From legacy systems to decentralised frontiers: redefining payment ecosystems for the modern era

Understanding blockchain begins with legacy systems. Neira Jones explores the centralised payment rails it’s poised to disrupt.

Traditional payment ecosystems: a primer for fintech enthusiasts

To understand blockchain’s disruptive potential, we must first examine the centralised payment rails it seeks to reinvent. Traditional systems like card networks and bank transfers rely on trusted intermediaries to orchestrate complex processes, a stark contrast to decentralised models. Let’s dissect how these well-established systems operate.

The four-party model: a centralised choreography

Centralised payment ecosystems pivot on three core mechanisms: authorisation, clearing, and settlement. While bank and card transactions share this foundation, card systems amplify complexity through their four-party framework where cardholders, merchants, issuers (cardholder PSPs), and acquirers (merchant PSPs) interact under the orchestration of central entities (schemes) like Visa and Mastercard. These intermediaries synchronise transactions through a tightly choreographed sequence, blending institutional oversight with operational precision to ensure trust and finality at each step.

Step 1: authorisation

The authorisation process begins when a cardholder initiates a transaction, triggering a meticulously orchestrated dialogue: the merchant’s acquirer dispatches a request through the card scheme (e.g., Visa, Mastercard) to the issuer, scrutinising the card’s validity and probing for red flags like atypical spending patterns.

The issuer then cross-examines the request against the cardholder’s balance, credit limits, and risk thresholds, rendering a verdict (approval or decline) echoing the same digital pathway. If approved, the issuer temporarily reserves the transaction amount, a financial placeholder ensuring liquidity without immediate fund transfer, blending real-time vigilance with procedural precision.

Step 2: clearing – the reconciliation dance

Post-authorisation, transactions enter the clearing phase. Here, the card scheme aggregates batched transactions from acquirers and issuers, reconciling discrepancies and calculating net positions. This process ensures all parties agree on the amounts owed, but no actual money moves yet.

Step 3: settlement – moving the money

Settlement finalises transactions on card networks through two phases: interbank settlement, where funds transfer between issuers and acquirers via a commercial bank (the settlement agent) to balance institutional ledgers, followed by merchant settlement, where the acquirer deposits the net amount (less fees) into the merchant’s account according to their contractual terms. Unlike card systems, bank payment settlements bypass the acquirer-issuer model, consolidating these steps into a single transfer.

The cost of centralisation

This system relies on centralised trust: card schemes, banks, and settlement agents act as arbiters of truth. While effective, this introduces friction:

• Latency: multi-day settlement delays tie up capital.
• Fees: each intermediary takes a cut (e.g., interchange, scheme, acquirer fees).
• Opacity: participants depend on closed-loop reporting with limited transparency.
• Single points of failure: outages at central entities (e.g., Visa’s 2021 European downtime) disrupt entire networks.

These inefficiencies created fertile ground for blockchain’s emergence, a system aiming to replace centralised trust with cryptographic verification and distributed consensus.

Transacting in a decentralised world: modern pathways for value exchange

The evolution from physical cash to blockchain-powered ecosystems has redefined transactional frameworks, blending traditional finance with decentralised innovations. Unlike centralised systems that rely on institutional intermediaries, blockchain transactions operate through cryptographic proofs and distributed consensus, creating a paradigm where code governs value transfer.

For payment professionals navigating this hybrid landscape, understanding custodial models, smart contract risks, and regulatory nuances is critical. Below, we explore the infrastructure enabling this paradigm shift.

Authorisation, clearing, and settlement: the decentralised version

In Understanding Payments, I detailed the foundational trio of payment processing in traditional finance: authorisation, clearing, and settlement. Yet these pillars persist in blockchain ecosystems, albeit reimagined through a decentralised lens. Here, transactions undergo validation, where nodes scrutinise integrity (preventing double-spending or fraud), followed by consensus, the algorithmic choreography that orders validated transactions into the blockchain’s immutable ledger. Validation mirrors the checks of authorisation and clearing, while consensus, achieved via mining (Proof of Work) or staking (Proof of Stake), seals transactions into unalterable blocks, akin to settlement’s finality. This dance of code and cryptography, explored in depth in Beyond Payments, underpins blockchain’s promise: trustless efficiency.

Now, as we pivot to digital wallets, those popular facilitators of modern payment transactions, let’s revisit their evolution, where centralised convenience converges with decentralised sovereignty to redefine value exchange.

Traditional wallets: centralised convenience

Four primary models dominate fiat transactions:

Closed loop systems

Ecosystem-specific platforms like Starbucks Rewards lock users into branded networks while monetising breakage, unspent balances totalling USD 210 million for Starbucks in 2023. These platforms foster loyalty but limit merchant reach beyond their walls.

