## Stablecoins and Identity Verification Systems Become the True Competitive Moats of Digital Banks

Once, the success metrics for digital banks were simple: number of users and transaction fees. But that era is gone. Today’s top digital banks compete not by who has more users, but by who can build a more powerful revenue engine.

### Why Traditional "User Count" Is No Longer a Winning Strategy

Looking at a few leading digital banks worldwide reveals this shift. Why can Revolut’s valuation surpass Nubank, which has far more users? The answer is simple: different monetization approaches.

Revolut taps into multiple revenue streams such as forex trading, stock trading, wealth management, and premium memberships, each generating far more value per user than a single revenue model. In contrast, Nubank’s expansion mainly relies on credit services and interest income, with a relatively narrow growth focus. WeBank has chosen a different path: achieving growth through extreme cost control and deep integration with the Tencent ecosystem.

These differences reveal a core truth: **User base size is no longer the sole metric; it’s how much revenue each user can contribute**. This logic applies equally, if not more, in the crypto space.

### Who Truly Profits in Stablecoin Competition

In the new era of crypto digital banking, a phenomenon called "natatangi" is emerging: **"Wallet + Bank Card" no longer constitutes a competitive barrier**. Any institution can easily replicate this combo. The real differentiation lies in **which path to monetization to choose**.

Some platforms earn from interest on user account balances; others profit from transaction volume paid via stablecoins; the smartest players have identified a deeper opportunity—earning the most stable and predictable income by issuing and managing stablecoins themselves.

This explains why competition in stablecoins is intensifying. For reserve-backed stablecoins, what is the core revenue source? It’s the interest generated from reserve investments—usually short-term government bonds or cash equivalents. This money doesn’t flow to the digital bank providing stablecoin services but to the institutions holding these reserves.

Here emerges a classic "separation of yield rights" phenomenon: consumer-facing apps responsible for user acquisition, product optimization, and trust-building often cannot profit from the underlying reserves. It’s this value gap that drives companies like Stripe and Circle to deepen their development.

Stripe launched its own blockchain Tempo, designed specifically for low-cost, instant stablecoin transfers. Instead of relying on public chains like Ethereum or Solana, Stripe built its own transaction channels to control settlement processes, fee pricing, and transaction throughput—**meaning it can directly capture all economic benefits from these segments**.

Circle adopted a similar strategy: creating the Arc network as an exclusive settlement layer for USDC. Through Arc, USDC transfers between institutions can be completed in real-time, avoiding congestion on public chains and high fees. Essentially, Circle has built an independent backend system for USDC, no longer dependent on external infrastructure.

### Privacy Protection Drives Proprietary Networks at the Infrastructure Layer

Besides revenue, another factor driving this shift is **privacy**.

Public chains record every stablecoin transfer on transparent, open ledgers. While ideal for open finance, this becomes problematic in commercial scenarios like payroll, vendor transactions, and asset management. Transaction amounts, parties, and payment modes are sensitive information, and the extreme transparency of public chains allows competitors to easily reconstruct a company’s internal financial situation via blockchain explorers and on-chain analysis tools.

The Arc network enables USDC transfers between institutions to be settled off-chain, maintaining the advantages of fast stablecoin clearing while ensuring transaction confidentiality—this is a very practical need.

### Stablecoins Are Disrupting the Underlying Logic of Payment Systems

Traditional payment processes involve too many intermediaries: acquiring gateways handle fund collection, payment processors route transactions, card organizations approve transactions, and banks settle finally. Each step incurs costs and delays.

Stablecoins bypass all of these. Stablecoin transfers do not rely on card networks, do not need to wait for batch settlement windows, and can be completed via peer-to-peer transfers on the underlying network.

The impact on digital banks is profound: **it changes user expectations**. Once users experience instant transfers on other platforms, they will no longer tolerate slow and costly transfers within digital banks. Digital banks must either deeply integrate stablecoin transaction channels or risk being marginalized.

This also reshapes the business model of digital banks. In the past, they could rely on card transaction fees for stable income because payment networks tightly controlled transaction flows. But in the new stablecoin-driven system, profit margins are greatly compressed: peer-to-peer stablecoin transfers are usually free, and digital banks that rely solely on card-based revenue face zero-cost competition.

What’s the result? **Digital banks must shift from card issuance to becoming payment routing layers**. They need to become the central nodes in stablecoin transaction flows, so that whenever users make transfers, this platform becomes the default choice—once habits form, it’s hard for users to migrate elsewhere.

### Identity Verification Systems Moving from Back-End to Front-End

Meanwhile, another equally important change is quietly occurring: **identity verification is becoming the new account carrier**.

In traditional finance, identity verification is a separate step: banks collect user documents, store information, conduct background checks, and once completed, identity verification is done.

But in the real-time transfer wallet ecosystem, every transaction depends on a trusted identity verification system—without it, compliance checks, anti-fraud controls, and basic permission management cannot be performed. This directly leads to the rapid integration of identity verification and payment functions.

