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What if sending money overseas was as simple as sending a text? Stablecoins should be the answer to making this a reality.
Stablecoins, or digital currencies tied to relatively stable assets, such as the U.S. dollar, offer a new way to send money across countries. Unlike the popular perception of cryptocurrencies, their value remains stable over time. And because stablecoins use blockchain technology, they can make cross-border payments faster, cheaper, and easier for everyone.
Traditional payment systems are slow and expensive due to multiple intermediaries — the man in the middle.
Many nations have been feeling the pinch of inflation in the last few years, but for readers with the luxury of a relatively stable currency, it is hard to imagine how difficult it is to live under a sovereign currency rapidly inflating.
And with the costs involved in traditional remittance channels, people can be really trapped, even generationally, by the monetary policies of their countries.
Key Takeaways
- Stablecoins (digital currencies tied to relatively stable assets) offer a new way to send money across countries.
- The growth of stablecoins is expected to enhance cross-border payments by addressing speed, cost, and accessibility compared to fiat money.
- Stablecoin transactions let users send money at the speed of the Internet, 24/7/365.
- Stablecoins are still relatively new, and there are aspects, including regulation, that need to be figured out.
- Governments and businesses need to work together to ensure stablecoins are safe and fair for everyone.
The Growth of Stablecoins
The main reason for the growth of stablecoins is simply demand, says Chen Arad, co-founder and CXO at Solidus Labs.
“The public is increasingly interested in engaging in crypto and decentralized finance (DEFI) for purposes like cross-border payments or shopping, which requires holding digital assets,” he says.
Stablecoins play a critical role in this adoption as their stable value lets users enjoy the benefits of crypto, such as controlling their own funds and quick, direct transactions, without the price swings of Bitcoin and Ethereum, according to Arad.
This is not the quick buys of people looking to double their money and get out, but instead to use crypto in real-world scenarios.
As Kwamie Dunbar, associate professor of finance and director of fintech programs at Worcester Polytechnic Institute, tells us:
“The growth of stablecoins is expected to significantly enhance cross-border payments by addressing key areas, such as speed, cost, and accessibility
“This could be particularly beneficial for businesses and individuals in countries with weak financial infrastructures, enabling more efficient and inclusive access to global markets??.
“The demand for faster, cost-effective, and accessible financial services, especially in cross-border transactions, has led to increased adoption of stablecoins??.”
Benefits of Stablecoins Over Traditional Cross-Border Payments
Today, cross-border payments typically go through a network of banks involving multiple intermediaries, each adding cost and time, says Pablo Bejarano, CEO of PBG.io.
“It’s a slow, expensive process with fees and delays that can be frustrating for users.”
Stablecoins can streamline cross-border payments by reducing the number of intermediaries, cutting down on fees, and speeding up transactions, according to Bejarano.
“They offer a more direct and efficient way to transfer value across borders, making them a compelling alternative to the traditional system,” he says.
Today, sending money overseas is slow and expensive, agrees Elizabeth Severinovskaya, managing director in the financial crimes compliance practice at consulting firm K2 Integrity. It usually takes several days and can cost up to $50 because multiple banks are involved. There are also limits on how much people can send and where.
“Now contrast this with a peer-to-peer stablecoin transfer on, for example, the Solana network,” she says.
“You can send any amount, to any recipient in the world, in a USD equivalent, where the average transaction speed will be seconds, not minutes, not days, and the average transaction fee will be in cents, not dollars.”
Stablecoin transactions let users send money at the speed of the Internet, 24/7/365, rather than at the speed of banking which involves a complicated series of intermediaries, Severinovskaya adds.
“It’s also this lack of intermediaries that helps keep costs down, both for the senders and the recipients.”.
Dunbar says that stablecoins offer several benefits over traditional cross-border payment methods.
“They provide faster settlement times, with transactions processed in real-time, reducing delays associated with traditional banking systems,” he says.
