Introduction

The publication of the bitcoin white paper heralded the beginning of an era where a distributed payment system could exist, which enabled the transfer of value without the need for central intermediaries[i].

Although still a controversial topic, the use of crypto assets, the concept introduced by same (i.e. a payments system without intermediaries), its associated potential benefits and/or the technology that supports it[ii], appears to have disrupted the payments space[iii] in one manner or another[iv].  

Proponents maintain that crypto facilitates faster and more cost-effective cross-border transactions, challenging the conventional payment system’s limitations, by enabling near instant settlement through the use of distributed ledger technology (DLT), programmability and smart contracts.

Some argue that cryptocurrencies, for various reasons, may not be as useful as purported[v], and that crypto is fraught with various risks that could cause serious harm to the financial system. However, it has been conceded that the technology supporting crypto could be used to facilitate greater efficiencies within the payment space[vi].

Others promote the idea that regulated crypto can play a critical role enabling efficiencies in the payments space. To this end, some regulators have started to introduce frameworks to mitigate risks associated with the use of crypto as a means of payment, while supporting responsible adoption of same.

The Payment Space

The payment ecosystem has traditionally consisted of various players interacting with each other during the payment process[vii] and through the use of traditional banking infrastructure and payment rails.

Traditional payment systems have been the primary way to transfer value as a matter of convenience, legal certainty, stability, and relative security. Critics note however that slow transactions speeds, delays, high fees, and limited financial inclusion have impeded its effective utility. The traditional payment system has been described by antagonists as “cumbersome and informationally heavy” involving a number of counterparties for the sequential creation and transmission of information and value.  

The introduction of innovative technologies has created opportunities for growth and evolution within the payments space. Among those, is the technology and concepts utilized for crypto.

Crypto’s Influential Aspects

Whether it is the asset itself, the infrastructure supporting it or the need to match its beneficial attributes, crypto assets have arguably influenced developments within the payment space in one manner or another. 

The Technology Behind Crypto

Distributed ledger technology[viii] has garnered the attention of many in the payments space as it offers an infrastructure that simplifies the payment process[ix]. The use of DLT eliminates the need for various intermediaries to carry out numerous reconciliation processes, through the proposal and validation of transactions and the updating of records in a synchronised manner across a network.

Alongside DLT, the aspects of programmability[x], smart contracts[xi] and tokenization, utilized in the crypto space, are being embraced in the payments space. In that regard, proponents postulate that DLT will, among other things, improve efficiencies, allow for greater degrees of programmability in payments, and provide innovative avenues to meet consumer expectations. This aligns with the desire of participants who seek to offer new payment methods that would facilitate instant and atomic settlement, increased automation as well as transparency and efficiency[xii].

Notwithstanding these benefits, concerns have been noted in utilizing this technology including, the novelty of same (i.e. it has not been solidly tried and tested as the traditional infrastructure has) as well as possible operational risks (such as 51% attacks, protocol and software vulnerabilities, etc)[xiii].

Despite these concerns, players in the payments space continue to pursue the use of this innovative technology. For example, Ripple's XRP ledger is used by certain banks to facilitate real-time cross-border payments.

Crypto as a Means of Payment

Whether through the use of crypto itself or the use of central bank digital currencies, the way in which payments are made in the space is poised for change.

The Growing Use of Stablecoins

The introduction of bitcoin was arguably spurred by the intention to move away from reliance on intermediaries[xiv] by creating an alternative means of payment. However, trending uses have been, in the main, for speculation and trading. One of the reasons for the skepticism in adopting crypto for payments has been its associated volatility.

The introduction of stablecoins has added a different dynamic to the space, particularly fiat backed stablecoins, which proponents contend may be a revolutionary solution for cross border payments[xv]. 

The need for more efficient cross border payments has long been recognized by the international community[xvi]. International standard setters have identified four impediments to efficient cross-border payments[xvii]. Namely, cost, lack of speed, limited access, and lack of transparency. Protagonists claim that stablecoins offer a faster, cheaper, frictionless means of payment[xviii] compared to its traditional counterpart[xix]. The use of stablecoins also offer the potential to expand access to more people in more places[xx] and to address some of the technical challenges that are associated with conventional cross border payment arrangements[xxi]. The native programmability, strong auditability properties, the ability to self-custody, and native interoperability of stablecoins are among the key aspects that offer advantages, relative to existing payment systems[xxii].

