Introduction

Web3 payments are an innovative method that minimizes intermediaries. With substantial growth potential, they lower transaction costs, improve efficiency, and enhance security. This article explores the Web3 payment landscape, comparing it to traditional systems and exploring the ecosystem, business models, regulations, key projects, and future development paths.

What is Web3 Payment?
Web3 payment is a new type of payment based on cryptocurrency and blockchain technology. Reducing intermediaries makes payments more accessible, cost-effective, efficient, and secure.

Blockchain Technology: Web3 payments leverage decentralized blockchain networks to ensure transparency and immutability, enhancing the security and reliability of transactions. Smart contracts automatically execute payments, eliminating the need for manual intervention and improving both automation and accuracy.

Cryptocurrency as the Medium: Web3 payments primarily use cryptocurrencies, with stablecoins (e.g., USDT, USDC) being the most common. These stablecoins are pegged to fiat currencies, mitigating the risks of cryptocurrency price volatility and are widely used for applications like cross-border payments.

Advantages of Web3 Payments Over Traditional Payments

Traditional payment systems usually involve intermediaries such as banks, payment gateways, and clearing centers. Payments are verified, cleared, and settled by these financial institutions. This often excludes people without bank accounts or lacking identity verification from accessing the global financial system. Additionally, each step takes time and involves transaction fees, with bankruptcy risks at each stage. These issues are particularly problematic in cross-border payments.

Next, we will compare bank-to-bank, third-party, and Web3 payments processes in cross-border payment scenarios.

Bank-to-Bank Payments

Process

Initiating Bank → [SWIFT Information Transfer] → Intermediate Bank 1 → … → Intermediate Bank N → [Target Country Clearing System] → Target Bank

Intermediary Steps:

• Initiating Bank
• Intermediate Banks (possibly multiple)
• Target Bank
• Clearing systems (e.g., SWIFT)

Fees and Timing:

• Typically high fees due to multiple intermediaries.
• Low fee transparency, with possible hidden fees.
• Slow processing that takes several days, with potential additional fees.

Third-party Payments

Process
Initiating Bank → Third-party Payment Platform → [Currency Exchange (if needed)] → Target Bank

Intermediary Steps:

• The initiating party uses a third-party payment platform account.
• Third-party payment platform processes the transaction.
• The target party receives funds in their third-party payment platform or bank account.

Fees and Timing:

• Fixed fees, often comprising a flat transaction fee and/or a percentage of the transaction amount.
• High transparency: most service providers publish fee structures on their websites.
• Fast processing, typically completed within a few days or instantly.

Web3 Payment

Process

Initiating Wallet → [Smart Contract Execution] → Blockchain Network → [Transaction Confirmation] → Target Wallet

Intermediary Steps:

• The initiating party initiates the transaction via a smart contract.
• Blockchain network verifies and records the transaction.
• Target party confirms receipt of cryptocurrency or stablecoins.

Fees and Timing:

• Typically low fees, mainly dependent on the blockchain network’s transaction fees (gas fees).
• Complete transparency: all fees are visible on the blockchain.
• Transaction speed depends on the blockchain network’s performance, typically completed within minutes.

Figure 1: Traditional Payment vs. Web3 Payment

Source: Web3 Xiaolv

The comparison shows that Web3 payment has distinct advantages in inclusivity, cost, efficiency, and security transparency.

• Financial Inclusion: Web3 payments offer financial services to individuals not covered by traditional banking systems. Anyone with internet access can use cryptocurrencies for payments and transfers, significantly enhancing financial inclusion.
• Lower Costs: Web3 payments eliminate intermediaries like banks and payment gateways, reducing transaction fees. Especially in cross-border payments, Web3 payments incur almost no extra exchange rate costs or service fees.
• Efficiency: Web3 payments remove intermediary steps, making the payment process more direct and efficient, particularly in cross-border payments and large transactions. Automated execution via smart contracts also speeds up transactions.
• Transparency and Traceability: All transaction records are stored transparently on the blockchain, ensuring traceability and security. This feature is crucial in preventing fraud, improving compliance, and building trust.

