Digital Wallet in Support of Digital Assets for Instant Payments

FPC Digital Assets Work Group

The widespread adoption of digital wallets is transforming access to a broad range of payment options for consumers and businesses, all through a secure interface. Integration of mobile phones with hardware secure elements is accelerating this trend, allowing for more diverse applications and expanded functionality.  

The United States remains a key innovator in digital wallet technology, with ample opportunities for growth that could facilitate the holding and exchange of digital currencies and assets. This positions digital wallets as a cornerstone of the future in U.S. financial technology.

The FPC Digital Assets Work Group suggests that digital wallets will play a crucial role in processing various digital assets, including tokenized currencies, deposits, and securities. This blog will explore the expanding influence of digital wallets in supporting digital assets and how technological advancements will drive the adoption of instant payments.

Definition of a Digital Wallet

A digital wallet is a convenient place to store all financial transaction information including payment options, loyalty programs, rewards, and other non-financial application data. The ultimate digital wallet would solve for the centralization of a user’s financial lifestyle into one single application supporting: 
  • Payment options: debit, credit in fiat currency, pay by bank and digital currencies (e.g., CBDCs, stablecoins, tokenized deposits, and cryptocurrency)
  • Support existing rails, on-chain and off-chain/offline activity, and peer-to-peer transfers
  • Accumulation and tracking of points, which can also be recorded and exchanged as digital assets
  • FX for the exchange and fee assessment of digital currencies in the global marketplace
  • Features and obligations associated with the management of the wallet
  • Use of APIs to aggregate all accounts into a single application
An important distinction for digital assets is that the digital wallet is primarily an access medium not a storage facility. Traditional assets and credit facilities are references via the digital wallet, usually via debit and credit cards. The “storage” of crypto, NFTs, and other digital assets are typically not housed in the digital wallet itself but on the digital ledger – which is referenced via an address (alphanumeric source code).

The wallet stores the private and public keys that are used to perform purchases, transfers, and exchanges of other digital assets. These keys uniquely identify with the owner and enable viewing and transacting with the owner’s digital assets. New digital tokens are issued with the private key that certifies asset ownership.

Structure of the Digital Wallet

The infrastructure for instant payments typically focuses on an account-based structure where a financial institution holds the account of record on behalf of the consumer or business in support of credit push or peer-to-peer payment transactions. This concept holds true in the digital asset world as well and there is growing support for the use of a digital wallet for instant payments. 

There are many distinct types of digital wallets ranging from those issued by a financial institution or technology company to a “Super App” provided by companies like Apple, Google, Samsung, Android, Block, and PayPal. These apps can support traditional payment types (e.g., the PayPal model) or may also include cryptocurrencies and other digital cash, like CashApp or Coinbase that support cryptocurrency tracking and other FX capabilities. 

Needs Assessment - Business Versus Consumer Digital Wallets

Digital wallets, traditionally known for their applications in the retail or consumer space, are increasingly finding utility in the institutional or B2B space. These wallets offer several advantages over traditional account-based solutions, especially as institutions seek faster, more secure, and more transparent ways to conduct business and financial transactions.

Digital wallets combine the benefits of physical bank accounts with innovative solutions for instant payments, digital identity, and programmable money, all of which can be seamlessly integrated for end users. While often associated with consumer mobile applications, digital wallets can also be incorporated into existing Enterprise Resource Planning (ERP) applications and Treasury Management Systems (TMS) via API. This integration can improve the speed and efficiency of payments, securities settlement, trade finance, supply chain management, and fraud mitigation.

For example, digital wallets can integrate traditional physical bank accounts with blockchain-based capabilities behind the scenes, providing a seamless user experience. For cross-border payments, businesses can instantly transfer money from their legacy bank accounts to a tokenized account, enabling atomic (instant) settlement using Distributed Ledger Technology (DLT). Companies can hold multiple currencies, simplifying international and FX transactions.

