Visa tests USDC payments on Ethereum

Visa has tested how to effectively accept USDC payments on Ethereum

This was revealed on Sunday directly by the head of the company’s crypto division, Cuy Sheffield, speaking at the first session of StarkWare 2023 meetings being held in Tel Aviv.

USDC payments on Visa

Sheffield said Visa is trying to figure out how to make it possible for its customers to convert digital assets to fiat currencies directly on its platform.

Indeed, it already automatically converts dollars into euros when cross-border transactions are made, so it should not be complicated from a technical standpoint to also enable automatic conversion of tokenized dollars into traditional dollars.

Thus the goal does not seem to be to allow USDC to be sent over the Ethereum network from one’s Visa card, but instead to fuel it with incoming transactions of the USDC on Ethereum.

Visa does allow payments in traditional fiat currency, and this will continue to be the case. However, it appears that in the future, in addition to drawing fiat currency funds from a bank account, it may also draw them from an Ethereum wallet in USDC.

As things stand though, these are just internal technical tests being done to see if this type of service is feasible, but the very fact that Visa has a head of the crypto division working on these things makes it very clear that they are serious about this.

USDC on Ethereum

USDC is a stablecoin fully collateralized in US dollars. Technically it is a token issued in ERC-20 format on the Ethereum blockchain, so to be transacted it requires a transaction on this blockchain or via one of the various layer 2s such as Polygon, Arbitrum or Optimism.

USDC, whose full name is USD Coin, is a stablecoin that is used mostly in DeFi on Ethereum, even though Tether (USDT) is more generally used.

The issuer of USD Coin is Circle, but the partnership with Coinbase is also very relevant.

Indeed, Coinbase is a publicly traded company, and this entails a whole host of legal and administrative obligations that makes USDC the stablecoin considered to be the safest overall.

Moreover, USD Coin is not just fully collateralized, but as collateral has US government debt bonds, for more than 77%, and cash dollars for 23%.

Rivalry with Tether

Nevertheless, the most widely used stablecoin remains USDT from Tether.

Indeed, not only does USDT have higher market capitalization, it also has much higher trading volumes.

As of today, Tether’s USDT capitalizes about $68 billion, while USD Coin’s $41 billion, or almost 40% less.

In terms of volumes, on the other hand, there is really no match: on crypto exchanges USDT is by far the token with the largest trading volumes. Higher even than Bitcoin. USD Coin, including DEXs, has 14 times less volume.

The thing is, USDT has two advantages that often make it preferable in the eyes of crypto users.

Advantages of Tether vs USDC

The first advantage is that it can be traded on many different blockchains, including in particular that of Tron as well as Ethereum of course. Tron allows for much faster and especially much cheaper transactions, so much so that there are now more USDT transactions on Tron than on Ethereum. USDC, on the other hand, is still very much tied to Ethereum, which reduces its potential for use.

The second advantage of USDT is anonymity.

Admittedly, this is not really pure anonymity, both because on-chain transactions are public and because upstream KYC must be performed in order to obtain these tokens. However, once the initial KYC is done, subsequent transactions can be done with anonymous P2P wallets.

Conversely, it turns out to be more difficult to exchange truly anonymous USDC. While it is true that on decentralized finance protocols people operate anonymously, the bulk of stablecoin trading takes place on exchanges, where KYC is often necessary.

Circle and Coinbase cannot afford extensive use of USDC that escapes anti-money laundering controls, for example, so transaction controls are more stringent. Since crypto users often like anonymity a lot, it is not surprising that they generally prefer Tether, although this is commonly considered less secure than USD Coin.

Why Visa chose USDC over Ethereum

It is also quite clear from the comparison with Tether that the reason Visa is turning to USDC is related not only to security, but also and especially to anti-money laundering controls

Having Coinbase behind it, as well as the US-regulated company Circle, makes it possible for Visa to accept USDC, while in contrast the absence of a US regulated company behind USDT makes it difficult for companies like Visa to adopt it.

Whereas the choice of Ethereum seems forced, given that USDC is a token traded mostly on the Ethereum network, but it is also due to the fact that it is one of only two high-security P2P crypto networks, besides Bitcoin of course.

In other words, Visa has decided to play it safe for now, in order to avoid possible embarrassments in using unsound stablecoins, or on insecure blockchains, such as the collapsed UST on Terra or USDD on Tron.

Visa vs Mastercard

Visa has a thriving business based on fiat currencies, so it may well decide not to venture into an area still riddled with problems like crypto. However, it has wisely decided not to stay out of it a priori, in order to avoid being overtaken by some competitor, since, for example, Mastercard is also increasingly active in the crypto sector.

However, the willingness to enter this sector is not enough. Regulated companies like Visa have an obligation to provide their customers with a high level of security service, which is a level that to date crypto instruments still struggle to achieve.

For example, Tether’s level of financial and regulatory security is probably not enough to qualify for Visa’s security standards. USDC, on the other hand, apparently has a sufficient level of security, in addition to the fact that it is probably the only crypto stablecoin that can currently offer it.

Cryptocurrency payments via debit card

It is worth mentioning that cryptocurrency payments via Visa or Mastercard debit cards are already possible. Except that for now they require relying on a third party, usually an exchange. whereas Visa’s idea seems to be to make USDC payments via fiat debit cards possible without having to go through a third party.

In reality, even in Visa’s case it will probably be necessary to go through a third party, i.e., an exchange that allows USDC to be traded for USD. The difference, however, will lie in the fact that this swap will be done by Visa, and not by the user.

Current Visa and Mastercard debit cards that can be fueled with cryptocurrencies involve exchanges issuing them and sending them to the user. The users must deposit their funds on the exchange, where they can sell them to collect fiat currency to move to the card.

The solution being experimented with by Visa, on the other hand, seems to involve the user simply depositing USDC onto the card. At which point Visa automatically exchanges them for fiat dollars. However, it is not yet clear whether the exchange will be made at the time of deposit, or at the time of eventual payment in fiat currency. just as it is not clear whether USDC deposited on Visa cards will also be withdrawable.

Instead, what in theory should be certain is that the conversion will be 1:1, meaning one fiat dollar for each USDC deposited.