Web3 investment has been steadily falling since late 2021 as investors take a step back from the mercurial cryptocurrency ecosystem. In the third quarter of this year, investment in Web3 startups fell for the seventh straight quarter, data from Crunchbase show.

The decline was steep: Web3 startups raised $1.3 billion in the July-September period, compared to about $2 billion in both the first and second quarters.

But compared to last year and the year before, the drop was even more pronounced. Web3 startups raised roughly $8 billion per quarter beginning in the July-September 2021 period and ending in the June 2022 quarter.

While the broader crypto winter is partially responsible for decreased Web3 funding, there are fundamental issues with the concept itself. If they are not resolved, Web3 could fizzle out as far as financial services is concerned.

A Solution In Search Of A Problem

Web3’s biggest proponents in financial services usually argue that it can improve the speed, efficiency and transparency of payments, thereby enabling greater financial inclusion for both consumers and small businesses. The idea that Web3 payments can empower fintechs to play a larger role in cross-border payments is appealing for many, as is the possibility of improving upon slow traditional correspondent banking networks.

But the way we see it, payments have already improved dramatically in recent years without blockchain or crypto. For that reason, Web3 payments do not offer any compelling advantages over existing real-time payment systems. SWIFT GPI has resolved many of the most vexing aspects of the interbank messaging network’s service. Southeast Asian central banks have raced ahead of many of their counterparts globally to build a nascent QR code-based payments system in which retail users in multiple ASEAN countries can send payments to one another with just a phone number. And of course, cross-border payment focused fintechs like Wise, Rapyd and Airwallex continue to disrupt the market landscape, mostly for the better.

Ripple is one company in the crypto payment space that seems to have staying power, but much of its success can be attributed to a willingness to work with banks. On Oct. 24, Ripple announced a new partnership with Web3 financial platform Uphold, which has agreed to provide it with enhanced crypto liquidity capabilities for its cross-border payments infrastructure. Those capabilities will support crypto-to-fiat transfers and bank payouts.

The Crypto Factor

While China has sought to develop a Web3 ecosystem devoid of cryptocurrency, decentralized virtual currencies are generally considered one of the essential building blocks of Web3. This worked in Web3’s favor prior to the crypto winter, but not since then. After all, if crypto itself has an uncertain future, why build essential digital payment infrastructure on top of it? You need to have a high-risk appetite.

Crypto believers point to the steady adoption of regulations to support various aspects of the industry in economies like Japan, Singapore and Hong Kong, as well as the European Union’s Markets in Crypto-Assets Regulation (MiCA) – which institutes uniform EU market rules for crypto-assets – as evidence that digital assets are here to stay. Some observers believe the EU’s adoption of this regulation will act as a catalyst on other major jurisdictions.

The jury is still out though. The United States, China and India all remain skeptical about cryptocurrency. China has banned it in many respects; India has severely restricted its use and the U.S. has shown little interest in developing a comprehensive regulatory framework. If these three countries, which together account for almost 40% of the world’s population and 53% of global GDP, do not embrace cryptocurrency, it is highly unlikely to gain a foothold in the global economic and financial system.

Keep An Eye On Stablecoins

The future of Web3 in financial services is likely to hinge to a large degree on the success of stablecoins. If stablecoins live up to their promise of offering the benefits of crypto without the volatility, they could become a more solid foundation for Web3 applications in financial services than the likes of Bitcoin BTC or Ethereum ETH .

When it comes to stablecoin regulation, Japan and Singapore are leaders. With its regulatory framework, the Monetary Authority of Singapore (MAS) aims to legitimize fiat-backed stablecoins as a credible digital medium of exchange that can bridge the gap between fiat currencies and the digital asset ecosystem. To that end, the MAS will require reserves that back stablecoins to be held in low-risk and highly liquid assets that must equal or exceed the value of the stablecoin in circulation at all times. Japan, meanwhile, enacted stablecoin regulations in June that seek to address concerns about whether issuers have adequate assets to back them, and if they do, how to ensure that these assets can be easily accessed and are not tied up in shady investments.

Meanwhile, JPMorgan’s JPM Coin is increasingly popular, having reached $1 billion in daily transactions. While it is often called a stablecoin, JPM Coin is probably best thought of as a permissioned payment rail and deposit account ledger that allows wholesale clients to make dollar and euro-denominated payments through a private blockchain network. It is one of the scant examples of a live blockchain application by a major bank, and while $1 billion sounds like a lot of money, Bloomberg notes that it “remains a small fraction of the $10 trillion in US dollar transactions moved by JPMorgan on a daily basis.”

We expect stablecoin adoption to continue growing in the months and years ahead, but as long as its ability to solve problems in financial services remains roughly equivalent to existing payment systems, it is hard to see how a Web3 revolution will ever happen.