Will stablecoins replace traditional international money transfers?

Stablecoins, cryptocurrencies pegged to fiat currencies, have the potential to replace international money transfers. While the latter takes between one to five working days, a transfer of stablecoins takes a couple of minutes and is far cheaper. But it’s not the only reason. Let's look at why they are gaining traction.

Stablecoins emerged in 2014 as a counterpart to cryptocurrencies such as Bitcoin and Ether which are renowned for their volatility. Stablecoins as their name indicate aim at eliminating the volatility by being pegged 1:1 to either a fiat currency, most often the US dollar, or precious metals.

Stablecoins are the largest asset class in the crypto universe behind Bitcoin and Ether, with their total market share oscillating around 10 percent. This figure jumped to as much as 17.8 percent following the collapse of the crypto exchanges Terra-Luna and FTX in 2022, as investors rushed to stable crypto assets. Tether is by far the largest dollar-pegged coin, tracked by USD Coin, Dai, Binance USD, TrueUSD, USDD, Pax Dollar and many more. Read more about the main crypto assets here.

Immediate transaction & low costs are its key main advantages

Stablecoins are ideal for cross-border payments and remittances as the transactions carried out on the blockchain are next to immediate. We’re talking seconds or minutes compared to the one to five working days involved when traditional international bank transfers are carried out. These generally go through the SWIFT network, which provides secure financial messages between banks.

The transaction costs involved with stablecoin transfers is also low, 65 cents on average on the Ethereum network, 21 cents on average on the Binance Smart Chain and 1.8 cents on average on Polygon, a compilation made by the website Help with Penny shows. This is unbeatable compared to the costs involved with traditional international bank transfers.

By 2028, the value of cross-border stablecoin payments is set to represent roughly three quarters of the total stablecoin transactions globally, Juniper Research predicts.

“Stablecoins can be highly effective, as they remove stages in the cross-border process, increase speed of transactions and settlements, and greatly improve traceability,” the analyst house specializing in fintechs and market trends said.

Potential to reap 40 percent of total payment volume

Up to 40 percent of the total payment volume could be transacted in stablecoins in the future, as they could become the asset of choice for individuals in regions with limited access to traditional banks, the CEO of Bitbond, Radoslav Albrecht, predicted at the European Blockchain Convention held in February 2023. 

We’re talking about a large figure, about 1.4 billion people that still are unbanked, according to the World Bank. This amounts to almost a quarter of the global population. All they would need to bank is an internet connection and a digital wallet containing stablecoins.

Online payment players enter the stablecoin market

PayPal for instance launched its fully backed stablecoin PayPal USD on August 7, 2023. Its stablecoin issued by Paxos Trust Company is fully backed by deposits in US dollars, US Treasuries or other cash equivalents and of course redeemable 1:1 into US dollars.

“This announcement is a clear signal that stablecoins—if issued under a clear regulatory framework—hold promise as a pillar of our 21st century payments system,” said the Chairman of the House Financial Services Committee, the Republican Congressman Patrick McHenry. “Clear regulations and robust consumer protections are essential to enabling stablecoins to achieve their full potential.

McHenry filed the Clarity for Payment Stablecoins Act, aiming at establishing a clear legal framework for stablecoins in the US in July 2023. The bill is now in the hands of the US Congress, where it will be debated and voted upon.

“We believe that it would be appropriate to have quite a robust federal role in what happens in stablecoins going forward,” Jerome Powell, the chair of the Federal Reserve, said at hearing held at the US Congress in June.

Regulations in place or on their way

The Financial Stability Board (FSB), an international body that makes recommendations about the global financial system, in July 2023 actually issued a report recommending global stablecoin arrangements regulating, supervising and overseeing stablecoins.

These global arrangements ought to have “effective risk management frameworks in place that comprehensively address all material risks associated with their functions and activities, especially with regard to operational resilience, cyber security safeguards and anti-money laundering (AML)/counter-terrorist financing (CFT) measures.”

The EU is one step ahead of the US, as the Markets in Crypto-Assets Act (MiCA) entered into force earlier this summer. MiCA covers stablecoins.  The act sets clear requirements for private stablecoin issuers to maintain appropriate minimum liquidity as a reserve. In the UK, the Financial Services and Markets Act 2023 was voted through the country’s parliament earlier this summer and will enter into force later in August. This act will notably give the UK regulator the power to supervise stablecoins.

Risks nevertheless exist

There are of course risks associated with stablecoins just as there are with any other financial asset. One of these is the centralization risk. Some of the stablecoins are centralized such as Tether and USDC, TrueUSD (TUSD), PAX… Unauthorized third parties can then block or access these. Concerns have also been raised about transparency in their operations and financial backing, accountability, and potential regulatory risks.

Another risk is the counterparty risk. Centralized stablecoins rely on the reputation of the issuer and the reserve backing the stablecoin. If the issuer runs into financial difficulties or goes bankrupt, the value of the stablecoin may be jeopardized. The collapse of algorithmic stablecoin TerraUSD (UST) in May 2022 is a good example. It was at the time the third-largest crypto asset in the crypto universe behind Bitcoin and Ether. Its collapse lead more than 450 billion US dollars in asset value being destroyed in crypto and decentralized finance (DeFi), according to the Bank for International Settlements.