Pass-through architectures

Tokenized card wrappers (Apple Pay, Google Wallet) prioritise security via dynamic tokenization. While reliant on Visa/Mastercard rails, they monetise data partnerships rather than transaction fees.

Stored value powerhouses

Alipay and WeChat Pay exemplify Asia’s USD 5.5 trillion e-money market, offering cross-currency flexibility. Providers profit from float interest and ancillary services like microloans.

Hybrid models

PayPal and Cash App blend stored value with card-linked functionalities, though fragmented fee structures complicate merchant forecasting.

The blurring of lines: bridging crypto and fiat

Traditional payment platforms like PayPal, Revolut, and Square are increasingly integrating crypto trading into their services, offering users a familiar gateway to digital assets. These platforms leverage existing infrastructure to enable seamless buying, selling, and holding of major cryptocurrencies like Bitcoin and Ethereum, often alongside stablecoins and fiat conversions. By centralising custody, they simplify entry for newcomers, blending crypto into conventional financial dashboards with user-friendly interfaces. However, convenience comes with trade-offs: limited asset diversity (prioritising regulatory compliance over niche tokens), reliance on platform security (exposing users to breaches like PayPal’s 2022 credential leaks), and heightened regulatory vulnerability (e.g., Revolut halting US crypto services in 2023 post-SEC scrutiny). While these services demystify crypto for mainstream audiences, they exemplify the tension between accessibility and decentralisation, a cautionary tale of TradFi’s cautious embrace of blockchain’s disruptive potential.

And then we have the crypto wallet, which is an altogether different beast.

Crypto wallets: self-sovereign frontiers

Unlike traditional counterparts, crypto wallets manage private keys rather than assets (i.e. they don’t store your crypto, just the proof that you own it). Every transaction begins with a crypto wallet, a digital interface managing public-private key pairs. Public keys act as pseudonymous addresses (like bank account numbers), while private keys cryptographically sign transactions to prove ownership. There will be distinctions between crypto wallets depending on who has custody of the keys, and whether they are online or offline.

Custodial wallets

Custodial wallets act as digital vaults managed by third-party providers. Think of them as crypto banks: platforms like Coinbase or Binance store users’ private keys on their behalf, handling security, backups, and transaction execution. This model prioritises convenience – users recover accounts via email if they lose passwords – but introduces centralised risk. For instance, when FTX collapsed in 2022, users lost USD 8 billion in commingled funds, illustrating the perils of trusting third parties with custody.

Non-custodial wallets

Non-custodial wallets, like MetaMask or Trust Wallet, flip this dynamic. Users retain full control of private keys, embodying the crypto mantra ‘Not your keys, not your crypto’. This self-sovereignty eliminates reliance on intermediaries but demands technical vigilance: losing credentials means irreversible asset loss. While non-custodial wallets enable direct DeFi interactions, they require users to manage phishing risks and smart contract vulnerabilities independently. Users are also faced with achieving a balance between accessibility and security when considering online and offline capabilities.

Hot wallets

Hot wallets (e.g., Trust Wallet, MetaMask) are always connected to the internet, enabling seamless trading and DeFi participation. However, their online nature makes them prime targets. The 2023 Atomic Wallet hack, which drained USD 100 million from 5,500 users, underscores the risks of frequent hot wallet use.

Cold wallets

Cold wallets (e.g., Ledger, Trezor) store keys offline on hardware devices, creating an ‘air-gapped’ barrier against remote attacks. While this method safeguards long-term holdings, like a digital safety deposit box, it isn’t foolproof. Ledger’s 2020 data breach exposed 270,000 emails, proving even cold storage faces supply-chain risks.

Context-driven choices

Custodial wallets, managed by regulated entities like Coinbase, offer beginners streamlined access with features like automated compliance checks and fraud detection, but charge fees (0.1-2% per transaction) and expose users to exchange risks. Non-custodial wallets (e.g., MetaMask) eliminate intermediary fees but require users to absorb network costs (e.g., Ethereum gas fees) and shoulder full security duties. In addition, it is generally recommended to use hot wallets for small, frequent transactions (e.g., <5% of holdings) and cold storage for bulk assets. Regulatory frameworks further shape user trade-offs: the EU’s MiCA mandates custodial platforms to enforce stringent AML/KYC checks, linking all transactions to verified identities and insuring holdings up to EUR 150,000, enhancing fraud protection but eroding financial privacy. Meanwhile, Japan’s licencing regime requires providers to maintain strict capital reserves and store 95% of user funds in cold storage, prioritising platform stability but limiting accessible cryptocurrencies and imposing withdrawal delays. These rules force users to balance convenience against privacy loss (EU) or innovation against institutional-grade security (Japan), reshaping how individuals and businesses interact with digital assets.

