- A new generation of crypto could replace the rigid and antiquated SWIFT system for international payments. Using stablecoins, businesses can move money around the world almost instantly, with greater certainty, and at lower cost.
- Because the value of stablecoins is pegged to a national currency, often the US dollar, these digital assets do not fluctuate or invite speculation the way Bitcoin and many other cryptos do. The volume of cross-border payments made using stablecoins has grown tenfold since 2020, to $2.5 trillion annually.
- To further cement the use of stablecoins and unlock their significant benefits, we need smart, sensible regulation in the US. Stablecoins need to preserve their stability and be protected against criminals, terrorists, and other bad actors who are looking for untraceable ways to move money.
KEY INSIGHTS:
Across the world, digital payments are already mainstream. In countries like India, Thailand, and Brazil, the vast majority of the population uses a centralized platform to send money instantly from their phones, even if they don’t have a bank account. Users in places like the US and China can pick from a variety of different payment apps. Businesses, too, have a plethora of options. In the US, a bustling fintech sector helps businesses move money cheaply and in real time.
But all these innovations apply only to payments made domestically. Try sending a payment across international borders and you may as well be back in the 1990s. Your payment will take days to arrive and involve multiple institutions — the sender’s bank, the recipient’s bank, and at least one intermediary bank. This flow of money will be dependent on banking hours in the originating and receiving countries, so if you happen to initiate a payment near a bank holiday on either end, the money could take up to five days to arrive — an eternity in the current era. Then there are unnecessarily high costs in the form of exchange rates fees and wire transfer fees.
It’s little wonder that the system that governs all this, the Society for Worldwide Interbank Financial Telecommunications, or SWIFT, was created in 1973. It is long overdue for a replacement.
Enter stablecoins
A powerful, new crypto-based system has emerged to avoid these pitfalls and disintermediate SWIFT. Like all digital assets, stablecoins operate on globally disbursed, decentralized blockchain technology, which is not controlled by any government or financial entity. Thus, stablecoins can be used for nearly instantaneous cross-border payments at any hour of any day, at a significantly lower cost.
But what are stablecoins? Unlike first-generation crypto coins like Bitcoin and Ethereum, which have well-earned reputations for volatility, stablecoins are “stable” because they are pegged to a government-issued, or fiat, currency. Currently, most stablecoins are linked to the US dollar. A single Tether (USDT) or Circle coin (USDC) — the two biggest types — equals one dollar and is backed by a reserve. Issuers typically hold these dollars in a 1:1 reserve in the form of US Treasury notes or cash deposits. In contrast, Bitcoin is not tethered to any set value beyond what people think it’s worth on any given day, which is why it has experienced epic speculative booms and busts.
The predictable value of stablecoins makes them ideal for cross-border payments, especially for global businesses, which incur significant costs when using the SWIFT network. In addition to transfer and exchange rate fees, banks effectively hold a company’s capital hostage. As financial institutions in different countries spend days communicating with each other — exchanging currency, navigating different sets of regulations — money is trapped in-transit, where it isn’t available to fund growth or other opportunities. Recent research found that, at any given moment, nearly $12 billion in working capital is floating somewhere in limbo. While this money lingers, currencies can fluctuate, generating unpredictability and potential losses.
“The predictable value of stablecoins makes them ideal for cross-border payments, especially for global businesses, which incur significant costs when using the SWIFT network.”
Payments with stablecoins, on the other hand, settle almost immediately. They work like this:
- A California-based company needs to make a $10,000 payment to its digital design team in India or make other purchases in India.
- The company purchases 10,000 USDC stablecoins.
- The stablecoins are transferred to the design company’s digital wallet in India, where they can be used to pay employees or purchase office equipment.
- The stablecoins could also be converted into the local currency (the Indian rupee).
Companies like TransFi facilitate such cross-border stablecoin transactions, cutting the transit time to a matter of minutes. Crucially, neither SWIFT nor any banks are involved in the transfer, and both companies and their payers/payees have the security of knowing when their money will arrive.
A booming use case for stablecoins
This isn’t just a hypothetical example. Transactions like these are already happening across the globe. Companies are using stablecoins to pay international suppliers and contractors, make loan payments, issue customer refunds, and pay employees in countries where the local currency is unstable or unreliable.