Additionally, digital wallets can enable frictionless access to digital assets like tokenized Money Market Funds (MMFs), native digital currencies, and on-chain repo for verified businesses. They can also pair traditional bank accounts with smart contracts and AI models to significantly increase workflow automation and optimize the deployment of financial resources, allowing institutions to focus on their core business strengths.

Enhanced security and compliance are additional key benefits. Tokenized identity can be directly incorporated into digital wallets to instantly verify trusted entities, reducing the overall cost and redundancy of KYC verification across the industry. Evolving blockchain applications, such as social graphs (that represent social relations between entities), could allow compliant actors to independently verify a wallet’s identity and add to that user’s trust score in the network.

SWOT Analysis

There are numerous benefits associated with supporting a digital wallet to access digital assets. This SWOT Analysis provides a cursory overview of the pros and cons associated with its adoption in support of real-time payments. 
 
STRENGTHS WEAKNESSES
Convenience
  • Users have payment flexibility and do not need to hold on to physical payment devices or remember account information. 
  • Merchants reap the benefits of less friction in the payment process. 
Security
  • Digital wallets secure payment data and commonly use tokenized (encrypted) information to facilitate a payment.
  • Digital wallet access in conjunction with biometric authentication provides an extra layer of security.
Integration
  • Digital wallets integrate payments from multiple rails into one application or even incorporated or integrated into mobile and online banking, shopping, and other applications.
Payment Acceptance
  • Not all providers are enabled to accept payments from digital wallets or may be limited to certain rail types in multi-rail wallets.
Technology Adoption
  • Not all payment participants incorporate the technology needed to leverage a digital wallet.
Device Security
  • Digital wallets rely on device specific security which is in the end user’s control and may not be kept up to date.
 
OPPORTUNITIES THREATS
Payment Method Prominence/Preference
  • Potential to make your provider’s payment method top of wallet and/or prominent for regular use. 
  • Some wallets can be designed to enable user preferences based on payment amount, use case, items purchases or by merchant or merchant category codes.
Market Growth
  • As the adoption and proliferation of digital wallet usage increases among providers and users, digital wallets will become more valuable and lead to further development and participation opportunities. Apple NFC creates a whole new opportunity for market growth in digital wallets. 
Financial Inclusion
  • Helps solve the challenge of financial inclusion by enabling payment capabilities for parties not currently connected to financial services.
Regulatory Oversight 
  • There is a continued push to protect end users concerning financial institution services including payment mechanisms that, coupled with ever-changing regulatory priorities, means digital assets may be under regulatory scrutiny.
Competition
  • As the market value and importance of digital wallets increases, the potential for additional providers to enter the space becomes a reality.  Increased competition means that the providers will need to innovate, differentiate, and develop market acceptance strategies.
Cybersecurity Concerns
  • Digital wallets are enabled by technology that is at risk of cyber security attacks.

Technology Spearheading Adoption

Technology advancements associated with the digital wallet will help to facilitate their use of digital assets. Three primary areas of focus include data movement and aggregation, offline storage and transfer options, and use of the secure element for added security.

1. Data Movement and Aggregation

Aggregation in a digital wallet refers to the process of consolidating multiple financial services, accounts, cards and assets into a single platform or wallet. This enables users to manage various accounts (such as bank accounts, credit/debit cards, cryptocurrencies, and loyalty programs) from one interface, simplifying their monetary management. Aggregation can enhance convenience, improve financial oversight, and provide additional features like spending analysis, budgeting, and rewards tracking.

Digital wallet aggregation has great promise to consolidating multiple financial services, accounts, cards, and assets into a single user experience. This enables users to manage their financial services from one interface, simplifying their management, transactions, and budgeting.

Key features of digital wallet aggregation:
  • Unified Financial View: User can see balances and transactions from multiple accounts in one place, including cross-border accounts.
  • Multi-Bank Support: Aggregators connecting to financial services via APIs, allowing users to view and manage accounts across several banks without logging into each one separately.
  • Payments Flexibility: Aggregated wallets allow users to switch between different payment methods during checkout, online and offline. 
  • Expense Tracking and Budgeting: Aggregated wallets will provide monetary management tools that help the user analyze spending patterns, budgeting, and insight into their financials across all connected accounts.
  • Cross-Border: Aggregation can support multiple currencies
2. Option for offline storage and transfers.

