Thomas GretherCredit card giant Visa has been betting heavily on cryptocurrencies and building relationships with blockchain companies over the past two years. Visa has already made it clear several times that it wants to position itself as a player in the crypto world. Visa CEO Alfred Kelly was outspoken about the credit card provider’s crypto plans. In February 2021, Visa launched a debit card in Austria together with crypto exchange Bitpanda. In addition, a pilot project with the digital platform Crypto.com is to start.
Settlement of stablecoins via Visa
Now the company is expanding its crypto ambitions. Alfred Kelly said during a conference call, “Our focus is on five different opportunities that we see in this space. It’s an area we’re leaning into in a very big way and we’re very well positioned.” Kelly also announced plans to develop crypto-related interfaces for financial institutions and upgrade infrastructure. The goal: to enable settlements with stablecoins via Visa. Kelly reiterated that he divides cyberdevices into two distinct categories:
- Investment assets that are more “digital gold.” These include cryptos such as bitcoin.
- Digital currencies, which are more likely to be used for payments. This probably means stablecoins and CBDCs in particular.
The goal is a universal payment channel
Visa wants to build a universal hub for exchanging stablecoins and central bank digital currencies. The project is still in its early stages. Visa announced plans for a “universal payment channel” on Nov. 11, 2021. This is intended to facilitate transactions between various stablecoins and central bank digital currencies (CBDCs). Visa’s announcement is timely. Regulators around the world are paying close attention to stablecoins and CBDCs. In the U.S., both the White House and the Federal Reserve will release reports on the role of stablecoins in the economy in the coming weeks.
Visa wants to leverage existing financial networks
Visa’s idea is to create a digital currency equivalent to the existing international payment system, according to Decrypt. It will be possible for consumers to pay abroad with a debit or credit card by drawing money from an account in their home country. This method relies on existing networks operated by banks and credit cards. It is based on national currencies, not blockchains. With the launch of its “universal” payments channel, Visa is trying to replicate this system for the blockchain era. Behind this is the belief that stablecoins, such as USDC (a digital token pegged 1:1 to the U.S. dollar), will prevail.
The Visa project is interesting. It will theoretically be possible to clear all types of tokens with each other.
Prof. Dr. Philipp Sandner, Head of the Frankfurt School Blockchain Center (FSBC)
Interaction with digital wallets
The new Visa channel acts as a hub that will interact with trusted digital wallets. This is comparable to “Layer 2” solutions being developed for Bitcoin and Ethereum. This means that initial transactions will go through on a layer separate from the blockchain – and then settle on the blockchain. “Layer 2” processes aim to give users the transaction speed of a traditional network (blockchains are comparatively slow). The advantage is that they simultaneously benefit from the immutable, tamper-proof records of a blockchain.
What are the benefits for consumers?
What does this mean for consumers who use the Visa card in everyday life? Among other things, it should be possible to buy and spend cryptocurrencies with the Visa card. For this, the company is working with crypto exchanges as well as wallets and payment gateways, he said. Addressing the Visa plans, Prof. Dr. Philipp Sandner, head of the Frankfurt School Blockchain Center (FSBC), says: “It’s fascinating how global payment infrastructures based on Ethereum are emerging.” For example, he said, it is theoretically possible to clear all types of tokens with each other. “This will then also make it possible to pay in euros and debit in U.S. dollars, for example.
Clarify consumer needs
An important first step for Visa is to identify the needs of its customers. What digital assets does it want to offer customers as an alternative to traditional currencies? To do this, the company conducted due diligence in the following areas:
- Demand: what currencies are customers interested in paying with and receiving? Is there a dynamic environment and developer community to support these assets?
- Stability: what about volatility? Does the price fluctuate? Is there enough liquidity to convert in and out of the digital asset?
- Transfers: how long would transfers in and out of the digital currency take. And, what is the impact of transaction duration on the process? It is also important to clarify where consumers would want to pay with cryptos.
- Security: does the currency consumers want have a clear set of compliance and regulatory protocols to support it? What infrastructure providers are in place, and how trustworthy are they? Where do major vulnerabilities or risks lie? There is a need to prevent money laundering and extortion.
Secured by blockchain and smart contracts
Unlike “Layer 2” solutions like the Lightning Network, Visa’s universal payments channel focuses on interoperability. This supports the scaling of Bitcoin and the ease of exchanging one currency for another. To make this possible, Visa plans to rely on smart contracts. These are “hash-timelock contracts.” These are already widely used in the crypto world. They ensure that both parties to a transaction do what they promise.
A lot of development work is still needed in the future
For this to work, however, there is still a lot of work to be done. Visa needs to convince companies and national governments to provide developer resources. After all, digital wallets need to be developed that are compatible with the proposed universal channel. In Switzerland, the legal basis has been created with the DLT Act. Those who do not participate could experience disadvantages. A token is likely to lose influence if it is not part of a broader network. Visa’s new payment channel emerged from an academic research lab in Silicon Valley. The project is still in its early stages.
Are governments accepting digital currencies?
Catherine Gu, product lead for CBDCs at Visa wrote in a blog post, “As we continue our applied research, we’re working to translate our ideas into actual lines of code.” One consensus could be that governments accept digital currencies. However, it is unclear whether this will include privately created stablecoins such as USDC and Tether. It is also possible that some countries will follow China’s example and only allow state-operated digital currencies. Decentralized currencies like Bitcoin do not fit into the political calculus of any government.
Visa is ambitious - and buys CryptoPunk-NFT
Visa wants to know for sure. And is testing how to buy NFTs right on the front end. Without further ado, the credit card company bought the NFT of a CryptoPunk. These art NFTs (yes, it is real art tokenization!) are pixel images of - as the name says - punks. Apparently, they want to know firsthand what Visa's requirements are. Such as when it comes to processing an NFT purchase, storing and using an NFT. "We believe NFTs play an important role in the future of retail, social media, entertainment and commerce," said Cuy Sheffield, head of crypto at Visa. More experience on art NFTs
