On stablecoins and cross-border payments

The hypothesis for stablecoins is simple: payments — the movement of financial value from one account to another — is broken in ways that open, decentralised ledgers can fix. Most people who interact with modern payment systems would agree that we are further ahead technologically than they reflect. Most notably, we can send messages to one another in milliseconds regardless of location and volume. Still, it often takes hours or even days to move money across countries despite message transmission being a significant part of digital payments. Stablecoins are a bet that blockchain technology with tokens that can be sent peer-to-peer can remedy payments. This article explores that bet, specifically for fiat-pegged stablecoins (simply ‘stablecoins’ moving forward) in cross-border payments.

While still a nascent payment method, stablecoins are growing in adoption and usage. Over the last decade, the value of USD stablecoins in circulation has grown from $20 Million to over $150 Billion. In April 2024, stablecoins were used to transact over $2.5 Trillion, a 300% increase in monthly transaction volume compared to the same period in 2023. Even in the conservative case that excludes smart contract transactions and automated trading, stablecoins process up to one-sixth of Visa and Mastercard’s combined volume in payments. Visa’s Crypto team estimates the volume of payments initiated directly by end-users and businesses via stablecoins to be about $250 Billion¹ monthly.

How stablecoins work

Stablecoins are typically created, issued and managed by private companies such as Circle, Tether, and recently PayPal. These issuers raise funds from various sources and keep them in relatively liquid and low-risk assets such as bank deposits and government bonds. They then ‘mint’ (crypto-speak for issuing new units of a token) an equivalent amount of these assets on a blockchain.

When a user deposits dollars to purchase the stablecoin, the issuer mints new assets. When they withdraw, the issuer ‘burns’ the equivalent value on-chain. In a smaller, less sophisticated system this would happen with every transaction. However, in practice, most users deposit and withdraw through applications that hold a stock of the tokens, and minting and burning only happen when the volume of tokens in circulation changes.

Stablecoins have functionality that corresponds to the standard of fungible tokens on the blockchains they’re issued on. For the most part, this means that they can be sent from one wallet to another, and be used in smart contracts for specialised on-chain transactions such as lending, borrowing, staking, token swaps etc.

Cross-border payments today

Ultimately sending money via any payment method is a system of transmitting messages and updating ledgers through parties that are authorised to do so: banks, card schemes, payment networks, and non-bank financial institutions. Each of these entities owns and controls internal ledgers that represent the balances of their customers and are used for transacting on their behalf.

As the amount, currencies, entities, and countries involved in a payment increase, the complexity compounds in terms of fees, speed, and compliance requirements. Most cross-border payments in emerging market corridors (e.g. Nigeria to the US) look like:

Money gets to the right place and person most of the time, but it can be pretty expensive, slow and difficult to trace. In 2024, it costs about $75 and takes one to five days to send $500 from Nigeria to the US². In an increasingly interconnected world where we work, trade, and cultivate personal relationships across borders, it is a significant problem that money doesn’t move quickly or efficiently once it involves multiple countries. Other payment methods like cards provide a speed improvement to end users but fall short in other areas. Card schemes like Visa and Mastercard maintain a network of merchants, issuers and acquirers that facilitate cross-border payments. This is often much faster than direct bank transfers, but can still be expensive, restrictive, and fraud-prone.

In theory, stablecoins offer several benefits over these systems of payments. Because they can be sent peer-to-peer on open blockchains, they could be used as a set of shared ledgers among the parties in a payments system. This ideally should result in improvements in costs, speed, accessibility and transparency for end users.

What can stablecoins provide?

The features of stablecoins are typically location-agnostic because the public blockchains on which they run are borderless. This means that, sending 1000 USDC from wallet X to wallet Y when both users are thousands of miles apart costs the same and is just as fast as if they’re in the same room.

Stablecoin payments are generally cheaper and faster than other payment methods because they don’t require intermediaries to move funds. Traditional international transfers require a banking relationship between the sender’s and recipient’s banks. Since there are thousands of banks worldwide that could be involved in a transaction, they rely on a system of correspondent banks that act as intermediaries, each charging fees for their services and extending the time it takes to deliver the funds. In contrast, with stablecoins, any two users or wallets on the same network can directly send payments to each other, eliminating these intermediary costs and delays.

An added benefit of not depending on intermediaries who each have their own closed ledgers is the increased visibility and trackability of funds for users. There’s a huge gap between the current state of international transfers and the desired level of transparency: users often have to wait days before knowing if their transfers have failed or succeeded. In applications that support on-chain transfers, users can by default track the status of their transactions by querying the blockchain or using third-party tools even if the app doesn’t provide an interface for it. The obvious downside to doing this is the potential lack of privacy. While we want visibility into our payments, we want to be able to restrict others from seeing all of our payment history. For stablecoin payments to become mainstream, providers will need to make it sufficiently challenging for external parties to trace transfers to specific users. This is pretty much the experience with centralised exchanges such as Coinbase and Kraken today and will require technical investment to replicate in decentralised wallets (Metamask, Trustwallet etc.). However, what is important to call out is that the technology natively supports transaction tracking across the entire flow.

Additionally, stablecoins like other blockchain tools enable real-time settlements. Blockchains work 24/7 and on weekends, giving users and businesses faster access to their funds regardless of the time of day. While there is an argument to be made for holidays and breaks within payment systems as a tool for fraud control, real-time payments (RTP) aren’t novel to blockchains and stablecoins and there are approaches across the payments ecosystem to derisk them. More than 70 countries including Nigeria, Brazil and the Netherlands support real-time payments today for domestic transfers⁴.

