Stablecoins will eat payments.
Talk to anyone in crypto and this is likely the obvious consensus you'll hear. And while many will paint a beautiful picture of laughing consumers happily paying for their Mocha Lattes with USDC via QR codes, I don't think stablecoins will be a consumer-led revolution. Not many people are demanding to pay for anything with USDC. Credit Cards still rule the consumer side of the market in many regions, and likely will for the foreseeable future.
However, the merchant side of the equation is a different story. From my perspective it seems much more likely we'll see a quiet revolution take place there.
Why? The modern payment stack consists of numerous entrenched middle-men (payment processors, designees, networks, issuing banks, acquiring banks, wallets, BNPLs, BPPs and CPPs). They make payments flow easily for merchants and consumers, and the system works well. Directly attacking those middle-men and competing for volume is crazy difficult. Competition is for losers (paraphrasing Theil). Many have long-term contracts and hardware in place that cements their relationships with merchants. They’re not going anywhere for a bit.
Now, for that ease of flow, payment intermediaries obviously charge a fee. Who pays those fees? Merchants do. Unless, of course, they “surcharge”, which you might see as a “convenience fee” of 3-4% on your receipt. Surcharging sucks. It’s a horrible consumer experience that Merchants also dislike because it can drive away repeat business.
So, one common discussed attack vector are those merchant fees. But competing directly on fees with something like "free stablecoin payments via QR codes", is a loser’s game. You have to convince both sides of the markets (consumers and merchants) to pay and accept you stablecoin. Again, crazy difficult.
The smarter play, and bigger opportunity, is to lean into the existing landscape and empower the entrenched payment intermediaries with stablecoin settlement. But not just USDC or Tether. The revolution will occur with “revenue sharing stablecoins”. These are tokens that are backed by US treasuries and/or defi staking, which then share some of that yield to participants in the payment flow. To revolutionize payments, that yield should be shared directly with the end beneficiary (i.e. the Merchant) to offset, or eliminate, their payment processing fees.
Why would Square or FIS or Adyen want this? Value-added services!! It gives them a way to offer free or significantly reduced payments to their merchants without any changes to the merchants existing hardware or software, and the intermediaries don’t have to build stablecoin infrastructure/issuance. That’s a win/win and massive competitive advantage! If FIS is offering it to their merchants, Adyen will eventually have to as well. And for startups building in this lane, you get automatic distribution and legitimacy by partnering with existing players.
Yield
Lets get this out of the way at the beginning. Yield can be a problem for US stablecoin holders. And many people will say that yield on a stablecoin is illegal in the US, because it will classify the stablecoin as a security. And for most yield strategies, I would agree. But if the yield earned by merchants is a REBATE on the payment processing fee the merchant’s pay it may not be viewed as income/profit. IRS guidance and below case law establishes a precedent that rebates are not considered income, removing a vital Howey prong. So, if the yield earned by the merchant (stablecoin holder) does not exceed the payment processing fee, there is no income, no profit, no investment (the merchant is just receiving a payment for goods), so no security.
1. IRS Guidance:
• Rebates and discounts reduce the cost of purchases and are not taxable income.
• Rewards tied to spending fall under this category.
2. Case Law:
• General Motors Corp. (1966) and subsequent rulings establish that rebates are price adjustments.
• Shankar (2018) and Anikeev (2021) confirm non-taxable treatment for rewards tied to personal spending.
3. Tax Principles:
•Rewards are seen as part of the transaction and not independent payments, making them non-taxable under established principles.
And with yield-rebating, instead of creating a new type of Stablecoin Intermediary that would compete directly with payment giants like Square, FIS or Adyen, the smarter play is to build a new type of payment middleware that integrates with the existing stack and provides revenue-sharing settlement to the entrenched payment processors.
Below, I introduce a stablecoin payment intermediary that does just that. This allows processors to offer their merchants the option to settle transactions in stablecoins and earn yield on funds held in those stablecoins. This yield can offset or eliminate payment processing fees, while providing a cost-effective and innovative alternative to traditional settlement methods.
The Opportunity
As we've discussed, credit card payments come with a fee. That fee is paid by the merchant. Every time you swipe your card for coffee or shoes or dinner, the merchant typically pays between 2%-4% per transaction. Sometimes more when you add if there are additional middlemen in the payment flow, like payfacs. For many merchants, this crushes their margins.
Stablecoins To The Rescue
So, you might think, to avoid fees just pay with USDC. Well, here is where the old "chicken and egg" problem enters our story. Most consumers don't hold USDC (or any stables). Most merchants don't have infarstructure in place to accept stables. Where does one start to attack this problem? How do you convince people that already have free payments via credit cards, to switch to paying with USDC? Especially when crypto still lacks trust in the marketplace.
The answer is, you can't.
Case in point: Coinbase set up a pizza truck in Washington Square Park last summer (2024) that only accepted USDC payments for pizza. Not many people in line had USDC or even a wallet. Coinbase had employees in line to help people download a wallet, and actually funded that wallet with $10 of USDC. There were additional problems with downloading and funding because of the glare on the QR codes. No one knew what to do. And everyone worried that they'd look like a fool at the counter for not knowing how to pay with a wallet, me included. The entire experience was just plain bad (no disrespect to Coinbase; it was great to see them making moves and I applaud it all).