Think about how many times and places where reliable internet access is available for either or both the party’s devices that want to transact with each other. It is not enough to support instant digital asset transfers between these devices. For POS transactions, most merchants will have hard wired or their own private wireless connection to the internet, but the transfer of digital assets requires both party’s devices to be online.

While currently all digital asset information is stored and transacted on the on-chain and online distributed ledger, new technological developments provide functionality to support off-chain and offline storage and transfer of digital assets on mobile and other devices that can communicate with each other directly.

Off-chain and offline storage stores a shadow copy of the on-chain and online only data. These devices can update the data even when one or both of the transacting devices are not connected to the internet. The offline transactions update this data as having been transferred such that it cannot be double spent much like it would when done online. When either device is connected online, the copy of the same on-chain and online data is updated.

The off-chain and offline devices can see the data and transactions not yet synchronized to their on-chain and online copy along with the online history that the devices no longer need to see offline.

3. Use of the secure element for added security.

Apple’s super app digital wallet has the potential to revolutionize the payment landscape, particularly for digital assets like cryptocurrencies and stablecoins. By leveraging Apple's Near-Field Communication (NFC) technology and its Secure Element (SE), the wallet could enable fast, seamless, and secure payments for digital assets.

Apple’s decision to open NFC and SE access to third-party developers is a significant change for digital asset payments. This move allows various wallet apps, including digital asset wallets, to use iPhone’s NFC and SE capabilities for payment processing. With this, developers can offer in-app contactless transactions for payments; potentially, in the future, allowing users to perform transactions using blockchain-based currencies, such as stablecoins (e.g., USDC and Tether), by simply tapping their iPhone at a point-of-sale terminal.

This tap-to-pay functionality extends beyond stablecoins to other digital assets, such as cryptocurrencies and non-fungible tokens (NFTs). Apple’s payment process is streamlined with users confirming transactions using biometric authentication, such as Face ID. Payments could be settled on-chain, making the process fast, transparent, and cost-effective.

Apple’s decision to open their NFC and SE for development offers a frictionless, low-cost solution for direct-to-merchant payments.

Apple's Secure Element for Enhanced Security

A key advantage of Apple’s super app wallet lies in the use of its secure element, which is a dedicated hardware component in iPhones designed to enhance transaction security. Apple has opened this secure element to developers, allowing third-party apps to tap into this robust security infrastructure. The secure element is already used for Apple Pay, providing a device ID that ensures authentication and encryption for every transaction.

The use of Apple’s secure hardware means transactions involving digital assets will benefit from top-tier security measures, reducing the risk of fraud or data breaches. This secure element stores sensitive data, such as encryption keys, and processes authentication independently of the phone’s main operating system, adding an additional layer of protection.

Developers will need to enter into commercial agreements with Apple to access these secure features and enable NFC and Secure Enclave entitlements for their apps. This ensures that only authorized developers who meet certain industry and regulatory requirements, and commit to Apple’s ongoing security and privacy standards, can access the relevant APIs.

It is worth noting that Apple will charge fees for using its NFC and SE technology, which could impact the cost of transactions.

Once third-party NFC-enabled apps are launched, users can designate these apps as their default payment options, allowing them to use Apple’s secure infrastructure for transactions as effortlessly as using Apple Pay.

This new capability could significantly enhance the use of blockchain-based assets in retail and other industries where contactless payments are becoming increasingly popular. With Apple’s vast user base and the growing popularity of stablecoins like USDC, the integration of NFC technology into iPhones could accelerate the mainstream adoption of digital currencies.

Android and Samsung's Secure Element for Enhanced Security

Android and Samsung device users can similarly make contactless payments leveraging the devices, NFC capabilities and digital wallets.
 