While stablecoins are in the main utilized today as a settlement asset within the DeFi ecosystem, and as a bridge between TradFi and DeFi, there appears to be a growing trend in stablecoin utilization for [cross border] payments, among other things[xxiii]. The development of regulatory frameworks in various jurisdictions[xxiv] for [fiat] stablecoin issuance also [arguably] lend to its legitimacy, adoption and growing use as a means of payment[xxv].

However, some have argued that stablecoins may not be a practical means of payment[xxvi] and do not adequately substitute traditional payment arrangements since transaction speeds may not always be efficient[xxvii], transaction costs may vary (based on the complexity of a transaction or the congestion of the network) and may not offer a clear-cut advantage to some traditional payment options[xxviii]. 

The Development of Central Bank Digital Currencies

Alternatively, central bank digital currencies (CBDCs) have been touted as the solution for cross border payments[xxix]. CBDCs are a digital form of a country’s currency issued by its central bank. As at September 2024, approximately 134 countries & currency unions, representing 98% of global GDP, are exploring a CBDC[xxx].

CBDCs are presented as a safe option for cross border payments which would alleviate risks, such as counterparty risks[xxxi], provide liquidity in payments[xxxii], while addressing issues such as the need for increase in speed of transactions, lower costs, and simplification of intermediation chains[xxxiii]. The use of a reliable and widely accessible database (held by relevant market participants), that is synchronized, and potentially tamper-proof[xxxiv], could enable interoperability and efficiency. Facilitating the exchange of currencies simultaneously, would mean that “one party does not bear the risk of the other walking away”. 

However, various concerns have been raised in relation to CBDCs including lack of privacy (depending on the design of the CBDC), centralization (which could lead to a single point of failure)[xxxv], the potential impact on financial stability and operational risks, as well as lack of adoption. Some have suggested that careful consideration is required by policymakers in determining whether CBDC issuance is an appropriate response to the crypto sector development[xxxvi]; while others argue that both crypto [specifically regulated stablecoins] and CBDCs could play critical roles and potentially co-exist[xxxvii] for the public good.

Crypto Payments Gateways

The growing adoption of crypto as a means of payment has prompted the rise of crypto payment gateways[xxxviii]. Although crypto payments are not yet an everyday occurrence for the average customer, overall interest in digitally native solutions appears to be increasing[xxxix]. Crypto payment gateways facilitate the processing of crypto payments and their conversion into fiat, or vice versa, essentially acting as a bridge between the traditional financial space and the crypto world. Proponents note that the rise in payment gateways has supported the progression of efficient cross border transactions, as participants can send and receive payments regardless of geographical boundaries or currency restrictions (whether banked or unbanked). They are deemed by some as “conduits for the integration of cutting-edge technologies, opening new possibilities for efficient and secure financial transactions”. Examples of major players include Coinbase Commerce, Paypal[xl], CoinGate and BitPay.

Crypto-Traditional Payment Products

Stablecoins are typically seen as the key example of a merger between crypto and a traditional financial instrument, but other products and services containing aspects of both worlds have been trending in the space. An example is the use of crypto debits cards. Key players, like Visa, have partnered with exchanges such as Binance, Crypto.com and Coinbase to offer cards. Mastercard has likewise developed partnerships with exchanges such as Binance and Nexo. 

Regulatory Frameworks that address Crypto Payments

In a number of jurisdictions, regulators recognize the potential for the widespread adoption of crypto (stablecoins) as a means of payment. They also note the concerns raised by international standard setters in relation to the various risks the use of same may pose to the functioning of the payment and financial systems. In that regard, some jurisdictions have introduced, or intend to introduce, regulatory guardrails to address potential risks while enabling responsible adoption.

The United Kingdom

The United Kingdom, in late 2023, set out its plans for the regulation of fiat backed stablecoins[xli] including its use in payments chains, and in relation to operators of systemic payment systems utilizing stablecoins.

Regulators recognize that “certain stablecoins have the potential to become a widespread means of retail payment, driving consumer choice and efficiencies”[xlii]. The intention is to address such activities through, inter alia, amendments to the Payment Services Regulations 2017 (PSRs)[xliii]. A well-structured and practical regulatory framework could stimulate growth, innovation and responsible adoption of crypto (including its use as a means of payment) by, among other things, providing regulatory certainty while mitigating key risks. 

