and transaction volume.
An ideal stablecoin should have the following features: global real-time transfer based on blockchain, interest income (such as the Federal Reserve interest rate calculation), and can be directly used in real-world payment networks such as Swift and Visa. Fiat24's stablecoin is an example, which is based on ERC20 and can also be used for real-world consumption.
Spinach mentioned that stablecoins have shown obvious efficiency advantages in cross-border payments and remittances. Compared with traditional payment systems such as Swift and the cumbersome processes of intermediary banks, stablecoins have fast payment speeds and low fees, solving many pain points in traditional cross-border payments.
In terms of global acceptance and practical applications, Spinach shared several real cases:
Stablecoins have been used on a large scale in some areas, especially in Ukraine's foreign trade, where 30% of transactions are settled in stablecoins, and there are even self-issued fiat stablecoins.
In trade between Russia and China, due to sanctions against Russia, stablecoins have emerged as a solution to circumvent the Swift system and enable cross-border payments through third countries such as Singapore and Hong Kong, China.
On the regulatory level, Bocai mentioned that regulators in the UK, Hong Kong and other places have begun to promote the compliance of stablecoins. In the future, the use scenarios of stablecoins will not be limited to currency speculation, but will be more used in real-world applications such as trade and e-commerce, such as corporate settlement and consumer payments.
Will highlighted four major advantages of blockchain-based stablecoins in cross-border payments during the discussion:
Real-time settlement: The flow of funds and information is synchronized, and the funds can be transferred to the account within seconds, which greatly improves the payment efficiency.
Low cost: The cost of on-chain transfers is extremely low, especially compared to the high fees of the traditional banking system, which has obvious economic advantages.
24/7 operation: Blockchain is able to operate 24/7 and is not restricted by banking hours.
Global reach: Blockchain technology can realize global fund transfer, especially in cross-border trade.
In specific application scenarios, stablecoins can be used to bypass the Swift system, especially in crude oil trade in sanctioned countries such as Venezuela. Payment settlement through US dollar stablecoins not only improves transaction efficiency, but also solves the limitations of traditional payment systems in these countries.
In addition, in economically turbulent regions such as Africa and Latin America, US dollar stablecoins are popular because of their advantages in fighting currency depreciation. Will also mentioned that stablecoins with interest income (such as USDY launched by Ondo Finance) can not only participate in payments, but also provide US debt income, further enhancing the attractiveness of using stablecoins.
Zuo Ye supplemented the advantages of stablecoins in the payment field, especially the obvious improvement compared with the traditional Web2 international payment system.
Process simplification and cost reduction:
The traditional international payment system has a cumbersome process, while Web3 payment is developed on-chain, has a simple architecture, and only relies on the network's gas fees. As more and more public chains explore gas-free transactions, the cost of stablecoin transfers will be further reduced in the future.
Solutions to the foreign exchange shortage problem:
Zuoye shared his experience in lending business in Africa, pointing out that many regions lack foreign exchange (such as US dollars) and face currency shortages when trading with foreign countries. Stablecoins have become an effective alternative to help these regions achieve convenient settlement in global trade.
Q2
What is the current application status of encrypted payment in the Web3 ecosystem? What are the technical foundations and innovation trends in the payment and finance track?
902 (Fiat24 Co-founder) shared the current application status of blockchain-based payment systems in the Web3 ecosystem from the case of Fiat24, and pointed out its technical foundation and innovation trends:
Successful application cases of encrypted payment:
Fiat24 applies blockchain technology to a system similar to traditional bank accounts. All ledger data is recorded on the blockchain, which greatly reduces back-end operating costs, especially the complexity of ledger reconciliation. The use of blockchain technology makes the payment system more efficient and provides users with more product and service choices.
Technology foundation and innovation trends:
Fiat24 was first developed on the Stellar blockchain, but because it is not part of the EVM ecosystem, it was eventually moved to the EVM-compatible Layer 1 network. However, Layer 1's high gas fees and slow transaction speeds (such as NFT casting fees of up to $200 and transaction confirmations taking 15 minutes) make it difficult to achieve commercial-grade performance.