Ecosystem and Business Models

Ecosystem

The key players in the Web3 payment space include cryptocurrency issuers, public blockchains, deposit/withdrawal institutions, and payment platforms.

• Cryptocurrency Issuers: Mainly stablecoin issuers, such as Tether (USDT) and Circle (USDC).
• Public Blockchains: Ethereum, Solana, etc., provide the underlying blockchain networks for recording and verifying transactions, replacing centralized networks like SWIFT.
• Deposit/Withdrawal Institutions: Handle the conversion between fiat and cryptocurrency.
• Payment Platforms: Include decentralized Web3 wallets and centralized platforms like exchanges that facilitate cryptocurrency payments, including on-chain payments for virtual assets and off-chain payments for physical goods.

Figure 2: Web3 payment landscape

Source: Web3 Xiaolv

Business Models

Issuers and public blockchains form the Web3 infrastructure. Issuers profit mainly from low-risk investments of their fiat reserves, while public blockchains generate revenue primarily from network gas fees. Deposit/withdrawal institutions and payment platforms directly generate revenue from Web3 payments, mainly through the following methods:

• Deposit/Withdrawal Fees: Users pay a fee for converting cryptocurrencies and fiat currencies, typically around 0.6% of the transaction amount, which is shared among third-party payment institutions, aggregators, issuing banks, and international card organizations.
• Integration Service Fees: Payment platforms charge merchants for integrating payment systems, for example, offering API interfaces to accept cryptocurrency payments.
• Currency Exchange Spreads: Earned by exchanging different cryptocurrencies and fiat currencies, often based on market rate differences.
• Staking and Liquidity Provision: Some Web3 platforms allow users to stake crypto assets to provide liquidity to the network and earn rewards.

Deposit/withdrawal and integration service fees are the primary revenue sources and exhibit strong network effects. As the user base and transaction frequency grow, the value of the entire network increases, attracting more participants and enhancing network effects.

Regulatory Compliance

As Web3 payments integrate into the global financial system, regulatory attention is increasing. Various countries and regions require compliance with licensing and qualifications within regulatory frameworks.

United States

In the U.S., Web3 payment regulation is overseen by multiple agencies, with the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury, being the most prominent. FinCEN regulates anti-money laundering (AML), combating terrorist financing, and customer due diligence (KYC) for crypto assets.

Under the Bank Secrecy Act (BSA), FinCEN treats “money transmission” as including activities such as money orders, stored value cards, and cryptocurrencies. Companies engaged in “money transmission” must comply with BSA regulations and obtain a Money Services Business (MSB) license. Additionally, centralized exchanges and wallet providers offering services to U.S. customers must apply for a Money Transmission License (MTL), which requires separate applications in each state, often taking considerable time.

The BitLicense, issued by the state of New York, is one of the most influential crypto asset licenses in the U.S. It applies to companies conducting crypto business in New York and requires adherence to regulatory frameworks concerning consumer protection and anti-money laundering compliance. Therefore, obtaining a BitLicense is crucial for Web3 payment companies seeking to enter the U.S. market.

European Union

The EU gradually clarifies its regulatory framework through the Crypto Asset Market Regulation (MiCA). MiCA aims to create a unified regulatory environment for crypto asset issuers and service providers. It defines categories for crypto assets, including Electronic Money Tokens (E-Money Tokens), Asset-Referenced Tokens, and other types of crypto tokens. Service providers must register as Crypto Asset Service Providers (VASP).

For example, companies like Coinbase and MoonPay, after obtaining their EMI licenses in the UK and Ireland, are also waiting to operate under the MiCA regulation within the European Union. Once MiCA comes into effect, it will provide a unified compliance standard for Web3 payment companies within the EU, which allows them to operate freely across 27 member states and a market of over 450 million people.

Hong Kong

In Hong Kong, the regulation of Web3 payments is overseen by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA). Hong Kong has implemented a VASP (Virtual Asset Service Provider) system for crypto assets, which requires companies operating crypto asset exchanges and related services in Hong Kong to register with the SFC and obtain the necessary licenses.

