In the Web3 era, USDT bank cards (bank cards for stablecoin payments) attempt to bridge traditional finance and the decentralized world, offering users a more convenient and flexible payment experience.

Due to the legal regulations not fully adapting to the integration of this emerging technology with traditional systems, U card companies often find themselves in a dilemma. Compliance is like a sword of Damocles, lingering ambiguously over the industry, which may fall at any time due to policy adjustments or regulatory actions. Companies not only need to deal with the challenges of technological innovation but must also remain vigilant against potential legal risks; a single misstep could result in fines, lawsuits, or even serious consequences like business interruption.

This article will analyze the current situation and challenges of the U card industry from an industrial perspective and explore its breakthroughs in the payment field.

The Dilemma of U Card Development

The U card industry currently faces the dilemma of unclear compliance. This industry is closely intertwined with the rapidly evolving digital asset field and the traditional financial industry, creating a complex regulatory gray area.

Currently, most compliance researchers in the industry focus on policy, studying the compliance actions required in various chains of U card payments. However, the U card industry also faces other issues: high operational costs, fierce market competition, and profitability dilemmas, all of which test the survival wisdom of U card issuers.

From an industry perspective, perhaps compliance is not the most urgent issue for entrepreneurs at this time?

The Dilemma of U Cards

1. The Dilemma of Issuing Channels

Firstly, the most basic requirement to make U cards is to have a bank card, which requires specific issuing institution qualifications, usually meaning companies must comply with a series of strict financial regulatory requirements and financial institution licenses. However, most U card companies, such as the recently scrutinized Infini, do not have the qualifications to issue bank cards directly. Therefore, these companies often choose to partner with banks or payment gateways that have obtained these qualifications, using their APIs or infrastructure to provide services.

2. The Dilemma of Channel Costs

Since U business relies on others' channels to complete the entire business chain, it incurs costs for payment channels. In addition to the aforementioned need for profit from the card-issuing banks, the payment chain also includes various other channel fees; API access services need to be profitable, currency exchanges need to profit, and international settlement channels like MasterCard/Visa need to earn money, while payment platforms like Apple, PayPal, Alipay, and WeChat also need to generate profit.

When a user uses a credit card to spend 100, the merchant receiving payments through international payment channels only receives 97 yuan, which is significantly higher than through domestic UnionPay channels. Some fees must be borne by the merchant, leading to fewer payment scenarios supporting international payment channels.

The Dilemma of Profit Models

1. The Dilemma of Fees

In the U card profit model, a significant portion comes from renewal fees. When choosing U card payments, the U card issuer charges relevant fees, including payment fees, cross-border fees, and exchange fees. For users, the most concerning aspect is the exchange rate between stablecoins and the payment currency, as well as the differential compared to the actual foreign exchange quoted price.

Generally, the comprehensive fee rate is around 1.5% or higher, depending on the scale and bargaining power of the U card issuer. For example, if the exchange rate for USD to RMB is 7.20 RMB/USD on the day you spend 100 RMB, the U card will deduct the equivalent of 14.10 USD or more in stablecoins, with an exchange rate of 7.092 RMB/USD.

A few U cards may offer more favorable comprehensive rates in a short period, such as through promotional activities that reduce the comprehensive rate to 1% or below, but these activities can only last for a short time, mainly to promote the activity and increase customer acquisition, and cannot maintain low rates for an extended period.

Why can't rates go down? Because operating costs are inherent, long-term low fees will lead to projects being unable to sustain operations. Initial promotions may subsidize to attract users, but over time, who can guarantee ongoing investment?

Thus, another significant expense for U card issuers is advertising promotion, increasing customer acquisition while scaling up operations and enhancing channel bargaining power. More importantly, it strengthens market visibility and influence to secure new financing for further expansion.

2. The Dilemma of Transaction Fees

Since operating costs are so high, can fees be increased? Can comprehensive rates be raised to 2% or higher?

The answer is negative.

Firstly, the U card industry is currently facing fierce competition, with low user loyalty; a slight misstep can lead to losing industry status.