It was not until the emergence of Layer 2 solutions that Fiat24 was able to truly achieve commercial-grade crypto payments, especially through this year's Ethereum Cancun upgrade, which reduced gas fees and increased transaction processing speed. The future 7702 upgrade will further optimize the ecosystem so that users do not need to pay gas fees.
Bo's answer focused on the application scenarios of encrypted payments in the real world, especially the use of stablecoins in developing countries such as Africa. He pointed out that although some countries (such as Ghana) have launched central bank digital currencies (CBDCs), stablecoins are more popular in practice because local currencies are often unstable and many people prefer to use US dollar stablecoins for transactions.
In terms of technical foundation and innovation trends, Spinach mentioned the potential importance of privacy payment technology. Although it is not difficult to achieve privacy payment technically, compliance remains a key challenge. Spinach proposed a compromise solution that can achieve payment privacy while allowing regulators to retrieve records when necessary, which is crucial for practical applications.
In addition, Bo emphasized the need for privacy protection in enterprises. For enterprises, public e-commerce transaction information may be used by competitors, so he expects breakthroughs in privacy payment technology to better meet real business needs. This is also an important development direction in the field of encrypted payment in the future.
Will used the Polyflow project to emphasize the importance of structuring the payment process on the blockchain. Compared with centralized encrypted payment solutions, on-chain deployment can bring stronger transparency and security, especially in fund custody and integration with DeFi.
Advantages of on-chain deployment:
Seamless integration with DeFi and crypto wallets: The payment system deployed on the chain is able to interact directly with decentralized finance (DeFi), making the payment process more flexible.
Transparency and security: The encrypted payment cards of centralized institutions rely on custodial bank accounts, which poses the risk of funds being misappropriated or run away. On-chain custody ensures that all transactions are open and transparent, and users can view the flow of funds in real time, reducing trust issues.
Innovation scenarios and compliance:
Polyflow’s on-chain custody solution not only improves fund security, but also alleviates the compliance pressure of payment projects. On-chain custody can better adapt to regulatory requirements while providing PayFi with safer fund management.
On-chain assets can also be seamlessly integrated with DeFi scenarios, promoting innovation in the payment field and promoting the emergence of new payment scenarios, such as automated financial services or smart contract payment solutions.
Zuoye’s supplement mentioned privacy issues and the practical application of Lightning Network in crypto payments:
Technological progress in privacy protection:
Zuoye mentioned that privacy protection is a key challenge when institutions go on-chain. Fully homomorphic encryption (FHE) technology can hide transaction information on the chain, thereby addressing institutions' concerns about data privacy. This is very attractive to institutions involved in the fields of real-world assets (RWA) and PayFi, providing them with new possibilities when going on-chain.
Practical applications of Lightning Network:
At present, the most practical application of Web3 payment is the Lightning Network, especially in the off-chain payment scenario. For example, Argentina and Latin American countries have achieved widespread payment applications through the Lightning Network. Zuo Ye also mentioned that the payment system used by Trump to sell beer in New York in September was a payment product based on the Lightning Network.
Q3
The Game Between Government Digital Currency and Decentralized Stablecoin
902 put forward the following insights when discussing the competition and cooperation between national bank digital currencies (CBDCs) and decentralized stablecoins:
The evolution and challenges of currency forms:
The current monetary system consists of three forms: cash, coins, and digital currencies in electronic banks. Decentralized stablecoins (such as ERC20 tokens) are considered the fourth form of currency, which poses a huge challenge to the existing monetary system. Governments attach great importance to the right to mint coins because it is closely related to national interests and control.
Policy differences between the United States and other countries:
The United States is very entangled in dealing with the issue of stablecoins. On the one hand, USDC and Tether hold a large amount of U.S. Treasury bonds, which is in line with the vested interests of the United States; on the other hand, stablecoins circumvent the long-established anti-money laundering regulatory system in the United States and challenge the global dominance of the U.S. dollar.
The US policy may be to encourage the development of stablecoins by the private sector, especially if Trump promises not to promote CBDC. This will maintain the global hegemony of the US dollar and allow the US to continue to control the global financial system.
Unlike the United States, China has chosen to ban the private sector from issuing stablecoins and instead launch a government-led CBDC (digital yuan). The different strategies of the two countries show the game between the two political systems in the field of stablecoins.