No way normal people put up with that hassle when they can just Tap and Go with Apple Pay instead.
After going through that experience, I felt it in my bones that if stablecoins are ever going to disrupt payments, it won't start at the consumer layer.
Stablecoin middleware is the answer at this stage of crypto’s development. And the biggest opportunity is to leverage the yield from stablecoins to bring existing intermediaries along by offsetting fees for their merchants.
Platform Overview
Our platform serves as a middleware layer between Payment Processors like payfacs and payment designees, and merchants. By integrating stablecoin settlement with payment processors, we enable them to offer their merchants the ability to generate yield to offset the fees they incur.
Key Features:
Yield Sharing: Merchants can hold settlement funds in stablecoins on the platform, earning a portion of the yield generated through DeFi protocols.
Stablecoin Settlement: Merchants can opt to settle transactions in stablecoins instead of fiat, leveraging blockchain’s efficiency, speed and universal access.
Customizable Risk Levels: Not all stablecoins are the same. Some earn more yield, but consequently carry more risk. Merchants can choose yield options based on their risk appetite, ranging from low-risk, collateralized protocols to higher-risk, high-yield strategies.
Partnering with PayFacs and Designees
Our intermediary does not replace existing payment providers but enhances their offerings by introducing stablecoin settlement as an add-on feature. The key is to create partnerships with the existing payment stack, enhancing the services that Payment Processors offer their merchants, while obtaining beneficial distribution for our protocol.
Benefits to PayFacs and Designees:
Differentiation: Attract merchants with a cutting-edge settlement option.
Revenue Sharing: Gain a share of the stablecoin yield generated by merchant funds.
Seamless Integration: APIs connect directly to PayFacs’ and designees’ platforms, requiring minimal development effort.
Yield Sharing Model
Merchants who choose stablecoin settlement would automatically begin earning rebates on their processing fees, and could even allocate their funds into various risk-adjusted yield tiers:
Example Scenario:
A merchant sells $50,000 worth of goods.
They incur roughly $1,500 in processing fees.
They allocate that $50,000 to stablecoin settlement via their existing Payment processor, who is empowered to offer stablecoin settlement via our APIs:
Traditionally, the processor settles to the merchant’s bank account.
With stablecoin settlement, the processor would settle to the merchant’s stablecoin wallet.
Funds are placed into a Moderate-Risk Tier stablecoin, earning 5% annual yield.
The $2,500 annual return offsets their processing fees, saving money while maintaining liquidity.
But What About Cash Flow?!?!?
At this point, you might be thinking, well, then the merchant has to keep her money in stablecoins for a year. She effectively locks that money and can’t use it to pay her bills. That crushes her cash flow.
Yes, that is true. But stablecoins are easily transferable into USD at any moment. When the merchant needs to pay a bill, she can easily cash out of stables and into USD, earning yield right up until the moment her bills are due.
Platform Architecture
Core Components:
PayFac/Designee API: Provides a seamless integration layer for processing stablecoin settlements, capturing yield and dispersing that yield to the merchant account.
DeFi Integration: Secure connection to leading DeFi platforms for yield generation.
Stablecoin Construct: our platform creates a “Wrapped Stablecoin”, which is a basket of other stablecoins and defi tokens. This aggregates yield from multiple different sources, optimizing returns while spreading out risk. The yield aggregator contract automatically allocates deposited stablecoin collateral to the highest yielding strategies available. To optimize returns, the aggregator will monitor available yields, existing allocations, and risk parameters.
The yield aggregator and allocations will be managed by a multisig controlled by the core team. In the future, allocation parameters and strategies could be decentralized but that is not a focus area at this time.
Merchant Dashboard: Merchants monitor settlements, select yield tiers, and track earnings in real time.
Security and Compliance:
Custody: Partner with trusted custodians like Fireblocks or Anchorage for secure asset management.
KYC/AML Compliance: Ensure all transactions meet regulatory requirements.
Risk Management: Offer insurance-backed options for low-risk tiers to mitigate potential DeFi risks.
Merchant Benefits
Reduced Fees: Yield sharing offsets or eliminates processing fees, enhancing profitability.
Liquidity Flexibility: Access to funds remains instantaneous, even while earning yield. If the merchant needs to pay builds, she can do so very quickly, maintaining the optimal balance for her needs, marrying yield-generation and cash-flow management.
Financial Inclusion: Smaller merchants gain access to yield opportunities typically available only to large institutions.
Vision and Next Steps
And there you have it: Revenue-sharing stablecoin middleware for payment processors. Just rolls off the tongue, doesn't it lol.
With this platform we aim to revolutionize merchant payments by aligning the benefits of stablecoins, DeFi, and traditional payment networks. Initial rollout will focus on partnering with forward-thinking PayFacs and designees.
Ultimately, we envision a future where stablecoin settlement becomes a default, cost-efficient choice for global commerce, enabling merchants to transform their payments from a cost center into a profit generator.
Stablecoins will eat payments.
But from the inside out.
And one day soon they'll bust out of the market's chest, and take over both sides of equation.
Thanks for reading. If you have any question my DMs are open (@philip0X), or feel free to email me at pdeckr@gmail.com.
