Stablecoins and The Challenge for Cross-Border Payments

Stablecoins and The Challenge for Cross-Border Payments

Samee Zafar
August 1, 2022

We know cryptocurrencies are highly volatile, which is what makes them attractive for speculative trading. Buying crypto is a roll of the digital dice that has made fortunes for some. Since the birth of Bitcoin, cryptocurrencies have been used extensively for speculation.

But high volatility is what makes crypto unsuitable for payments or settling monetary obligations. To fix this, the crypto industry came up with a more stable / less volatile class of cryptocurrency called stablecoins. A stablecoin is linked to an actual or “fiat” currency (so far, mostly the United States Dollar but others as well). It is only as volatile as the currency it is linked to, making it suitable for making and receiving payments.

But suitability does not always translate to acceptance or actual usage. This is because there are some formidable barriers to be overcome if stablecoins are to be used for cross-border payments. At the domestic level – that is, for payments within a country – the bank payment infrastructure is fast and reliable. In countries with real or near real-time systems, domestic payments are processed within seconds. Internationally, however, it is a different story. Transactions are completed over a network of “correspondent” banks till they reach their destination. Industry players deploy an array of different systems, operational processes, currency conversion and hedging desks, and compliance with complex anti-money laundering procedures. The dominant non-bank players have even gone as far as to obtain banking licenses in their key markets. While large corporations receive the attention of banks eager to serve them, small and medium-sized enterprises sometimes struggle and international payments can take a lot of their time and effort which is why cross-border payment specialists such as Moneycorp or Wise step in to offer better and more tailored services and provide the guidance and assistance these businesses need.

Would stablecoins simplify cross-border payments? Not yet because of some key challenges. Stablecoins, above all, face the challenge of interoperability. Regular currencies are fully “fungible”. Dollars in one bank account are the same as dollars in another. But stablecoins on one system are different from stablecoins on another. Even stablecoins issued by the same entity but using different blockchains are not interoperable. Michael Hsu, Acting US Comptroller of Currency, stated in an address earlier this year at Georgetown University, “if or when stablecoins expand from trading to payments, this lack of interoperability will become more apparent.”

Even if a global organisation is in a position to develop a single network of participating members who agree on interoperability to cover the globe, much like what Visa or Mastercard did for credit cards, regulators may fear market dominance. In relation to Meta’s stablecoin system called Diem, Hsu noted there was a “fear of the concentration of economic power” that the coin’s issuer would be in a position to exert.

Additionally, the process of currency conversion would still have to take place. Crypto exchanges already do that at not-so-insignificant costs. But for the forex trading industry to cover stablecoins, it will take a long time as there isn’t enough liquidity in the market to service such transactions – yet.

Finally, the rules relating to anti-money laundering will have to be applied regardless of how the money crosses international borders. Current systems can cope with stablecoins, which means no cost savings for stablecoins.

For now, stablecoins are seen and used as crypto light, the entry point to the wild and wacky world of full-fledged crypto. It is easier, quicker, and cheaper to convert stablecoins to crypto and back than fiat currencies.  The goal of cross-border payments is still far away.

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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