Trading venues: from CEX to atomic swaps

Centralised exchanges (CEX): the convenient gatekeepers

Centralised exchanges act as crypto ‘stock markets’, where third parties like Binance or Coinbase manage transactions and hold user funds. These platforms dominate trading volume (68% of 2024’s USD 14 trillion crypto trades) by offering high liquidity, user-friendly interfaces, and tools like futures contracts. However, centralisation creates systemic risks: the 2014 Mt. Gox collapse (850,000 BTC stolen), the 2022 FTX implosion (USD 8 billion customer shortfall), and the February 2025 Bybit record-breaking USD 1.4b billion hack highlight vulnerabilities in custodial models. While ideal for beginners, users trade control for convenience, a gamble where trust in the platform is paramount.

Decentralised exchanges (DEX): cutting out the middleman

Decentralised exchanges like Uniswap let users trade peer-to-peer via smart contracts, eliminating intermediaries. These platforms rely on automated market makers (AMMs), where liquidity providers pool funds to enable trades. While empowering self-custody, DEXs face challenges: liquidity fragmentation, impermanent loss (value erosion for providers), and smart contract exploits like KyberSwap’s 2023 USD 56 million hack. Despite risks, DEXs drive DeFi innovation, offering censorship resistance and direct blockchain integration.

Hybrid exchanges

Hybrid crypto exchanges blend the liquidity and user-friendly interfaces of CEX with the security and self-custody of DEX, offering traders a versatile middle ground. By decentralising order matching (via Automated Market Makers or order books) while centralising functions like deposits and withdrawals, they aim to marry convenience with control. Users can choose between holding funds on the exchange for ease or retaining private keys for autonomy, trading cryptocurrencies and stablecoins across both centralised and decentralised protocols. Though promising, hybrids face hurdles: balancing regulatory compliance with decentralised governance, mitigating inherited risks like smart contract vulnerabilities, and bridging liquidity gaps between systems. While platforms like Raydium and Kyber Network showcase innovation, challenges around complexity and partial centralisation remind us that in the quest for equilibrium, trade-offs remain inevitable.

Atomic swaps and P2P trading: trustless but tricky

Atomic swaps enable cross-chain crypto trades without intermediaries, while P2P platforms like Bisq facilitate direct user transactions. Atomic swaps use ‘all-or-nothing’ smart contracts to eliminate counterparty risk, ideal for privacy-focused traders (e.g., Komodo AtomicDEX). However, adoption remains below 0.5% due to technical complexity and limited coin compatibility. P2P trading thrives in regions with banking restrictions, like Nigeria during its 2023 naira crisis, where citizens used Bisq to trade BTC for stablecoins, but demands vigilance against scams, such as fake escrow services stealing 2,300 ETH on LocalBitcoins in 2022. Both models exemplify crypto’s decentralised ethos but face uphill battles for mainstream traction.

Bridging trust and innovation: the next chapter in decentralised finance

The crypto trading landscape is a high-stakes dance between centralised efficiency and decentralised innovation. Centralised exchanges (CEXs), like Binance, remain the industry’s backbone and dominate liquidity but carry legacy risks, demanding rigorous due diligence. DEXs and atomic swaps offer alternatives for tech-savvy users but demand deeper blockchain literacy. Decentralised exchanges (DEXs), like Uniswap, empower self-custody but expose users to smart contract exploits and impermanent loss. Meanwhile, atomic swaps and P2P platforms offer censorship-resistant trading at the cost of technical complexity and scam risks. For professionals, the future lies not in choosing sides but in hybrid strategies: leveraging CEX liquidity, auditing DEX protocols, and piloting cross-chain tools while advocating for resilient, user-centric frameworks. As Visa and JP Morgan blur TradFi-DeFi lines, adaptability, not ideology, will define success in this volatile frontier where innovation and risk walk hand in hand.

Specialised asset marketplaces

NFT marketplaces

NFT marketplaces revolutionise how digital art and collectibles are traded, enabling creators and collectors to buy, sell, and auction unique tokens representing ownership of digital assets. Platforms like OpenSea and Blur allow users to connect crypto wallets directly, maintaining custody of their NFTs while leveraging blockchain transparency for provenance tracking. These marketplaces empower artists to monetise work and collectors to discover rare items, but face volatility, risking financial losses. Intellectual property disputes and evolving regulations add complexity, as lawmakers grapple with copyright enforcement and fraud prevention. Security remains a concern, with scams targeting wallets and personal data. Blur overtook OpenSea in 2024 with USD 4.3 billion gaming NFT sales, yet 23% faced IP disputes. Bored Ape floor prices swung 380% amid speculative volatility, while Sotheby’s metaverse auctions legitimised digital art provenance tracking. Despite these challenges, NFT platforms continue to drive innovation in digital ownership, blending creativity with decentralised technology, while navigating a landscape where regulatory clarity and market stability remain works in progress.