Furthermore, Hong Kong’s VASP regulatory framework has strict requirements for asset custody. Crypto asset companies must custody client assets through wholly-owned subsidiaries and obtain a TCSP (Trust or Company Service Provider) license to ensure the security of client assets. These regulations provide a clear legal framework for Web3 payment platforms and enhance market transparency and credibility.

Singapore

Singapore is considered one of the most crypto-friendly countries globally, with its financial regulatory framework managed by the Monetary Authority of Singapore (MAS). Singapore’s regulation focuses on managing payment tokens, governed under the “Payment Services Act.” According to this law, companies offering Digital Payment Token (DPT) services, such as wallet services, exchanges, and custodians, must apply for a DPT service license.

The DPT licensing regime in Singapore is relatively stringent, but the legislation also provides a transitional exemption period for emerging Web3 payment platforms that allows startups to operate before obtaining a license. Well-known Web3 payment companies like Circle, Paxos, and Coinbase have already obtained the DPT license in Singapore, ensuring they can operate legally and compliantly in the Asian market.

Dubai

Dubai has adopted a more open stance on Web3 payment regulation. It strives to become a global hub for crypto assets. The Virtual Asset Regulatory Authority (VARA) in Dubai regulates all crypto asset companies operating within Dubai and its free zones. According to VARA’s regulations, Web3 payment companies must apply for the appropriate licenses to conduct payment activities locally.

Dubai’s regulatory framework provides an environment conducive to innovation while ensuring that businesses comply with international standards. Due to its strategic location and open regulatory policies, Dubai has attracted numerous Web3 payment platforms and crypto asset companies.

Japan

Japan’s Web3 payment regulation is overseen by the Financial Services Agency (FSA). The FSA enforces strict regulation on crypto assets and requires crypto asset exchanges and wallet service providers to register and obtain a Virtual Currency Exchange Business license (VFA). This license mandates compliance with anti-money laundering (AML) and customer due diligence (CDD) regulations.

To promote the development of Web3 payments, the Japanese government is also exploring how to integrate crypto assets with Central Bank Digital Currencies (CBDCs). For companies wishing to engage in Web3 payment activities in Japan, obtaining an FSA license is a prerequisite for their entry to the market.

South Korea

The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) manage South Korea’s crypto asset regulation. The country’s crypto regulations focus on anti-money laundering (AML). All companies that offer crypto asset trading services must obtain a Virtual Asset Service Provider (VASP) license.

Under South Korean regulations, all Web3 payment service providers must undergo AML procedures and submit compliance reports to the Financial Services Commission (FSC). Given the strong demand for crypto assets in the South Korean market, obtaining a VASP license is crucial for operating legally in the country.

Key Projects

Coinbase Pay: Seamlessly Integrates Trading and Payments

The primary reason centralized exchanges obtain payment licenses is to comply with trading regulations, but these licenses also enable them to expand into deposit, withdrawal, and payment services. Many exchanges, such as Coinbase with Coinbase Pay, Gate with Gate Pay, and others, have developed their own payment solutions. Coinbase Pay, for example, has strengthened Coinbase’s position in the Web3 payment space by offering a simple, secure cryptocurrency payment system for merchants and consumers. It allows users to pay directly with cryptocurrencies, while merchants can convert the payment into fiat currency. This service provides cryptocurrency payment solutions for online merchants, further advancing the real-world use of cryptocurrencies.

Merchant Payment Solutions

Coinbase Pay allows merchants to receive cryptocurrency payments through Coinbase Commerce. Merchants can accept cryptocurrencies, including Bitcoin, Ethereum, and stablecoins like USDC. This payment system is directly integrated with Coinbase’s exchange, so merchants don’t need to worry about the volatile cryptocurrency market. Merchants can convert cryptocurrencies into fiat currencies, ensuring payment stability and operability.

The launch of Coinbase Pay marks the gradual establishment of a bridge between cryptocurrency payment systems and traditional payment systems. By integrating with major global payment channels, Coinbase Pay enables seamless interaction between merchants and consumers within a unified ecosystem, lowering entry barriers and reducing payment risks.