“Stablecoins reduce transaction costs by eliminating intermediaries and mitigating currency volatility, ensuring that the value sent is the value received.”
And Dunbar adds that stablecoins improve transparency and traceability because all transactions are recorded on a blockchain, allowing users to track them in real-time.
Challenges to Using Stablecoins for Cross-Border Payments
The main challenges to using stablecoins for cross-border payments are regulatory uncertainty, varying legal frameworks across countries, and the potential for misuse, says Bejarano.
“Also, there’s the need for trust in the issuer of the stablecoin, as the stability of the coin depends on the issuer’s ability to back it,” he adds.
Arad concurs with Bejarano that the main challenges include regulatory uncertainty and the need to ensure trust by demonstrating that stablecoins can’t be easily used for criminal and illicit activity.
In addition to regulatory uncertainty, as different jurisdictions have varying laws and regulations regarding digital currencies, Dunbar says there’s also a chance that the value could become unstable, especially during times of financial trouble. He adds:
“Additionally, interoperability between different stablecoins and existing financial systems remains a significant hurdle, which could limit their widespread adoption??.”
Severinovskaya says that, essentially, it’s about the sender’s ability to buy stablecoins for cross-border payments and the recipient’s ability to turn those stablecoins into regular (fiat) money to use in the real economy.
Another important blocker for widespread use is making cryptocurrency payments simpler, she says. People are used to traditional cross-border payments, even though they are expensive and slow, as they know their banks or money transfer services will help them.
“Stablecoins are still quite niche and when people think of cryptocurrency, many still think primarily about Bitcoin and speculative investing,” she says.
“There isn’t necessarily that familiarity with other use cases nor the understanding of how one can go about purchasing stablecoins and sending those virtual assets to a recipient’s wallet in another jurisdiction.”
What Needs to Happen Next
To address these challenges, governments, regulators, and businesses must work together and laws should be similar in different places to avoid confusion, says Dunbar.
“Additionally, technological advancements to enhance interoperability between different platforms and networks are crucial,” he adds.
“Stablecoin providers must also work closely with financial institutions to integrate stablecoins into existing financial infrastructures, ensuring a smooth transition and broader acceptance?.”
Bejarano told Techopedia that clearer regulatory guidelines that apply globally, cooperation between governments, and transparent practices from stablecoin issuers is key to addressing the challenges of using stablecoins for cross-border payments:
“Central banks, international financial bodies, and the private sector all have roles to play in creating a safe and reliable environment for stablecoin use.”
To address stablecoin challenges there also needs to clear information from stablecoin companies about their assets as well as their tools to detect illegal activities and market manipulation in stablecoin trading, says Arad.
“We at Solidus are constantly working with the industry to come up with new fit-for-purpose risk monitoring tools for stablecoins, as well as to create standards for safe and regulated stablecoin usage,” he adds.
Severinovskaya says that cryptocurrency companies need to create easy-to-use products that appeal to everyone and build trust with consumers.
“Cryptocurrencies, including stablecoins, have not always had the most positive reputation in recent years with the crash of Terra Luna and the subsequent crypto winter that followed as large, consumer-facing entities like FTX and Celsius failed,” she says.
Some centralized players, such as Coinbase and Gemini, do a great job of developing educational materials for their users, which is a great start, Severinovskaya adds,
“But the next challenge for crypto will be to do for consumers what Stripe did for merchant processing, which is to [make paying simple and easy to understand] in order to bring the next 100 million users on-chain,” she says,
The Bottom Line
Stablecoins are changing the way we send money across borders. These digital currencies are making it faster, cheaper, and easier to move money between countries. By cutting out middlemen and using such technology as blockchain, stablecoins can speed up transactions and reduce fees.
However, it’s important to remember that stablecoins are still new, and there are things to figure out. In addition, governments and businesses need to work together to ensure stablecoins are safe and fair for everyone.