The key to global game:
902 believes that the global stablecoin game is mainly concentrated in the United States and China, and the influence of other countries is relatively small. The competition between the United States and China in the field of stablecoins and CBDC will determine the development direction of the future global financial landscape.
Spinach discussed this issue in depth and pointed out several key points:
Different CBDC technical forms:
The implementation methods of CBDC vary from country to country. China's CBDC is basically a centralized system, similar to a database, and does not really utilize blockchain technology. Australia's pilot project is based on Ethereum to issue ERC20 tokens that can interact with smart contracts, which is closer to decentralized stablecoins. In addition, the Hong Kong Monetary Authority has designed a two-tier architecture, with the first layer being a centralized database and the second layer being a blockchain system with a UTXO architecture.
The relationship between CBDC and decentralized stablecoins:
At present, CBDC and decentralized stablecoins are gradually changing from an adversarial relationship to a cooperative relationship. In the future, many countries may allow CBDC and stablecoins to be exchanged (swap) in a compliant environment. Although from a credit perspective, CBDC enjoys the highest level of credit (backed by the central bank), while stablecoins have potential risks such as explosions, the two may coexist through some kind of cooperation mechanism, especially in specific compliance scenarios.
Stablecoins and CBDCs versus Swift:
China is not only promoting CBDC domestically, but also developing a cross-chain currency bridge mBridge through cooperation with other countries (such as Hong Kong, Thailand, and the UAE). This move is to build a cross-border payment network that replaces the Swift system through blockchain technology (ERC20 CBDC) and further promote the internationalization of the RMB.
Impact on PayFi:
Spinach pointed out that PayFi faces many challenges in practice, such as the compliance of on-chain financing and the recovery of corporate revenue accounts. These require the promotion of the government and the central bank, such as improving the regulatory system through CBDC or tokenization of bank deposits. In the future, two parallel payment systems may emerge: one is based on traditional banks and interest groups, and the other is a pure Web3 model that provides liquidity to enterprises through global users.
In summary, as CBDC and decentralized stablecoins gradually merge, PayFi is expected to find a new development path in this process, but it also faces regulatory and compliance challenges.
Will's answer highlights the use cases of both and their applications in different systems:
Limitations and application scenarios of CBDC:
Will believes that the application scenarios of CBDC are mainly concentrated in specific scenarios such as international trade and cross-border remittances. For example, the mBridge project in which China cooperates with Thailand, the UAE and Hong Kong aims to promote cross-border remittances and trade settlements between these countries. However, the application of CBDC in the decentralized blockchain ecosystem is limited, especially when they are put on the chain, they may not work as efficiently as expected.
The role of decentralized stablecoins:
In contrast, stablecoins such as USDC and USDT play the role of on-chain dollars on the blockchain, similar to the on-chain settlement layer of Web3. They are very active in payment, trading, and DeFi scenarios, becoming an important tool in the digital economy. These stablecoins are not only widely used in daily transactions and payments, but also further promote the development of on-chain financial services by combining with decentralized finance (DeFi).
PayFi’s integration points:
Regarding PayFi, a payment finance track, Will explained that it is actually a combination of payment and decentralized finance (Payment + DeFi). By using stablecoins as a payment medium, PayFi can seamlessly interact with the DeFi protocol on the chain, such as using staking income directly for payment scenarios. Only by placing payments on the chain can interactions between smart contracts be realized, promoting the automation and efficiency of payment finance.
Q4
Privacy and Compliance: How does PayFi balance privacy and regulatory requirements in crypto payments?
902 emphasized the view that privacy does not equal anonymity in crypto payments. He pointed out that although many people in the community enjoy the anonymity of crypto payments, complete anonymity is not feasible in the global financial system and compliance field.
In the traditional financial system, the Travel Rule is a key component of Anti-Money Laundering (AML), which requires that all transaction information can be tracked by regulators. However, the anonymous nature of stablecoins and crypto payments breaks this rule. When using crypto addresses for transactions, regulators can only see the transaction amount and address information, but cannot identify the actual owners of these addresses, which opens the door to illegal activities such as terrorist financing and bribery.