  • Android users have access to Google Wallet (previously known as Android Pay) and their devices also use secure elements and passkeys to enhance security and authentication[1]
  • Samsung device users make contactless payments using Samsung Pay and have the protection of a secure element and passkeys.[2]
For now, third-party apps have limited access to either Android or Samsung’s contactless functionalities. However, at least Samsung is leaning towards the approach Apple is taking. For example: Samsung Galaxy device users can store, send, and receive virtual assets, including cryptocurrencies using the Samsung Blockchain Wallet. Additionally, Alchemy Pay integrated its virtual card service with Samsung Pay enabling users to make both cryptocurrency payments and purchases at supported retailers, such as Amazon, Netflix, and eBay, using the Samsung Pay app together with the Alchemy Pay virtual card.

For now, it is important to recognize that while the potential is there, current users of Apple, Android, or Samsung do not have the functionality to make payments using digital assets directly from their digital wallets. Notwithstanding, there have been announcements from the fintech company Circle[3], the issuer of the USDC stablecoin, that they intend to introduce a feature that will enable contactless payments using USDC on iPhones.

Time will tell, if more developers start using the NFC and SE to provide digital asset payment functionality access via either the makers of these devices' digital wallets or other digital apps hosted on these devices.

Speed of Adoption of Digital Wallets for Instant Payments

With multiple factors at play contributing to the evolution of the payments landscape, including technology, end user behavior, and emerging payments rails, the emergence of a digital wallet for digital assets may increase the adoption of instant payments by making it easier for users to get continuous access to their payment portfolio in a single point of interaction.

The speed of adoption of digital wallets by financial institutions will be accelerated by the proliferation of super apps which enable consolidation of multiple applications into one, financial aggregation services, offline storage and transfers, AI banking assistants, and even financial planning resources. New developments in this type of functionality will provide the financial service industry and fintechs with an added incentive to support instant payment adoption in digital wallets.

The biggest obstacle to instant adoption success is integration into the entire payments ecosystem coupled with a lack of ubiquity.  Without network-level interoperability between FedNow and the RTP Network, we are left relying on waiting for the industry to solve this challenge. Until this is solved and the networks further mature, we may not see the full benefits of instant adoption for a while. However, with the trend of digital wallets expected to continue to increase in adoption, a future with instant payment usage is likely to occur.

The details of how instant payments will tie into digital wallets still need to be further defined. Instant payment technology involves credit push transactions to and from connected parties on the Instant Payment Rails. Embedding these rails into digital wallets requires providers to have the ability to do this and there is then the obstacle of adoption by the part of the merchants that will accept these payments.
Digital Assets in the Financial Industry Work Group
Thank you to the members of the FPC Digital Assets Work Group (DAWG) who contributed to this blog.

Digital Assets Work Group Leadership
Bo Berg (Work Group Chair), Avenue B Consulting, Inc.
Kevin Barr (Wok Group Vice Chair), BNY
Maria Arminio (Work Group Facilitator), Avenue B Consulting, Inc.

Digital Assets Work Group Contributors
Eric Peterson, BNY
Mark Dixon, Nacha
Kirsten Trusko, Payments as a Lifeline
Steve Wasserman, Photon Commerce
Anthony Serio (Editor), Sphere Labatories, Inc.
Larry Pruss, SRM
Lou Grilli, Velera

About the Digital Assets in the Financial Industry Work Group
Maps out how digital assets relate to the financial industry, focusing specifically on payments made with digital funds – central bank digital currency (CBDC), regulated liabilities and stablecoin.

About the U.S. Faster Payments Council
The U.S. Faster Payments Council (FPC) is an industry-led membership organization whose vision is a world-class payment system where Americans can safely and securely pay anyone, anywhere, at any time and with near-immediate funds availability. By design, the FPC encourages a diverse range of perspectives and is open to all stakeholders in the U.S. payment system. Guided by principles of fairness, inclusiveness, flexibility, and transparency, the FPC uses collaborative, problem-solving approaches to resolve the issues that are inhibiting broad faster payments adoption in this country.
 

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