The UK’s Financial Conduct Authority will be responsible for regulating the use of stablecoins as a means of payment under the PSRs using two possible models (the ‘hybrid model’ and the ‘pure stablecoin model’). The hybrid model entails the use of [regulated] stablecoins at the entrance or exit of an existing fiat payment chain (but the actual transfer of value would be in fiat by way of a traditional payment service). The pure stablecoin model involves both the payer and payee transacting with [regulated] stablecoin, and the transfer of stablecoins between them occurs ‘on-chain’.

The Bank of England (BoE), in turn, will regulate[xliv] operators of systemic payment systems using stablecoins, the service providers that provide essential services to those systems and service providers that are systemic in their own right. Systemic importance is determined by an assessment of whether “a system or service providers’ potential failure may threaten the stability of, or confidence in, the financial system or have serious consequences for businesses and other interests”.

European Union

The Markets in Crypto Assets Regulation (MiCA) sets out a regulatory framework for crypto assets based on distributed ledger technology, including the issuance of asset referenced tokens (ARTs)[xlv]. MiCA imposes strict conditions for issuers, in relation to, inter alia, the use of ARTs as a widely used means of payment. ART issuers are required to have a registered office in the EU and to meet a number of regulatory requirements[xlvi].

MiCA aims to address risks that the wide use of cryptoassets (such as ARTs) could pose to financial stability, the smooth operation of payment systems, monetary policy transmission or monetary sovereignty[xlvii].

Singapore

In April 2024, the Monetary Authority of Singapore (MAS) introduced amendments to the Payment Services Act (PS Act) and its subsidiary legislation to expand the scope of payment services regulated by MAS, and to impose user protection and financial stability-related requirements on digital payment token (DPT) service providers. The scope of activities that the amendments cover include “(1) accepting (whether as principal or agent) DPTs from one DPT, for the purposes of transmitting, or arranging for the transmission of, the DPTs to another DPT account (whether in Singapore or elsewhere) and (2) arranging (whether as principal or agent) for the transmission of DPTs from one DPT account to another DPT account (whether in Singapore or elsewhere)”[xlviii].

MAS will also be regulating single currency stablecoins[xlix] as an additional payment service under the PS Act. MAS recognizes that stablecoins, as an emerging new class of DPTs, have the potential to “become a widely used payment instrument.” The forthcoming regulatory framework is meant to facilitate the use of stablecoins as a credible digital medium of exchange, among other things. In that regard, the regime will capture the necessary activities that a stablecoin issuer undertakes and will inter alia, ensure that SCS issuers adhere to requirements for the preservation of the SCS value through reserve assets, redemption protocols, capital requirements, and enhanced transparency with mandatory white paper disclosures.

Hong Kong

In Hong Kong, a regime for fiat referenced stablecoin regulation [FRS] has been proposed having regard to the potential for such stablecoins to be used as a commonly acceptable means of payment, as compared with other types of crypto assets; and the potential monetary and financial stability risks the use of FRS may pose.

Under the proposed regulatory regime, any person who issues FRS in Hong Kong will be required to obtain a licence from the Hong Kong Monetary Authority. Determining whether a FRS is issued in Hong Kong will depend on the facts and circumstances of each case.

The United Arab Emirates

In July 2024, the UAE Central Bank issued the Payment Token Services Regulation[l] (the PTSR) for regulating stablecoin-related services in the UAE[li].

One of the prohibitions found in the PTSR is the use of cryptocurrencies as a means of payment, within the UAE, unless they are:

a “Dirham Payment Token” (i.e. a UAE Dirham-denominated stablecoin) issued by a CBUAE-licensed issuer; or

a “Foreign Payment Token” (i.e. a non-Dirham denominated token) issued by a CBUAE-registered issuer[lii].

The PTSR aims to create an ecosystem where specific regulated tokens can be used for everyday transactions.

Bermuda

The Bermuda Monetary Authority (BMA) in the first half of 2024, issued guidance on Digital Asset Business Single Currency Pegged Stablecoins. The guidance sets out the BMA’s expectations for issuers on key aspects such as governance, risk management, and market integrity. The BMA, like other above-mentioned regulators, acknowledges the potential for SCPS to become a “widespread form of payment and foster innovation across the financial services sector” and is committed to protecting financial services customers while supporting responsible innovation.

Conclusion

The introduction of bitcoin, and/or the technology behind it, has spawned the development of various innovative and emerging solutions that offer the potential to improve efficiencies, within the payments space.