Fiat-Crypto Conversion

With licenses obtained in the U.S., the U.K., Ireland, Singapore, and other regions, Coinbase can operate globally in a legally compliant manner. These licenses enable Coinbase to smoothly offer conversion services between cryptocurrencies and fiat currencies, setting a compliance example for the Web3 payment industry. Particularly in the U.S., Coinbase has secured the BitLicense in New York and various state money transmitter licenses, providing it with strong domestic and international legal assurances.

Stablecoins and Cross-border Payments

Despite providing payment solutions for merchants, Coinbase actively advocates for using stablecoins, such as USDC, in Web3 payments. By leveraging stablecoins, Coinbase offers a secure, risk-free payment method, especially in cross-border transactions. USDC, one of the most stable cryptocurrencies, has become the go-to option for global cross-border payments and fund transfers.

PayPal: A Traditional Payment Giant’s Web3 Strategy

As one of the world’s largest online payment platforms, PayPal made a significant move into the Web3 payment space in 2023 by launching its own stablecoin — PayPal USD (PYUSD). This marks an important step for PayPal into Web3 payments. PayPal’s Web3 strategy extends beyond stablecoins to include support for cryptocurrencies and expanded deposit and withdrawal functions, aiming to bridge traditional finance and the crypto world.

Launch of the PYUSD Stablecoin

PayPal’s PYUSD is pegged 1:1 to the U.S. dollar, enabling seamless transfers between Web2 and Web3. PYUSD enhances PayPal’s payment capabilities and provides consumers with more payment options. Users can buy, hold, transfer, and pay using PYUSD through their PayPal accounts. It offers merchants a bridge between traditional payments and crypto payments.

Through PYUSD, PayPal has effectively integrated cryptocurrencies’ speed and low-cost advantages into its payment ecosystem, thereby increasing cryptocurrency adoption among mainstream users. In the future, PayPal is expected to enhance the interoperability of PYUSD with other cryptocurrencies, stablecoins, and fiat currencies, further promoting the widespread adoption of Web3 payments.

Compliance Pathway for Web3 Payments

PayPal’s Web3 payment services face strict compliance requirements. To adhere to regulatory guidelines, PayPal collaborates with Paxos to custody PYUSD and conducts anti-money laundering (AML) and know-your-customer (KYC) checks on all transactions. These compliance measures allow PayPal to legally provide stablecoin services to global users, especially in markets with stringent regulations such as the U.S., Europe, and Asia.

Bridging Web3 and Traditional Finance

PayPal’s Web3 payment services go beyond cryptocurrency trading and payments. PayPal also provides its existing 431 million users with a cryptocurrency wallet through the PayPal Crypto Hub to enable the easy management of digital assets. This wallet enables users to convert cryptocurrencies into fiat currency and perform cross-border transfers, merchant payments, and other operations, effectively bridging Web3 and traditional payment systems.

PayPal’s strategic goal is to strengthen its competitiveness in the global payment market through this stablecoin and wallet ecosystem, promoting the widespread adoption of Web3 payments.

MetaMask: Expanding Web3 Payments via a Decentralized Wallet

MetaMask, a leading decentralized wallet, has become a key player in the Web3 payment space with its user-friendly interface and widespread user base. MetaMask provides tools for managing Ethereum and other EVM-compatible blockchain assets. It also enables cryptocurrency payments through integrations with third-party payment providers.

Introduction of Payment Features

MetaMask’s Portfolio feature now includes both “Buy” and “Sell” options, enabling users to swap between fiat and cryptocurrencies effortlessly. The “Sell” function allows users to convert their crypto assets (e.g., Ethereum ETH) into USD, EUR, or GBP and transfer them directly to their bank accounts. In partnership with payment providers like MoonPay and Transak, MetaMask provides seamless deposit and withdrawal channels, allowing non-custodial wallet users to convert between fiat and crypto easily.

Collaboration with Payment Service Providers

MetaMask’s payment functionality is powered by third-party providers, including MoonPay and Transak. These partners offer a range of payment options, such as credit cards, debit cards, and bank transfers, bridging the gap between cryptocurrency and traditional finance.