First introduced a decade ago, stablecoins have surged in use in the past several years. There are now $182 billion worth of stablecoins in circulation. In the 12 months prior to May 2024, these stablecoins have been used to make $2.5 trillion in cross-border payments, representing tenfold growth since June 2020. (This figure accounts only for payments, not high-frequency trading, high-volume institutional money movement, smart contract intermediaries, and the like.) To put that $2.5 trillion in context, Mastercard, which has been around since 1966, reported 2023 volumes of $9 trillion, and PayPal’s volumes have yet to come anywhere near $2.5 trillion annually.
“In the 12 months prior to May 2024, these stablecoins have been used to make $2.5 trillion in cross-border payments, representing tenfold growth since June 2020.”
Another recent indication of the momentum of stablecoins is Stripe’s acquisition of the stablecoin platform Bridge for $1.1 billion in October 2024. Representing Stripe’s largest acquisition, Bridge will allow Stripe’s customers to incorporate stablecoins into their payment platforms. In April 2024, ahead of announcing the Bridge deal, Stripe co-founder and President John Collison said, “We’re seeing crypto finally make sense as a means of exchange.”
Impact on the global financial system
As with any fast-growing, transformative, new technology, it’s tempting to draw sweeping conclusions about the seismic impacts. There’s no question that stablecoins represent a win for global businesses and an existential threat to the archaic and rigid SWIFT system. But will stablecoins topple legacy banks or upend fiat currencies? In our view, both scenarios are unlikely. Since financial institutions are generally agnostic about the types of money they service, banks will eventually acquire the technologies that allow them to transact with stablecoins. However, the fees banks collect from wire transfers and currency exchanges will inevitably decline.
Stablecoins also won’t threaten national money supplies because they aren’t likely to be used for domestic payments. Most countries’ digital payment systems are already seamlessly integrated with traditional banks and operate with little friction. Fiat currencies will remain central to domestic economies due to their widespread acceptance, ease of use, and regulatory backing.
If anything, stablecoins could strengthen fiat currencies, particularly the US dollar. Issuers of dollar-backed stablecoins are already the world’s 18th biggest holders of US debt. Similarly, emerging markets like Turkey, Thailand, and Brazil are leading the way in stablecoin purchasing as a share of their national GDP. Residents in these countries frequently turn to stablecoins as a way to preserve their savings when the local currency loses value.
“Issuers of dollar-backed stablecoins are already the world’s 18th biggest holders of US debt.”
By creating a demand for US Treasury notes, stablecoins are already compensating for recent declines in dollars used for global oil purchases — the so-called petrodollar system that has existed for half a century and is a foundation of America’s economic power. China’s use of yuan to purchase oil from the Middle East and the ongoing global energy transition away from fossil fuels have both weakened the petrodollar regime.
Although many new issuers of stablecoins will emerge, including central banks that will create their own forms of digital currency, we believe that privately issued, US-dollar-backed coins will continue to have significant market share.
The urgent need for regulation
The promise of stablecoins as the currency of global finance is bright. It is also precarious. As appealing as stablecoins are to global businesses, they are even more attractive to criminals who are looking for a stable and secure way to make payments, launder money, or park ill-gotten gains. Without a regulatory framework, there is little to stop terrorist financiers, human traffickers, and illicit drug dealers from flooding the stablecoin market.
To avoid that scenario and establish trust in the system, we need strong and clear rules. We’re not advocating for overbearing regulation. What we need is a smart, sensible regulatory framework that will preserve the ease of using stablecoins while screening out criminal organizations. This will give global businesses confidence that stablecoins are here to stay, and it will encourage legacy banks to facilitate transfers to and from stablecoin platforms. At a minimum, such regulations would include reporting and disclosure standards for all platforms that sell stablecoins and robust capital and liquidity reserve requirements for stablecoin issuers. Holding adequate reserves is a critical factor in the ability of these digital assets to hold their value vis-a-vis the fiat currency.
“What we need is a smart, sensible regulatory framework that will preserve the ease of using stablecoins while screening out criminal organizations.”
The EU’s Markets in Crypto-Assets Regulation (MiCA) is a good template for regulations governing digital assets, including stablecoins. The US, however, has yet to take a proactive or comprehensive approach, instead attempting to regulate through enforcement.
We are hopeful that the year ahead and a change in administration will bring forth a fresh approach from Congress and regulators, one that realizes the value stablecoins can have for global businesses, international finance, and the US economy. The growth of stablecoins looks inevitable. The US should seek to steer this innovation as a force for good.
