Can Stablecoins Improve Cross-Border Payments?
If the wildly successful IPO of Circle Internet Group (CRCL) and the passage of the GENIUS Act are any indication of the relevance of crypto and digital assets in today’s economy, the back half of the decade could see a revolutionary level of adoption. But how integral will stablecoins be when it comes to everyday money movement?
Background
A stablecoin is a digital token whose value is often pegged one-to-one with a fiat currency like the U.S. dollar, and is being used for instant, low-cost transfers over a blockchain network.
In an era where information can be transferred over the internet instantaneously, there seems to be little reason that many traditional forms of payment settle in days rather than seconds.
Moving money is also historically expensive. For international wire transactions, every institution involved in moving that money to the end user takes their own cut. By the time the recipient receives their money, the amount is much less than what was sent. Where a fee is assessed, it can range from $15 to $45, with potential for additional costs when converting to a different currency.
Let’s look at an example:
Person A in the U.S. wants to send a small wire of $100 to Person B in Germany. Assuming a conservative transfer fee of $25, $75 remains.
If the money wasn’t first converted from USD to EUR, there would be a foreign exchange cost as well. Beware, FX markups and fee structures are notoriously opaque and difficult to see.
In 1-5 business days, the recipient might receive $70, 30% less than the amount originally sent.
Aside from being slow, expensive and lacking in transparency, had this example included a country or jurisdiction that restricts the flow of foreign currency or imposes strict capital controls, the money might not be received at all.
The Case for Stablecoins
Proponents of stablecoin technology claim to solve the speed, cost and transparency issues.
With no need for intermediary banks, costs are minimized and money can go directly from A to B. Using Circle’s USDC stablecoin as an example, because it is pegged one-to-one with the U.S. dollar, users gain access to dollar-based value without being in the U.S. And in restrictive markets, because stablecoins can be transferred peer-to-peer, users can circumvent the banking sector altogether. These payments can also be tracked in real time, reducing or eliminating uncertainty about where the money is.
Roadblocks
The ability to move from the stablecoin to local currency may still be an issue in many countries. Additionally, regulatory involvement in the crypto ecosystem will either help or hinder adoption. Where clear guardrails are established, the likelihood for deriving utility from the technology goes up.
Depegging is also a concern, as occurred with Terra’s UST and Tether’s USDT in 2022.
Final Thoughts
The benefits and use cases for stablecoins – such as conducting low-value international transactions – appear to be obvious and significant. The global remittance market is massive, growing from an estimated $128 billion in 2000 to $831 billion in 2022.
Legacy payment companies and platforms are already working to natively integrate stablecoins, making them well-positioned to take advantage of the technology. Whether this technology becomes more mainstream hinges on a handful of key factors: regulation, willingness to adopt, trust & safety, and the on/off-ramp infrastructure.
Stablecoins certainly won’t replace fiat, but they might modernize the plumbing behind it.