Even if not deemed a revolutionary solution to the inefficiencies within the traditional payments space, the developments that have followed since the introduction of crypto (including the exploration of CBDCs and the use of DLT by traditional/incumbent players) arguably evidences crypto’s footprints within the payments space. 

The initial use of crypto for speculation and trading appears to be progressing to other uses, including as a means of payment, given the development of assets such as fiat backed stablecoins. Some argue that crypto is poised to transition, in the near future, from being an asset class, “which is bought, held, and/or sold, to a payment method that can support real-world transactions within the retail landscape”.

Regulators recognize that there is potential for the widespread adoption of crypto as a means of payment and some jurisdictions are in the process of implementing regulatory regimes that will facilitate responsible adoption, while mitigating key risks to the financial/payments space. Creating proper and practical guardrails to preserve the safety and soundness of the financial system; while providing much needed regulatory clarity will lend support to the utilization and adoption of these innovative assets transforming the way value is transferred within the payments space.

References

[i] Digital money: options for payments, Deutsche Bundesbank Monthly Report (April 2021): click here

[ii] including key aspects such as programmability and smart contracts.

[iii] This article does not focus on whether crypto fulfils the functions of money. Rather the focus is on how crypto and the technology that supports same, has influenced the payments space.

[iv] One article notes that “cryptocurrency has reshaped the global financial infrastructure, compelling institutions to innovate in the digital transaction space (Khan et al., 2020)”.

[v] See ECB article where it is noted that stablecoins are not a practical means of payment for the real economy.

[vi] See for example IMF article ‘Technology behind crypto can also improve payments providing a public good’

[vii] such as issuers and acquirers, credit card networks, payment processors, payment gateways, independent sales organizations, value- added resellers, and payment facilitators.

[viii] DLT refers to the processes and related technologies that enable nodes in a network to securely propose, validate and record state changes to a synchronised ledger distributed across the network’s nodes. In the context of payment, clearing, and settlement, DLT enables entities, to carry out transactions without relying on a central authority to maintain a single “golden copy” of the ledger: per BIS/CPMI ‘Distributed ledger technology in payment, clearing and settlement- An analytical framework’ (February 2017). click here

[ix] DLT could simplify existing process flows by reducing friction to information sharing among participants including data discrepancies while facilitating quicker reconciliation and avoiding burdensome back-office activities: See BIS/CPMI ibid.

[x] ‘The tokenisation of money on a common programmable platform allows money to be transferred directly without messaging an intermediary first (e.g. clearing houses or correspondent banks’.

[xi] the use of smart contracts, along with programmability, allows for automation and composability of several operations within the payments process.

[xii] See EY’s ‘The rise of PayTech — seven forces shaping the future of payments’

[xiii] See for example: the EBA’s ‘Uses of Distributed Ledger Technology (DLT) in the EU banking and payments sector: EBA monitoring and convergence work’:

[xiv] Nakamoto 2008 whitepaper: to reduce the influence of intermediaries through decentralization.

[xv] For example, the Bank of Canada has noted that “The combination of openness with new blockchain technology could lead to entirely new products and services that are not yet feasible or that would require significant changes to traditional payment systems”. click here

[xvi] IMF Report: ‘A Multi-Currency Exchange and Contracting Platform’. The IMF has noted in relation to cross border payments that “internationally there is no common and widely available settlement asset”.

[xvii] FSB, ‘Enhancing Cross-Border Payments. Stage 1 Report to the G20: Technical Background Report’ (9 April 9 2020); CPMI, ‘Cross-Border Retail Payments’ (February 2018) <https://www.bis.org/cpmi/publ/d173.htm>. (European Central Bank – Bank of Japan, ‘Synchronized cross-border payments’ (June 2018).

[xviii] It has been noted that “Stablecoins are increasingly being used to construct robust payment systems on crypto rails, facilitating remittance payments and streamlining cross-border transactions”. See ‘Stablecoins and the New Payments Landscape’.

[xix] which among other things involve third party exchange & transfer fees, transaction delays, financial exclusion etc.

[xx] See for example the new report ‘Stablecoins: The Emerging Market Story’ (September 2024).

[xxi] The frictions contributing to these challenges include fragmented and truncated data formats, complex processing of compliance checks, limited operating hours, legacy technology platforms, long transaction chains, funding costs and weak competition: Central bank digital currencies for cross-border payments (July 2021) Report to the G20.

