The Future of International Transfers: Stablecoins for Cross-Border Payments

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The use of cryptocurrencies is growing rapidly, as evidenced by a growth of more than 100% per year, and is being adopted much faster than the internet in the early 2000s. Even if the growth rate slows to 80%, crypto will still reach a billion users by 2024.

One of the main goals of cryptocurrencies has been to redefine global payments. While global payments have evolved significantly over the years, most of the system’s efficiency has been in addition to commonly used currencies such as the US dollar or the euro. As a result, international money transfers to and from developed countries have become more cost-effective and faster. But transfers ending or coming from emerging economies have not become as cost-effective, nor have settlement times become as fast.

As cross-border payments from emerging markets are slow, expensive and take several days, even in 2022, the question remains: how do we take international transfers to the next level?

This is where the rapid adoption of cryptocurrencies can help support financial inclusion and accelerate the benefits of emerging markets financial system efficiency.

The answer lies in one specific type of cryptocurrency: stablecoin – the least volatile of all. Stablecoins are built not to fluctuate in price while still providing users with the benefits of crypto. Their value is linked to other assets, such as government-issued currencies such as the US dollar, precious metals, such as gold, and algorithmic functions.

Need for a better remittance solution for emerging markets

International money transfers or remittances are mainly seen through the lens of people living abroad in developed countries and sending financial support to their friends and family in developing countries. According to the World Bank, the transaction volume even reached USD 589 billion in 2021.

While remittances from emerging economies to developed economies are of lower volume, they are by no means insignificant, as they run into the hundreds of billions of dollars. Better solutions are still needed for these types of international transfers.

An emerging country user is at a disadvantage because of the financial system that poses serious challenges to international money transfers, starting with a huge surcharge of about 10% for exchange rates, high transfer fees and a longer settlement time of up to 5 days. According to the World Bank, depending on the destination country and the type of service used, a $200 transfer can incur fees ranging from 5% to 9.3%.

On the other hand, stablecoins such as USD Coin (USDC) are already integrated with global payment networks such as Visa Inc., enabling transaction settlement with USD Coin. In addition, according to McKinsey & Co. two popular stablecoins, USDC and Tether, completed transactions worth $3 trillion in the first half of 2021.

In addition, Facebook and Coinbase recently decided to develop and incorporate stable coin-based international transfers into their services. However, they still operate in regular payment corridors – from developed to developing countries. For example, Novi, a Facebook-based digital wallet, allows transactions from the US to Guatemala, but not the other way around. And that’s what needs to change.

Because stablecoins can withstand the price volatility experienced by traditional cryptocurrencies such as Bitcoin, they can serve as a bridge between crypto and fiat, especially for payment usage.

Restricting Third Parties via Crypto for Overseas Transfers

International money transfers often involve up to four intermediaries when traditionally performed. This traditional settlement process entails high transfer costs as each provider involved adds their service fees, and this multi-party settlement results in a delayed transfer process.

For example, when sending a money transfer abroad, a consumer in the country of origin has to pay a transfer fee to a Money Transfer Operator (MTO). These MTOs are financial institutions, not necessarily banks, that facilitate overseas transfers through their internal settlement network or through a third-party international banking network, such as SWIFT, or through a larger remittance service provider. In addition, an MTO may be required to pay regularly for payment network setup, usage-based subscription, and system maintenance.

As a result of this settlement process, the recipient collects less money in the currency of the destination country after deducting transfer fees and expensive currency conversion.

Thus, facilitating this settlement process through cryptocurrencies will reduce the number of intermediaries as it allows instant money transfers between sender and receiver, reducing transfer costs and settlement time.

Stablecoin Settlement as an Alternative to SWIFT

Global use of crypto grew by more than 880% in 2021, with P2P platforms driving cryptocurrency adoption in emerging markets. Not surprisingly, Vietnam and India are at the top of the global markets when it comes to cryptocurrency adoption by individual consumers.

This wide adoption of crypto in emerging markets provides an opportunity to facilitate international money transfers through stablecoins settlement. Although at first glance this may seem like an expensive solution due to the costs associated with both the ramp at pick up and the exit at payout. But with the current crypto adoption rate, both on-ramp and off-ramp costs are already competitive compared to the global average in a few payment corridors.

As cryptocurrency adoption continues, facilitating international money transfers from many other emerging markets would become faster and cheaper than traditional payment rails. In particular, with the enhanced role of stablecoins in global settlement payment networks, these sets of cryptocurrencies will power the next generation of international money transfers.

A good use case for this emerging markets stablecoin settlement process could be the international education market. Since the majority of the 6 million international students come from emerging countries, a cost-effective and faster method of cross-border payments that saves billions of dollars is undoubtedly the need of the hour.

Abhinov Balagoni is CEO and founder of Pax Credit.

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