Snaps Version: Expanding Web3 Payment Applications

MetaMask has expanded its Web3 payment capabilities by launching Snaps. This feature allows third-party developers to create plugins for MetaMask. As a result, users can interact with non-EVM chains like Solana, Aptos, Cosmos, and others. Snaps strengthens MetaMask’s leadership within the Ethereum ecosystem while enhancing its multi-chain functionality, broadening support for Web3 payments.

Aggregating Payment Features: Creating a Super Wallet

MetaMask aims to position itself as the “super wallet” of the Web3 space by continually expanding its features. By integrating payments, asset management, cross-chain bridging, and more, MetaMask offers a comprehensive Web3 payment solution. As it evolves, MetaMask is set to become a primary gateway for Web3 payments, connecting users to decentralized applications (DApps) and services across the ecosystem.

Future Outlook

The traditional payments industry is enormous, yet Web3 payments offer unique advantages. With just a 10% market penetration, Web3 already presents an opportunity exceeding $300 billion. According to Mordor Intelligence, the global payment industry processed 3.4 trillion transactions in 2023, valued at $1.8 quadrillion, with revenues of $2.4 trillion. This figure is projected to grow to $3.2 trillion by 2025 and $5.3 trillion by 2030, reflecting a compound annual growth rate (CAGR) of 10.9% from 2025 to 2030. Additionally, Chainalysis reports that the global stablecoin transaction volume reached $3 trillion in 2023, yet its market penetration remains under 0.2%.

Figure 3: Global Payment Market Size (Trillions of USD)

Source: Mordor Intelligence

Looking at the journey of traditional fintech companies like Alipay and WeChat, which gained market share from the banking system, PayFi and SocialFi could further penetrate Web3 payments.

PayFi: The Integration of Payments and Finance

PayFi (Payment Finance) is an innovative concept in the Web3 payment space that aims to combine payments with decentralized finance (DeFi), creating a broader ecosystem of financial products and services. The core of PayFi is to provide users with comprehensive financial services, including payments, lending, savings, investment, and yield farming. This innovation will allow users to automatically earn investment returns and financial gains during payment transactions, turning each payment into an opportunity for investment and growth.

PayFi’s success will extend beyond the payments industry, potentially disrupting sectors like insurance, investment, bonds, and other financial products. As the model evolves, PayFi is set to become a key catalyst in the Web3 payments space, drawing in more financial institutions, payment platforms, and DeFi projects.

SocialFi: The Fusion of Social and Payments

SocialFi (Social Finance) is a key component of Web3 payments, especially within social platforms and the creator economy, where it holds vast potential. By leveraging decentralized payment protocols, SocialFi enables content creators, community members, and users to engage in smooth economic interactions, fueling the platform’s economic activity.

In the Web3 payment space, X Payments (formerly Twitter Payments) exemplifies how social platforms can harness Web3 technologies to drive user engagement and value exchange. By integrating cryptocurrency payments and micropayments, X Payments allows users to make seamless transactions and fund transfers directly within the platform, boosting the commercialization potential of social networks.

Conclusion

Traditional payment systems rely on intermediaries such as banks, payment gateways, and clearinghouses, each step adding time, cost, and exposure to bankruptcy risks.

In contrast, Web3 payments leverage cryptocurrencies and blockchain technology, reducing intermediaries to lower costs, increase efficiency, and enhance security.

Key players in the Web3 payment ecosystem include cryptocurrency issuers, public blockchains, deposit and withdrawal institutions, and payment platforms. Asset issuers and blockchains contribute to Web3 infrastructure, with the former profiting from low-risk investments made with their fiat reserves and the latter earning mainly from network gas fees. The profitability of deposit and withdrawal institutions, as well as payment platforms, is directly tied to Web3 payments, with transaction fees and integration service fees being their primary income sources—both of which have strong network effects.

Despite the vast scale of traditional payments, Web3 payments hold distinct advantages. A mere 10% penetration could unlock over $300 billion in market potential. Drawing from the success of fintech giants like Alipay and WeChat, PayFi and SocialFi are poised to accelerate Web3 payment adoption.