[xxii] At minimum, enhancing cross-border payments is a multifaceted problem requiring a comprehensive approach, and DLT could be one way of addressing these inefficiencies. DLT comes with features that potentially assist in removing or lowering the mentioned four barriers. See Dirk A. Zetzsche, ,et al (2021) DLT-based enhancement of cross-border payment efficiency- a legal and regulatory perspective .

[xxiii] Ibid. “Stablecoins have evolved from mere trading collateral to a general-purpose digital dollar instrument”.

[xxiv] Some of the most proactive jurisdictions in creating regulatory frameworks for stablecoins include the EU, Singapore, Dubai, Hong Kong, Bermuda and the UK.

[xxv] It has been noted that a stablecoin-based payment system may reduce certain risks (e.g. by facilitating D vs P for the settlement of digital assets).

[xxvi] While crypto has offered some elements of genuine innovation, these can be replicated or embedded in the safer and more trusted traditional finance system (per BIS (2023))

[xxvii] May depend on inter alia, the blockchain platform used, (including its the consensus mechanism), block time and size, transaction fees and network traffic, etc.

[xxviii] See ECB’s article “Stablecoins’ role in crypto and beyond: functions, risks and policy”:

[xxix] Some have argued that the development of crypto has been the catalyst for the exploration of CBDCs. See Anton N. Didenko et al., After Libra, Digital Yuan and COVID-19: CBDCs and the New World of Money and Payment Systems click here

[xxx] Stats taken from click here

[xxxi] CBDCs represent a claim on the central bank and constitute therefore, the safest settlement asset available.

[xxxii] See IMF Blog on the Technology behind crypto can improve payments.

[xxxiii] See BIS ‘Central bank digital currencies for cross-border payments’ (July 2021) Report to the G20: click here

[xxxiv] Along with aspects such as programmability and the use of smart contracts.

[xxxv] the design of CBDCs that store transaction data in a centralized ledger may present unprecedented security risks and privacy concerns.

[xxxvi] See ‘Public and Private Money Creation for Distributed Ledgers: Stablecoins, Tokenized Deposits, or Central Bank Digital Currencies?’ (May 2024) where it was noted that “policymakers must clarify their objectives, pay attention to multiple channels and consider several design features before deciding whether CBDC issuance is an appropriate response to crypto sector development”.

[xxxvii] Guseva, Gazi and Eakeley : ‘On The Coexistence Of Stablecoins And Central Bank Digital Currencies’, click here

[xxxviii] Cryptocurrency payment gateways are platforms that allow merchants to receive cryptocurrencies as payment. They handle the necessary aspects of a crypto transaction, including security, transaction verification, and real-time currency conversion. Crypto Payment Gateways Market size was valued at USD 1.2 billion in 2023.

[xxxix] See references to reports in earlier notes.

[xl] PayPal held approx. $604 million in cryptocurrency for its customers in 2022.

[xli] Fiat-backed stablecoins activities will fall within the remit of the BOE, FCA and PSR, with a focus on minimising potential for customer harm and mitigating risks arising from those stablecoins, particularly when used for payments.

[xlii] click here

[xliii] which provide for the regulation of payment institutions and set the conditions for providing payment services.

[xliv] The Bank’s regime will ensure that systemic stablecoin payment chains as a whole demonstrate end-to-end financial and operational resilience.

[xlv] See previous article on stablecoins for more details on the MiCA regime.

[xlvi] For example, Articles 22(1)(d) and 58(3) of Regulation (EU) 2023/1114 (MiCA) require the issuer of an asset referenced token (ART) to report to the competent authority, on a quarterly basis, an estimate of the average number and average aggregate value of transactions per day, during the relevant quarter, that are associated to uses of that token “as a means of exchange within a single currency area”.

[xlvii] The European Union Banking Authority Final Report On Draft Regulatory Technical Standards On The Use Of ARTs And EMTs Denominated in A Non-EU Currency As A Means Of Exchange under MICA.

[xlviii] click here

[xlix] pegged to the Singapore Dollar or any G10 currency, and are issued in Singapore.

[l] click here

[li] The PTSR applies across the UAE except in the Dubai International Financial Centre (the DIFC) and the Abu Dhabi Global Market (the ADGM).

[lii] See part 3, article 2 (7) of the PTSR.