Therefore, regulators in various countries are wrestling with how to deal with this issue, especially in places like the European Union, where regulators want to maintain travel rules to ensure transparency of funds. However, the global nature of crypto payments makes it difficult for countries to develop a unified regulatory framework. In the next few years, this issue may still be in a gray area, and global regulators will continue to explore the appropriate balance.
Spinach pointed out that it is a very challenging task to achieve privacy protection and regulatory compliance on the public chain at the same time. The decentralized and permissionless nature of the public chain makes it difficult to effectively control the behavior on the public chain even if a country enacts laws. Spinach believes that consortium chains may be a viable alternative in the future.
He analyzed the alliance chains in mainland China in the past and believed that they were only used as databases and failed to truly realize the potential of blockchain. However, he envisioned that the alliance chains in the future would be operated by national institutions and funds could flow on the chain, which would ensure the privacy of transactions (keeping it secret from competitors) and meet the government's regulatory needs.
In general, we believe that it is difficult to achieve a balance between privacy and regulation on the public chain, and consortium chains and government-led systems may be a more realistic path.
Will mentioned that it is a challenge to achieve a balance between privacy and regulation in crypto payments. For example, he said that although users can protect their privacy through zero-knowledge proof (ZK) technology, such as only showing information that they are over 21 years old when purchasing alcohol, rather than all personal information, this approach may not be friendly to regulators. Regulators need to obtain complete information to ensure compliance, and ZK technology blocks a lot of information, which limits regulators in terms of information acquisition. This makes it difficult to achieve a solution that has the best of both worlds.
Q5
What are the future trends and challenges of PayFi and the opportunities for ordinary users to participate?
902 believes that in the long run, regulation will evolve with changes in productivity, and productivity is the primary factor driving change. Although regulation will lag behind the development of productivity in the short term, especially in the financial field, there is great resistance to technological innovation. The financial industry has always maintained a high degree of supervision due to its close connection with the lifeline of the country and its interests. Therefore, the trend of PayFi in the next 3-5 years will be in a state of "melee".
Bocai is optimistic about PayFi's future prediction. He believes that by 2027, the world may achieve fully compliant and legal stablecoin use. This speculation is based on his in-depth understanding of government plans. The G20 formulated a cross-border payment plan as early as 2020, with a clear goal of significantly reducing cross-border payment costs by 2027, and stablecoins are one of the key routes. In addition, the concept of "Financial Internet (Fintenet)" proposed by the Bank for International Settlements is also promoting the transformation of the global financial system to tokenization. Through the project Project Agora, central banks of many countries have cooperated with payment giants to create a unified global ledger to achieve financial interoperability.
For the participation opportunities of ordinary users, we suggest paying attention to the leading projects in the PayFi track, especially the leading projects that issue coins. Although there is no need to consider their actual application scale too much, history shows that leading projects are often the biggest winners in market trends, so investing in these projects may be an effective way to gain returns.
Will is cautiously optimistic about the future development of PayFi. He mentioned that although the concept of PayFi has just been proposed and many projects are still in the exploratory stage, this field will gradually mature as more PayFi projects issue tokens in the middle of next year. He particularly emphasized the importance of infrastructure, pointing out that Polyflow, as an infrastructure project of PayFi, will provide landing support for the entire track. Therefore, he suggested that everyone pay attention to Polyflow, as a key part of the development of the PayFi ecosystem, it will provide technical support and guarantee for the practical application of related projects.
Conclusion
Through in-depth discussions on the PayFi track, the guests explored the current status and future development direction of this innovative field from different perspectives. From the application scenarios of encrypted payments to the game between decentralized stablecoins and national digital currencies, to the balance between privacy and compliance, PayFi is driving changes in the global financial landscape with its unique technology and business model.
With the gradual clarification of the global regulatory framework and the continuous advancement of technology, the PayFi track will usher in more extensive applications and breakthroughs in the next 3-5 years. Ordinary users will also have the opportunity to share the dividends of this trillion-level market by participating in leading projects, technological innovations and new financial service platforms.
As more companies and countries gradually accept crypto payments, PayFi's potential will be further unleashed. For investors and developers, keeping up with the technological trends in this field and making early arrangements will be the key to seizing future opportunities. PayFi is gradually becoming an important driving force for global financial change, helping to build a more efficient, transparent and decentralized future financial ecosystem.