Metaverse economies

Gaming and metaverse marketplaces revolutionise virtual economies by enabling users to trade in-game assets, NFTs, and virtual real estate through blockchain-powered platforms like Decentraland and The Sandbox. These decentralised hubs empower gamers and creators to buy, sell, and showcase digital goods, from rare skins to virtual land, using non-custodial wallets, ensuring true ownership via transparent blockchain records. While fostering immersive communities and monetisation opportunities for developers, they must navigate risks like speculative price swings, copyright disputes, and evolving regulations. Decentraland’s virtual real estate market hit USD 700 million despite Axie Infinity’s 2022 token crash, and interoperable assets across The Sandbox signal maturing ecosystems, though sustainability concerns linger around play-to-earn models. As jurisdictions grapple with applying gambling laws and tax frameworks to virtual economies, users must balance innovation with vigilance against scams, underscoring the blend of promise and peril in this new frontier of digital interaction.

Other specialised marketplaces

Over-the-Counter (OTC) trading desks like Cumberland and Galaxy Digital cater to institutional investors and crypto ‘whales’, enabling discreet, large-volume trades to avoid market disruption, a stark contrast to public exchanges. These platforms negotiate bespoke deals under rigorous AML/KYC frameworks, balancing privacy with regulatory compliance, though counterparty risks linger. Meanwhile, Security Token Exchanges (STOs), such as tZERO and Securitize, tokenize real-world assets (e.g., real estate, stocks, bonds) into blockchain-based securities, blending fractional ownership with blockchain transparency. While these markets promise enhanced liquidity and global access, challenges like valuation complexity, custodial risks, and evolving regulations temper their growth. The collapse of FTX, once a titan in derivatives and tokenized stocks, underscores the fragility of opaque practices: its 2022 implosion (fuelled by commingled funds, Alameda Research’s risky leverage, and regulatory gaps) erased billions, triggering global scrutiny and a USD 12.7 billion restitution order. The IMF’s subsequent warnings highlight crypto’s systemic risks, urging tighter oversight to curb volatility and protect investors. Yet, from OTC’s shadowy liquidity pools to tokenized Wall Street, these niches persist as double-edged innovations, bridging traditional finance’s rigor with crypto’s disruptive potential, if tempered by accountability. The lesson? Even in decentralised realms, trust hinges on transparency, and progress demands learning from scars like FTX.

Regulatory tightropes

The regulatory landscape for crypto trading demands agility, as centralised exchanges and decentralised platforms navigate divergent pressures. CEXs like Binance and Coinbase face stringent AML/KYC mandates, licencing hurdles, and consumer protections. Decentralised platforms, while resisting traditional oversight through pseudonymous, non-custodial models, increasingly contend with regulatory scrutiny. Professionals must prioritise platforms with robust compliance frameworks (e.g., proof-of-reserves audits, segregated customer funds, transparent governance) while leveraging decentralised services for niche assets with full awareness of their regulatory ambiguity. Jurisdictional shifts, like the EU’s Markets in Crypto-Assets Regulation (MiCA), aim to standardise rules but risk burdening smaller players with compliance costs. The collapse of FTX, rooted in unregulated commingling of funds and lax oversight, underscores the perils of unchecked innovation, yet overregulation risks stifling progress or driving activity to less supervised markets. Success lies in balancing pragmatism with principle: treating compliance as a competitive advantage, advocating for clear frameworks that foster accountability without hampering decentralisation’s potential, and selecting platforms that transparently bridge innovation with real-world governance.

A balanced horizon

Decentralised rails aren’t displacing legacy systems but creating interoperable networks where TradFi liquidity meets DeFi innovation. Payment professionals must master cross-chain bridges, custody models, and regulatory sandboxes to navigate this blended future. As Thanos might say, convergence is inevitable and those harmonising security, compliance, and UX will lead the next transactional era. But unlike fiction, this future demands pragmatic adaptation over ideological purity.

 

This editorial piece was originally published in The Paypers’ Web 3 Payment Acceptance Report 2025. The report highlights the current landscape of Web 3 payments, including their rapid growth, high adoption rates, and underlying drivers. It also explores key players in the field, regulatory advancements, the role of AI in crypto and blockchain, and more.

 

About the author

 

With 25+ years in financial services and tech, Neira Jones is a renowned expert in payments, fintech, and cybersecurity. A board advisor and speaker, she guides firms on innovation and compliance. An Amazon best-selling author, she’s recognised in top influencer rankings and serves on the UK Payment Systems Regulator panel. Fellow of the British Computer Society.