The market is shifting from dispersed KYC processes across platforms to a **portable identity authentication system that can be used across platforms, countries, and services**.

Europe is demonstrating this future. The EU digital identity wallet has entered implementation. The EU does not require each bank or app to perform identity verification independently but has created a government-supported unified identity wallet accessible to all residents and businesses. This wallet not only stores identity information but also carries multiple verified credentials (age, residence proof, driver’s license, tax info, etc.), supports e-signatures, and has built-in payment functions.

Users can complete identity verification, share information on demand, and execute payments—all in one seamless process.

If the EU digital identity wallet is successfully implemented, it will fundamentally transform the entire European banking architecture: **identity authentication will replace bank accounts as the primary entry point to financial services**. Identity verification itself will become a public service, and the boundaries between traditional and digital banks will disappear—unless they can build value-added services based on this trusted identity system.

The crypto industry is also evolving in the same direction. On-chain identity verification has been experimented with, though no perfect solution exists yet, all efforts point to the same goal: **giving users a self-sovereign way to verify their identity without being locked into a single platform**.

Typical examples include:

- **Worldcoin**: building a global identity verification system that authenticates real human identities without compromising user privacy
- **Gitcoin Passport**: integrating multiple reputation and verification credentials to reduce Sybil attack risks in governance voting and reward distribution
- **Polygon ID, zkPass, and zero-knowledge proof frameworks**: enabling users to verify specific facts without revealing underlying data
- **Ethereum Name Service (ENS) + off-chain credentials**: not only displaying asset balances in crypto wallets but also linking users’ social identities and verification attributes

The common goal of these projects is consistent: **empowering users to own their identity credentials and carry them across different applications without repeated verification**. This aligns perfectly with the EU digital identity wallet vision.

This shift will also change how digital banks operate. Currently, they treat identity verification as a primary control mechanism: user registration, platform oversight, and ultimately creating accounts under the platform. But once identity verification becomes a portable credential users can carry themselves, the role of digital banks will shift to **being service providers that connect to this trusted identity system**.

This will accelerate user registration, reduce compliance costs, minimize repeated verifications, and ultimately, **crypto wallets will gradually replace bank accounts as the main containers for user assets and identities**.

### The Future of Digital Banks: Three Competitive Models

Overall, the once-dominant factors in digital bank competition are gradually losing their edge: **user count is no longer a moat, bank cards are no longer a moat, and even sleek user interfaces are no longer a moat**.

The real competitive moats now lie in three dimensions:
1. The profitable products chosen by the digital bank
2. The channels used for fund transfers
3. The connected identity verification systems

All other functions are becoming increasingly homogenized and substitutable.

Future successful digital banks will not be lightweight replicas of traditional banks but **wallet-first financial ecosystems**. They need a primary profit engine that directly determines platform profitability and competitiveness.

These core profit engines can be categorized into three types:

**Type 1: Interest-driven digital banks**

These platforms’ competitive advantage lies in becoming the main channel for users holding stablecoins. As long as they attract large user balances, they can profit from interest on reserve-backed stablecoins, on-chain rewards, staking, and re-staking, without needing a huge user base. The advantage is that the profitability of asset holdings exceeds that of asset circulation. On the surface, they are consumer-facing apps, but in reality, they are modern savings platforms disguised as wallets, with a competitive edge in providing seamless interest-earning experiences for users.

**Type 2: Payment flow-driven digital banks**

These platforms derive value from transaction volume. They aim to become the primary channel for users to transact with stablecoins, deeply integrating payment processing, merchant services, fiat-to-crypto exchanges, and cross-border payment channels. Their revenue model resembles that of global payment giants: small margins per transaction, but once they become the default transfer channel for users, accumulated transaction volume generates substantial income. Their moat comes from user habits and service reliability, ultimately becoming the preferred transfer tool.

**Type 3: Infrastructure-driven stablecoin banks**

This is the deepest and potentially most profitable route. These platforms not only serve as channels for stablecoin circulation but also seek to control stablecoin issuance rights and even underlying infrastructure, covering core functions like issuance, redemption, reserve management, and settlement. The profit potential here is greatest because controlling reserves directly influences revenue sharing. These digital banks integrate consumer-facing features with infrastructure ambitions, evolving into comprehensive financial networks rather than mere applications.

In simple terms: **Interest-driven banks profit from user deposits, payment flow-driven banks profit from user transfers, and infrastructure-driven banks can generate ongoing revenue from any user operation**.

Looking ahead, the market may split into two main camps: the first being consumer-facing application platforms that mainly integrate existing infrastructure with simple, easy-to-use products and very low user acquisition costs; the second focusing on core value aggregation—specializing in stablecoin issuance, transaction routing, settlement, and identity verification integration. The latter’s role will no longer be limited to the application layer but will serve as **infrastructure service providers, cloaked in consumer-facing appearances**. They will possess strong user stickiness while quietly becoming the core system for on-chain fund transfers.