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Cryptocurrency usage is rapidly increasing, as demonstrated by over 100% growth per year, and has far faster adoption than the internet during the early 2000s. Even if the growth rate slows down to 80%, crypto will still reach one billion users by 2024.
One of the major goals of cryptocurrencies has been to redefine global payments. Although global payments have significantly evolved over the years, the bulk of the systemic efficiencies complemented widely used currencies such as the U.S. dollar or euro. The result has been that international transfers originating and terminating in developed countries have become more cost effective and faster. But transfers terminating or originating in emerging economies have not become as cost effective, nor have the settlement times become as fast.
As cross-border payments from emerging markets are slow, expensive, and take several days to complete, even in 2022, the question still remains: how do we take international transfers to the next level?
This is where the rapid adoption of cryptocurrencies can help support financial inclusion and accelerate the benefits of financial system efficiencies to emerging markets.
The answer lies in one specific type of cryptocurrency: stablecoin — the least volatile of them all. Stablecoins are built to not fluctuate in price while still giving users the benefits of crypto. Their value is tied to other assets such as government-issued currency, like the U.S. dollar, precious metals — gold, for instance, and algorithmic functions.
Need for a better remittance solution for emerging markets
International transfers or remittances are mainly seen through the lens of people living abroad in developed countries sending financial support to their friends and families in developing countries. In fact, in 2021, transaction volume reached $589 billion, according to the World Bank.
While the remittances originating from developing economies to developed economies are lower in volume, they are certainly not insignificant as they are in the range of hundreds of billions of dollars. These types of international transfers are still in need of better solutions.
A user of an emerging country is at a disadvantage due to the financial system that includes severe challenges for international money transfers, starting with a huge exchange fee markup of about 10%, high transfer fees and an extended settlement time of up to 5 days. In fact, according to the World Bank, depending on the destination country and the type of service utilized, a $200 remittance can incur costs ranging from 5% to 9.3%.
On the other hand, stablecoins such as USD Coin (USDC) are already integrated with global payment networks such as Visa Inc., allowing transaction settlement using USD Coin. Moreover, according to McKinsey & Co., two popular stablecoins, USDC and Tether, have completed transactions worth $3 trillion during the first half of 2021.
What’s more, recently, Facebook and Coinbase decided to develop and incorporate into their services stablecoin-based international transfers. However, they still operate in mainstream payment corridors — from developed to developing countries. For example, Novi — a Facebook-based digital wallet, allows transactions from the U.S. to Guatemala, but not the other way around. And that’s what needs to change.
As stablecoins are resilient to the price volatility experienced by traditional cryptocurrencies such as Bitcoin, they can serve as a bridge between crypto and fiat, specifically for the payment use cases.
Limiting third parties through crypto for overseas transfers
International money transfers, when done traditionally, often involve up to four intermediaries. This traditional settlement process incurs a high transfer cost, as every provider involved adds their service fees, and this multi-party settlement results in a delayed transfer process.
For example, when sending a remittance abroad, a consumer in the originating country has to pay a transfer fee to a Money Transfer Operator (MTO). These MTOs are financial institutions, not necessarily banks, that facilitate overseas fund transfers utilizing either through their internal settlement network or through a third-party international banking network such as SWIFT or using a larger Remittance Service Provider. In addition, an MTO may be required to pay for payment network setup, usage-based subscription, and system maintenance on a regular basis.
As a result of this settlement process, the recipient collects fewer funds in the destination country’s currency after the deduction of transfer fees and expensive currency conversion.
Facilitating this settlement process through cryptocurrencies will thus reduce the number of intermediaries as it enables direct funds transfers between sender and receiver, thereby reducing transfer cost and settlement time.
Stablecoin settlement as an alternative to SWIFT
Crypto worldwide usage jumped over 880% during 2021, with P2P platforms driving cryptocurrency adoption in emerging markets. Not surprisingly, Vietnam and India are at the top of global markets in terms of cryptocurrency adoption by individual consumers.
This broad adoption of crypto in emerging markets presents an opportunity to facilitate international money transfers through stablecoins settlement. Although, at first glance, this may appear as an expensive solution because of costs associated with both on-ramp at collection and off-ramp at payout. But, with the current crypto adoption rate, both on-ramp and off-ramp costs are already competitive compared to the global average in a few payment corridors.
As cryptocurrency adoption continues, facilitating international money transfers from many other emerging markets would become faster and cheaper than traditional payment rails. Specifically, with the enhanced role of stablecoins across global payment networks for settlement, these sets of cryptocurrencies will power the next generation of international money transfers.
A good use case for this stablecoin settlement process from the emerging markets could be the international education market. As the majority of 6 million international students originate from emerging countries, a cost-effective and faster way of cross-border payments saving billions of dollars is undoubtedly the need of the hour.
Abhinov Balagoni is CEO and founder of Pax Credit.
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