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Stablecoins, like the broader cryptocurrency industry, have often been dismissed as a solution in search of a problem. That’s a bit unfair, though. When it comes to high-cost cross-border payments, crypto fans have actually identified a problem where stablecoins could be helpful — just not for the reasons some cheerleaders think.
Stablecoins are a type of digital currency that runs on a blockchain, as bitcoin does, but whose value is pegged against a regular currency. Fintechs and mainstream banks have touted them as a way to revolutionise international transfers, particularly in the US. Stripe and PayPal are enthusiasts; so are Bank of America and JPMorgan, participants in the Zelle bank-to-bank payments network.
Globally, the average price of sending a $200 remittance is more than 6 per cent of the transaction value, according to the World Bank. Businesses too get saddled with high fees. Stablecoin evangelists reckon they can slash those rates by using better technology and cutting out intermediaries.
The market is so huge that even taking a small fee for facilitating transfers quickly adds up. Estimates of the annual value of cross-border payments range from the extremely large — about $200tn, according to FXC Intelligence — to the mind-boggling — one quadrillion dollars, according to a recent IMF paper. That’s 15 zeros, for anyone unfamiliar.
Yet several fintechs have already proven it is possible to slash payment costs without inventing a whole new — energy-intensive — technology. London-listed Wise, for example, moved £85bn across borders in the six months to September, charging an average rate of just over 0.5 per cent.
Wise says it’s agnostic about the type of technology it uses, and would happily use stablecoins if they made transfers cheaper. So far, it remains unconvinced. Its costs are driven as much by keeping up with anti-money laundering rules and other regulations as they are by challenges relating to software and systems.
This is probably the biggest challenge for stablecoins. By rights, they should face at least some of the regulatory costs currently borne by the companies and platforms they are trying to usurp, which would limit their ability to beat their predecessors when it comes to conversion spreads and other fees.
Users of Coinbase’s “advanced” service, for example, could buy and transfer Circle’s USDC coin very cheaply, at least in developed-market currencies. But a newly signed-up user of its default service would pay a 0.5 per cent foreign exchange spread, plus a transfer fee to send the money to another account. The recipient may pay again to convert it back into fiat currency.
That’s not to say stablecoins don’t have a role in upgrading the financial system. One reason international payments have historically been so expensive is that customers are confronted with an oligopoly. While choice was limited to a few large banks and specialists like Western Union, providers could get away with charging high opaque fees.
Entrants like Wise and Revolut in the UK have already forced mainstream banks to respond by lowering their own charges. A flood of new players in the US and elsewhere could do the same. The technology underpinning stablecoins is clever, for sure, but the real game-changer could simply be good old-fashioned competition.
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