Finally, and most compelling, is that applications built on public blockchains are interoperable and don’t require specialised integrations to work together. In a world where apps like PayPal, Cash App and Venmo had USDC support, users could easily send USDC from Accrue (Nigeria) to CashApp (US) and back. One of my favourite products that I’ve contributed to, Sendcash, is designed around this attribute — it accepts Bitcoin and USDT deposits and makes remittance payments into local accounts, making it interoperable with other global products that support on-chain transfers by default.

What are stablecoins missing?

Realising these benefits is contingent on several non-technological factors that are critical to payment systems. These factors are multi-faceted and span politics, compliance, regulation, and scale, and present the most significant hurdles that any payment method must scale to succeed.

First, stablecoins are not accepted as settlement currency by most economic actors and need to be converted to fiat at a certain point. Today, that point is often too early for many customers to realise their cost and speed savings. If my friend sends me 100 USDT, but I immediately have to convert it into ZAR to pay a local restaurant, the off-ramp costs determined by other payment methods will erode most of the value gained in the initial transaction. One of the most critical challenges that stablecoin issuers must overcome to facilitate adoption is delaying the point in the flow of funds where the token has to be converted to settlement currency. Like any other payment system, widespread acceptance requires network effects: the support of merchants, service providers, financial institutions and other customers that accept stablecoins. It has taken card providers decades to build the level of acceptance that they now enjoy, and will likely be no different for stablecoin issuers. There have been some interesting developments around this in recent years. In 2023, Visa rolled out a pilot program⁴ to enable issuers of its crypto-backed cards to settle acquirers in USDC on Solana. It is one of the first implementations that takes advantage of stablecoin payments end-to-end. Users pay with USDC, the card issuer settles the acquirer platform USDC, and the merchant can also receive USDC at the end of the transaction.

The fragmentation of stablecoins across providers and chains makes the acceptance problem even more challenging. The costs and latency compound as users need to bridge from tokens on one chain to another before being able to use their funds. Eventually, the providers and chains with the biggest acceptance networks will win, and applications will need to abstract the diversity of chains and tokens away from their users. This is important because cross-border payments are a chain-agnostic use case. Users want money sent from person A to person B and will opt for the quickest, cheapest and easiest way to do so regardless of the underlying technology.

As acceptance increases and the technology becomes more established, KYC and AML compliance will become increasingly critical. These checks, while crucial for fraud protection, contribute to the speed, cost and restrictions involved in cross-border payments. If stablecoin networks are to be used globally for settling retail and business payments, they will need to comply with the relevant regulatory frameworks. So, some of the existing costs and delays will continue to impact stablecoin users, albeit with less severity since there are fewer intermediaries required. However, stablecoins will not eliminate the restrictions. As a Nigerian passport holder (who is not a compliance expert), I consider current KYC regimes to be fundamentally flawed and biased, but that is a political issue rather than a technological one. Unless KYC systems and the politics that influence them evolve to identify individuals beyond just their ‘country of origin’, stablecoins will have the same restrictions as their traditional counterparts, particularly for individuals and businesses in the global South.

Addressing these challenges is non-trivial and requires support and investments from governments, regulatory bodies, and financial institutions — all notoriously and justifiably risk-averse entities. For instance, non-US governments are often disincentivised from supporting USD-pegged stablecoins. The widespread adoption of these stablecoins could lead to them being preferred for local transactions, resulting in a dollarisation of their economies. Such a scenario would undermine the ability of those governments to implement monetary policy and will make them even more vulnerable to shocks within the US economy. In the US, stablecoin issuers are on track to become the largest holders of US debt within the next decade⁵. This growing influence would make them systemically important and will mean even more government scrutiny and activity in the space to ensure that they are resilient and are less impacted by volatility from the rest of the crypto ecosystem.

Additionally, stablecoin application providers will need to emulate the current players in financial systems today and abstract away the risks and complexities of transactions from everyday people and businesses. Consumers often rely on their banks to catch fraudulent activity and protect their interests in transactions. Merchants depend on their payment providers to handle tax deductions across different geographies and screen payments for them. These are all value-added services that customers have come to expect in payments. Direct peer-to-peer payments give customers more responsibility than they want and are equipped to handle. Crypto advocates espouse the idea of extreme self-custody that makes everyone their own bank, and while that is valuable in certain contexts, most people want to outsource the problem of ensuring that their funds are safe to their banks, financial institutions and governments — yes, governments. I believe the future of widely accepted and globally impactful stablecoin payments includes providers at different layers of the stack who handle these for their users and merchants.

I envision the stablecoin landscape evolving to look similar to the card payments stack but with an open network. Rather than direct payments between users, the process would involve senders interacting with the smart contracts of infrastructure providers who would likely be wallets providing this functionality through a simple interface. These contracts would perform the necessary fraud and AML checks and handle tax deductions before forwarding the payment to the recipient’s wallet. Merchants will have wallet providers who will act as acquirers that provide them value-added services e.g. the ability to take loans, a pretty payment page with tech to easily accept crypto transfers etc.

The first two layers could introduce some fees, and the second will introduce some latency, but the bet is that those are offset by the efficiency from the bottom two layers, and result in better value for users overall.

I’m personally curious — both as a user and as someone interested in cross-border payments and commerce — about how this space continues to evolve. Here are a few products I’m currently watching that offer cross-border payments powered by stablecoins/crypto:

• Sendcash
• Accrue
• Sling Money
• Daimo
• Beam

References

• ¹Visa on-chain analytics dashboard
• ²GTB International transfer tariff guide
• ³Mastercard on RTP
• ⁴Visa USDC settlements case study
• ⁵Stablecoins & US Debt
• Cross Border Payments Explained (Stripe)
• Payment and Settlement (Bank of England)
• BIS Stablecoin paper
• Visa factsheet
• Mastercard Earnings Release
• Visa Annual Report
• BitsaboutMoney on Bank Holidays