The market is gradually abandoning the dispersed KYC processes of various platforms, shifting towards a portable certification identity system that can be used across services, countries, and platforms.
Article author, translator: Vaidik Mandloi, Chopper
Source: Foresight News
Where does the real value of digital banks flow?
Looking at the global leading digital banks, their valuations are not solely determined by user scale but rather by the ability to generate revenue per customer. Digital bank Revolut is a typical example: although it has fewer users than Brazil's digital bank Nubank, its valuation has surpassed the latter. The reason lies in the diversified revenue sources of Revolut, covering various sectors such as foreign exchange trading, securities trading, wealth management, and premium membership services. In contrast, Nubank's expansion of its business map mainly relies on credit business and interest income, rather than bank card fees. China's WeBank has taken another differentiated route, achieving growth through extreme cost control and deep integration into the Tencent ecosystem.
Valuation of leading emerging digital banks.
Currently, crypto digital banks are reaching the same development node. The combination of 'wallet + bank card' can no longer be called a business model; any institution can easily launch such services. The differentiated competitive advantage of the platform lies precisely in its selected core monetization path: some platforms earn interest income from user account balances; some profit from stablecoin payment flows; and a few platforms pin their growth potential on the issuance and management of stablecoins, as this is the most stable and predictable source of income in the market.
This also explains why the importance of the stablecoin track is becoming increasingly prominent. For reserve-backed stablecoins, their core profit comes from reserve investment income, which is the interest generated by putting reserves into short-term government bonds or cash equivalents. This income belongs to the stablecoin issuer, not just the digital bank that provides stablecoin holding and consumption functions. This profit model is not unique to the crypto industry: in traditional finance, digital banks also cannot earn interest from user deposits; the actual custodial bank that manages the funds truly enjoys this income. The emergence of stablecoins has made this 'separation of income ownership' model more transparent and centralized, with the entities holding short-term government bonds and cash equivalents earning interest income, while consumer-facing applications primarily focus on customer acquisition and product experience optimization.
As the adoption scale of stablecoins continues to expand, a contradiction gradually emerges: application platforms that undertake user traffic, transaction matching, and trust building often cannot profit from the underlying reserves. This value gap is forcing companies to integrate vertically, breaking free from purely front-end tool positioning and moving toward controlling the core links of fund custody and management.
It is precisely for this reason that companies like Stripe and Circle are increasing their efforts in the stablecoin ecosystem. They are no longer satisfied with remaining at the distribution level but are expanding into settlement and reserve management areas, as this is the core profit link of the entire system. For example, Stripe launched the dedicated blockchain Tempo, which is tailored for low-cost, instant transfers of stablecoins. Stripe did not rely on existing public chains like Ethereum or Solana but built its own trading channel, thus controlling the settlement process, fee pricing, and transaction throughput, all of which directly translate into better economic benefits.
Circle has adopted a similar strategy, creating a dedicated settlement network Arc for USDC. Through Arc, transfers of USDC between institutions can be completed in real-time without causing congestion on public chain networks or incurring high fees. Essentially, Circle has built an independent back-end system for USDC through Arc, no longer constrained by external infrastructure.
Privacy protection is another important driving force of this layout. As Prathik explained in the article (Reconstructing Blockchain Glory), public chains will record every stablecoin transfer on an open and transparent ledger. This feature is applicable to open financial systems, but in business scenarios such as payroll distribution, vendor payments, and treasury management, it has its drawbacks. In these scenarios, transaction amounts, counterparties, and payment methods all constitute sensitive information.
In practice, the high transparency of public chains allows third parties to easily restore a company's internal financial status through blockchain explorers and on-chain analysis tools. The Arc network allows USDC transfers between institutions to be settled outside the public chain, retaining the advantages of high-speed settlement of stablecoins while ensuring the confidentiality of transaction information.
Comparison of asset reserves between USDT and USDC.
Stablecoins are breaking the old payment system.
If stablecoins are at the core of value, the traditional payment system appears increasingly outdated. The current payment process requires multiple intermediaries: payment gateways are responsible for fund aggregation, payment processors complete transaction routing, card organizations authorize transactions, and the banks of both parties ultimately complete the settlement. Each link incurs costs and causes transaction delays.
Stablecoins directly bypass this lengthy chain. Stablecoin transfers do not require the involvement of card organizations or acquiring institutions, nor do they need to wait for batch settlement windows, but instead realize direct peer-to-peer transfers based on the underlying network. This characteristic has a profound impact on digital banks because it completely changes user experience expectations — if users can achieve instant fund transfers on other platforms, they will not tolerate cumbersome and expensive transfer processes within digital banks. Digital banks must either deeply integrate stablecoin transaction channels or risk becoming the least efficient link in the entire payment chain.
This change also reshapes the business model of digital banks. In the traditional system, digital banks could earn stable fee income through card transactions because payment networks firmly controlled the core links of transaction circulation. However, under the new system dominated by stablecoins, this profit space has been significantly compressed: stablecoin peer-to-peer transfers do not incur fees, and digital banks that rely solely on card consumption for profit are facing a completely fee-free competitive track.
Therefore, the role of digital banks is changing from card-issuing institutions to payment routing layers. As payment methods shift from bank cards to direct transfers of stablecoins, digital banks must become core circulation nodes for stablecoin transactions. Digital banks that can efficiently handle stablecoin transaction flows will dominate the market because once users regard them as the default channel for fund transfers, it becomes very difficult to switch to other platforms.
Identity verification is becoming the new generation of account carriers.
