Crypto exchange Coinbase has unveiled the x402 protocol to automate online payments with stablecoins, allowing direct transactions from holder to merchant without intermediaries. The protocol will be particularly useful for AI agents to pay for digital items automatically, but can serve any service requiring micropayments – essentially functioning as the online version of automated toll payments. Applications could include API usage, online content, flights, or computer resources. While designed for direct payments, various intermediaries will likely emerge to simplify the process for merchants.
The key is that there is no need for an intermediary. The stablecoin payment goes directly from the holder to the merchant. That said, any number of intermediaries will pop up to make it easier for merchants.
While Visa and Mastercard are often blamed for the high cost of card payments, by far the largest proportion of the typical 3% merchant card fee goes to the card issuer, which is often a bank.
“We built x402 because the internet has always needed a native way to send and receive payments—and stablecoins finally make that possible,” said Erik Reppel, Head of Engineering at Coinbase Developer Platform. “Just like HTTPS secured the web, x402 could define the next era of the internet; one where value moves as freely and instantly as information. We’re laying the groundwork for an economy run not just by people, but by software—autonomous, intelligent, and always on.”
Coinbase was a co-founder of the USDC stablecoin and x402 initially supports USDC, but it is an open protocol for any stablecoin payment. The x402 source code has been released under the permissive Apache 2.0 license.
Coinbase is launching with some heavyweight partners, including USDC issuer Circle, Amazon AWS and Anthropic, the developer of Claude AI and MCP, which is an open source agentic AI protocol. The x402 documentation includes a guide on how to integrate x402 with an MCP server.
How x402 works
When browsing the web, if we come across a missing web page it often shows a 404 error. An error code that we never see is the 402 error, which says there’s a paywall and you need to make a payment. Coinbase is using this to build a protocol for payments to make it as seamless as sending a tweet.
One example is a data service charging micro fees. When an AI agent requests data, it receives an HTTP 402 error containing a payment request with essential details: payment amount, seller’s wallet address, transaction address, and network identifier (like Ethereum). The buyer simply responds with these details along with a cryptographic signature from their payment wallet, completing the transaction with minimal friction.
Is it just the starting point?
On the one hand, the simpler the protocol the better. Given this involves payments, it is pretty simple and elegant. Without the benefit of time to consider it more deeply, two potential issues jumped out.
Firstly, there’s no identity involved in the payment, and payments have to be compliant. Card providers and banks handle all that, so who does that here? On the other hand, merchants invariably know their clients, so most transactions won’t be entirely anonymous. But there’s a difference between knowing an email address and verifying someone’s identity. Unless the transactions add up to more than $10,000, it would be a shame if legal compliance created yet another roadblock to an elegant solution.
The second point is around currency. Some of the examples show currency, some of them do not. We assume that it will require the specification of a fiat currency, otherwise dollarization is taken for granted.
Today, if a European resident buys something from the US, they will pay in euros with the foreign exchange (FX) conversion happening in the background during the card payment process, so that the seller receives dollars. Who will perform the FX here? Most likely it will be the payer’s wallet provider that will do the conversion. We’d observe that some wallet providers already charge conversion fees that are more expensive than centralized and decentralized crypto exchanges.
Despite these observations, the x402 protocol looks very promising. It is yet another piece of the infrastructure that will help stablecoins to gain traction in real world payments.