Secondly, another competitor for U cards is exchanges/OTC withdrawals. If the fees are too high, the convenience and capital risk isolation advantages of U cards become too expensive for users, prompting them to prefer exchanges/OTC withdrawals. Moreover, U cards can generally only be used for small-scale consumption domestically; large transactions through Alipay or WeChat Pay incur an additional 3% fee.

3. The Dilemma of Capital Pool Interest Spreads

Some may argue that U card issuers still have capital pools, often dynamically announcing the TVL of the capital pool and the proportions of various assets on their official websites, sometimes reaching several million to tens of millions of dollars. Isn't buying government bonds or engaging in DEFI a significant source of income?

There are misconceptions in this regard. Firstly, most U card issuers lack channels for financial management interest spreads. This is similar to the natural advantages of exchanges, such as Bybit and Bitget issuing U cards; exchanges inherently have deposit and loan businesses, which can connect with the U card's capital pool.

However, other U cards do not have their own lending channels and need to rely on others' financial management channels. Whether those channels are sufficiently safe, can guarantee full and prompt redemption, and how liquid they are, especially in sudden large withdrawals, are all concerns.

If large withdrawals occur, and users are set withdrawal limits, in an extremely distrustful Web3 community, rumors about fund issues will quickly spread, leading to a death spiral of mass user withdrawals.

4. The Dilemma of the Capital Pool Depth

In simple terms, the capital pool is shallow. U card users typically do not load too much money onto U cards; instead, they tend to spend a small amount as needed, reloading only after using it up, leading to a short-term influx and outflow of funds.

After all, safety incidents are frequent in the Web3 industry, exchanges are still untrustworthy, so who can trust a small U card issuer?

So, despite the high TVL of the U card's capital pool, the actual deposited funds are low, with limited long-term funds available for high-yield investments or arbitrage. The proportion of funds that need to be readily available is high, and a significant portion can only invest in low-yielding demand deposits.

The operational model of Tether, the issuer of USDT, is enviable; USDT issuance is predominantly incremental with little redemption, allowing procurement of U.S. Treasuries, gold, and high-yield financial products.

Established U card issuers, such as Crypto.com's U card, encourage users to lock assets; the more assets locked, the more uses the card can support, the lower the fees, and the more staking rewards. Only with sufficient capital can U card issuers have more operational space.

The Dilemma of Compliance

1. Compliance and Self-Protection

As a U card issuer, compliance is necessary regardless of need, including code audits, project audits, capital audits, financial report audits, and custody audits, which are unavoidable operational costs.

Additionally, the capital pool needs to find third-party custody, and the strength and compliance level of the custodian must also be audited and background-checked, determining whether it is necessary for the partner to provide corresponding guarantees based on cooperation conditions. If a large institution is selected for custody, the cost might be too high for startup U card companies and average-sized capital pools to bear. If a small asset management company is chosen, there are concerns about the safety and compliance adequacy.

If unexpected events lead to capital losses, the first target for user complaints is the U card issuer, not the custodian. The U card issuer then must engage in lengthy and difficult legal proceedings with the custodian.

2. Compliance and Regulation

At this stage, compliance regulation may not be a priority for practitioners in the U card industry.

Firstly, the industry is still in its early stages, and the relevant regulatory policies and laws remain quite ambiguous.

Moreover, regulatory enforcement powers over U card issuers are limited. The qualifications for issuing credit cards are borrowed; the U card issuer is based in offshore regions, and the funds are held in third-party custody, making it challenging to impose penalties on U card issuers from a legal and enforcement perspective.

Moreover, U cards are issued through regular issuing channels + regular international payment channels + regular consumption scenarios. If there are legal disputes arising from the above channels, it is not entirely the responsibility of the U card issuer. If users violate regulations for cashing out or illegal usage, that violates foreign exchange management regulations, fraudulent transactions, or other illegal matters, the main responsible party is the cardholder, unrelated to the issuer.