When stablecoins make payments faster and cheaper, another equally important bottleneck gradually emerges: identity verification. In the traditional financial system, identity verification is an independent link: banks collect user documentation, store information, and complete reviews in the background. However, in scenarios where wallet funds are transferred instantly, each transaction relies on a trusted identity verification system; without this system, compliance checks, anti-fraud controls, and even basic permission management will be impossible.
It is precisely for this reason that identity verification and payment functions are accelerating their integration. The market is gradually abandoning the fragmented KYC processes of various platforms in favor of a portable identity verification system that can be used across services, countries, and platforms.
This transformation is unfolding in Europe, where the EU digital identity wallet has entered the implementation phase. The EU no longer requires each bank or application to conduct identity verification independently but has created a unified identity wallet backed by the government that all residents and businesses can use. This wallet is not only for identity storage but also carries various certified credentials (age, proof of residence, licensing qualifications, tax information, etc.), supports users in signing electronic documents, and has built-in payment functions. Users can complete identity verification, share information on demand, and conduct payment operations in a seamless process.
If the EU digital identity wallet is successfully implemented, the entire structure of the European banking industry will be restructured: identity verification will replace bank accounts and become the core entry point for financial services. This will make identity verification a public good, and the differences between banks and digital banks will be weakened unless they can develop value-added services based on this trusted identity system.
The crypto industry is also moving in the same direction. Relevant experiments in on-chain identity verification have been underway for years, and although there is currently no perfect solution, all explorations point to the same goal: to provide users with a method of identity verification that allows them to prove their identity or related facts without limiting the information to a single platform.
Here are several typical cases:
Worldcoin: building a global personality verification system that verifies users' real human identities without disclosing user privacy.
Gitcoin Passport: integrating various reputations and verification credentials to reduce the risk of witch hunts in governance voting and reward distribution.
Polygon ID, zkPass, and ZK-proof frameworks: supporting users in proving specific facts without disclosing underlying data.
Ethereum Name Service (ENS) + off-chain credentials: allowing crypto wallets to not only display asset balances but also link users' social identities and certification attributes.
Most crypto identity verification projects share a common goal: to enable users to autonomously prove their identity or related facts, without being locked into a single platform for their identity information. This aligns with the EU's concept of promoting digital identity wallets: a single identity credential can accompany users across different applications freely without requiring repeated verification.
This trend will also change the operating model of digital banks. Nowadays, digital banks view identity verification as core control: user registration, platform review, ultimately forming an account belonging to the platform. However, when identity verification becomes a credential that users can carry autonomously, the role of digital banks shifts to a service provider accessing that trusted identity system. This will simplify the user account opening process, reduce compliance costs, and decrease duplicate reviews, while allowing crypto wallets to replace bank accounts as the core carriers of user assets and identities.
Future development trend outlook.
In summary, the previously core elements of the digital banking system are gradually losing their competitive edge: user scale is no longer a moat, bank cards are no longer a moat, and even a simple user interface is no longer a moat. The real differentiated competitive barrier is reflected in three dimensions: the profit products chosen by digital banks, the fund circulation channels they rely on, and the identity verification systems they integrate. Beyond that, other functions will gradually converge, and substitutability will become increasingly strong.
The successful digital bank of the future will not be a lightweight version of traditional banks but a wallet-first financial system. They will anchor a core profit engine, which directly determines the platform's profit margins and competitive barriers. Overall, core profit engines can be divided into three categories:
Interest-driven digital banks.
The core competitiveness of such platforms is to become the preferred channel for users to store stablecoins. As long as they can attract a large-scale user balance, the platform can earn income through reserve-backed stablecoin interest, on-chain yields, staking, and re-staking, without relying on a massive user base. Its advantage lies in the fact that the profit efficiency of asset holding is far higher than that of asset circulation. Such digital banks seem to be consumer-facing applications but are essentially modern savings platforms disguised as wallets, with the core competitiveness of providing users with a smooth experience of depositing coins and earning interest.
Payment flow-driven digital banks.
The value of such platforms comes from transaction scale. They will become the main channels for users to receive, pay, and consume stablecoins, deeply integrating payment processing, merchants, fiat and crypto currency exchanges, and cross-border payment channels. Their profit model is similar to that of global payment giants: per transaction profit is thin, but once they become the preferred fund transfer channel for users, they can accumulate considerable income through a large transaction volume. Their moat is user habits and service reliability, becoming the default choice when users need to transfer funds.
Infrastructure-based stablecoin digital banks.
This is the deepest and potentially highest-yielding track. These digital banks are not just channels for the circulation of stablecoins but are also dedicated to controlling the issuance rights of stablecoins or at least controlling their underlying infrastructure, with their business scope covering core links such as stablecoin issuance, redemption, reserve management, and settlement. The profit space in this field is the richest because control over reserves directly determines income ownership. Such digital banks integrate consumer-facing functions with infrastructure ambitions, no longer being mere applications but developing toward a fully functional financial network.
In simple terms, interest-driven digital banks make money from users depositing coins, payment flow-driven digital banks make money from users transferring coins, while infrastructure-based digital banks can sustain profits regardless of the user's actions.
I predict that the market will split into two major camps: the first camp consists of consumer-facing application platforms that mainly integrate existing infrastructure, with products that are simple and easy to use but have extremely low user switching costs; the second camp is moving toward the core areas of value aggregation, focusing on stablecoin issuance, transaction routing, settlement, and identity verification integration.
The positioning of the latter will no longer be limited to applications but will become infrastructure service providers disguised as consumer-facing entities. Their user stickiness is extremely high because they quietly become the core system for on-chain fund circulation.