The most severe penalty for U card issuers from regulators may be the suspension of their card BIN (Bank Identification Number), causing user loss. This could likely lead to the downfall of a U card project, forcing them to learn from the experience and start anew.

3. Compliance and Anti-Money Laundering

For U card issuers, the biggest responsibility lies in anti-money laundering (AML) compliance. However, in the Web3 ecosystem, AML processes are already quite mature, as seen with major exchanges like Coinbase, Binance, and OKX, which rigorously control AML through on-chain data, cooperation with AML institutions, and risk control models.

Although there are relatively mature solutions for anti-money laundering, the costs are not low; it requires establishing a supervisory mechanism and its own risk control model, cooperation with relevant institutions, and recruitment of appropriate talent, all of which incur necessary costs. Furthermore, anti-money laundering is a top priority in any country.

4. Potential Compliance Risks

The term 'potential' is used because, according to the current state of the U card industry, the asset protection and anti-money laundering compliance mentioned above pose the greatest risks, while the importance of other compliance risks is not particularly high.

However, if U card issuers want to connect the upstream and downstream industry chains, they must bear additional operational risks. For example, increasing consumption scenarios, supporting fiat currency deposits and withdrawals, expanding Web2 users, connecting directly to e-commerce payments, and establishing "Yu'ebao". These businesses cannot avoid AML/KYC, securities law, foreign exchange management regulations, investor protection law, payment channel construction, and marketing channel development. The closer the integration with real-world scenarios, the more compliance is needed; the more compliant, the more the development model resembles Web2; the more it resembles Web2, the more it enters red ocean competition.

Web3 practitioners aiming to compete with Web2 companies need to readapt to the Web2 system, redistributing interests, rights, and responsibilities. The larger, deeper, and broader the business grows, the heavier the compliance shackles and social responsibilities become.

With great power comes great responsibility.

The Future of U Cards

What should U card companies do at this stage?

The first method is to explore and advance; the U card industry is still in the exploratory phase, with operational models, profit models, and resource allocation still under exploration. It is high-risk investment for pioneers to carve out their channel models.

The second approach is to focus on what you are good at, such as channel construction, community promotion, compliance risk control, capital custody, investment matching, capital clearing, and research background checks, becoming a quality supplier in the industry chain while leveraging your strengths. Compared to the first approach, this option offers stable income with lower risks.

As a branch of the Web3 industry, the U card industry benefits from the overall development of the Web3 sector and is still in a period of rapid growth, waiting for the entire industry to gradually mature and be accepted by the public.

Endure until the U.S. stablecoin legislation is passed, until merchants can directly accept stablecoins, until consumers can seamlessly use Web3 wallets for payments, until Web2 giants rush in, and until vast markets open up to Web3.

When the time comes, the surviving companies will hold the first-mover advantage and become industry leaders.

So should compliance still be pursued? Yes, it must be done, but survival comes first. "Better to ask for forgiveness than permission."

Compliance must be aligned with industry development and corporate scale; it is necessary but must balance business development needs with compliance investment costs and scales.

The bottom line of the industry is risk control; risk control is the core of the entire U card industry.

The core logic of U card's business from start to finish is the transfer of money, requiring 100% vigilance regarding money. Therefore, risk control is paramount—managing money well, ensuring there are no backdoors in the code, trusting partners, ensuring custody reliability, and ensuring employees can receive their salaries next month.

In short: risk control, risk control, and risk control.

Summary

The U card industry is at a critical stage of exploration and growth, where the balance between innovation and compliance will become a decisive factor in its future development. Companies need to flexibly adapt to market changes and optimize operational strategies while ensuring capital safety and strengthening risk control to address current challenges.

With the continuous maturation of Web3 technology and the widespread adoption of stablecoin payments, U cards are expected to become an important bridge between the digital economy and the real world, leading new trends in the payment field.

As the industry matures, compliance will become foundational. The primary task for U card companies at present is to advance steadily while waiting for the industry ecosystem and regulatory environment to improve and clarify.




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Author of this article: Crypto Miao