Cryptocurrencies have reshaped finance, with stablecoins emerging as revolutionary applications. It is not new that traditional cross-border remittance faces challenges, such as high fees and slow transactions. However, stablecoins, pegged to fiat currencies, offer a transformative solution. Enabling rapid, cost-effective transactions with transparency using blockchain-powered platforms, they enhance security and real-time tracking. Stored in digital wallets, stablecoins ensure both security and accessibility, navigating the complexities of financial innovations at the intersection of traditional finance and the digital frontier.
They play a vital role in the worldwide cryptocurrency landscape, offering both stability and practicality. Recent information from the Brazilian tax authority, Receita Federal do Brasil, reveals a notable increase in the utilization of stablecoins, with Tether’s USDT leading the surge and surpassing the combined trading volume of all other digital currencies in 2022. These digital assets, tied to conventional fiat currencies, have garnered significant popularity, comprising approximately 10% of the overall cryptocurrency trading volume. And the attractiveness of stablecoins lies in providing a secure refuge amidst market fluctuations, making them the preferred choice for a variety of financial transactions.
Noteworthy, is the contrasting experiences of successful stablecoins such as USDT together with the failures of projects such as Facebook’s Libra project underscore the vital relationship between regulatory dynamics and project average 6.2% to send money to loved ones overseas. outcomes. Whilst USDT's success is attributed to regulatory engagement and corporate strategy, the demise of Libra highlights the challenges posed by regulatory hurdles, emphasizing the need for a nuanced understanding of stablecoin projects. Indeed, one wonders whether other non-US-based issuers of dollar-backed digital currencies face pressure from government officials and regulators who fret over who ultimately has access to these new forms of digital payments. Rather bizarre though, as what controls do any governments have over the suitcases of cash that still seem to circulate the globe by nefarious actors? The term "remittance" pertains to the act of transferring funds, frequently by individuals sending money to friends and family, and typically into their countries of origin and is estimated to be in excess of $830billion p.a. This monetary movement holds a pivotal position in the worldwide economic landscape, influencing diverse regions and making substantial contributions to the economies of nations with lower and moderate income levels. According to Migration Data Portal: “In 2022, the top five recipient countries for remittances inflows in current USD were India (111 billion), Mexico (61 billion), China (51 billion), the Philippines (38 billion), and Pakistan (30 billion).” However, unfortunately some of the lowest paid workers who send money to their country of birth e.g. cleaners, security guards, shelf stackers, etc, suffer the fate of being charged on Recent key findings from the World Bank’s June 2023 report include:
· globally, the cost to remit money decreased from 6.25% in Q1 2023 to 6.2% in Q2 2023.
· South Asia has the lowest average receiving cost (4.31%), whilst Sub-Saharan Africa is the costliest (7.92% in Q2 2023).
· banks are the most expensive service provider (12.09%).
· mobile money remained the lowest-cost instrument in Q2 2023.
Global remittances themselves rose in 2021 and 2022, benefitting low and middle income countries and aiding poverty reduction, nutrition and school enrolment. India led in 2022 with $100billion of money being sent to India by overseas workers but India is also considerable money overseas on educating children as according to Live Mint: “An RBI report revealed that parents sent $4,991 million to their children abroad to cover education costs in 2019-20”. The COVID-19 pandemic initially reduced remittances, but they rebounded to $794 billion in 2022. Whilst India's remittances constituted 2.9% of its GDP, low- and middle-income countries relied heavily on remittances accounting for over 15% of GDP in 25 countries in 2022. For example, Lebanon received $6.8 billion in remittances - almost 38% of its GDP. Meanwhile, Tonga relied on remittances which constituted almost 50% of its GDP in 2022. Against this backdrop there is growing evidence that cryptocurrencies such as Bitcoin are being used as a method of remittance, as opposed to using traditional fiat currencies. For example, Tether (USDT) dominates Brazilian crypto transactions, surpassing Bitcoin. Representing 80% of transactions by 2023, it surged since July 2020, hitting over R$271 billion ($49 billion) by October 2023 - nearly double Bitcoin's volume. And, stable amidst industry turmoil, USDT's appeal grows in Brazil - the 9th globally in digital asset adoption. Furthermore, the remittance environment is undergoing transformation through the incorporation of blockchain technology. Emerging entities and start-ups are utilizing digital currency and blockchain technology to provide inventive money transfer services, posing challenges to conventional entities such as Western Union and MoneyGram. The list below shows a small selection of firms which are using blockchain-powered platforms to assist in make sending money between different jurisdictions both faster and cheaper:
· Abra (US) - P2P money transfers via an app, raised $12 million.
· Align Commerce (US) - enables businesses and payment platforms to send and receive payments in local currency using blockchain as a new settlement rail.
· Coins.ph (Philippines) - a Bitcoin exchange, facilitating mobile remittance.
· Volabit (Mexico) - collaborated for instant, low-cost funds transfer.
Interestingly, Japan, the world’s third largest economy in the world has also begun to embrace digital payments. Aligning with regulatory shifts, SBI Holdings has joined forces with Circle to roll out USDC and Web3 services, reshaping Japan's financial landscape. Meanwhile in the US, PayPal's launch of PayPal USD is set to disrupt payments, so testing crypto's real-world viability, by introducing industry competition and prompting federal regulatory discussions. These initiatives have all helped to ensure that the value of the stablecoin market exceeds $150 billion valuation and enjoys a daily turnover often exceeding $509billiona day, i.e., there is real demand and thus liquidity for stablecoins, despite the naysayers… One country which has led the deployment of digital currencies is China’s launching of the Digital Yuan (DCEP) by the People’s Bank of China. This has enabled a digital currency whereby the government is able to ensure centralized control, so reducing cash usage, and giving officials far greater knowledge of what is being spent by whom, on what. Whilst this has led to privacy concerns, let us not labour any illusions that governments do not already have access and control (if they so desire) over our bank accounts - as was seen previously by the Canadian authorities freezing truckers’ bank accounts in an effort to prevent them blockading roads between the US and Canada.
Meanwhile at the DC Fintech Week, US financial leaders were debating the impact of stablecoins, questioning whether they pose a threat or offer true innovation. Michael Hsu, acting US Comptroller of the Currency, saw potential in blockchain's tokenization for settlements but acknowledged persistent concerns about fraud in the crypto space. Correspondingly, Fed Vice Chair, Michael Barr, emphasized the necessity for strong central bank oversight (especially for stablecoins) highlighting the regulatory imperative to manage private money creation for financial markets stability and security. Meanwhile, lawmakers are exploring stablecoin legislation, with discussions on the Clarity for Payment Stablecoins Act and the balance to maintain confidence in financial markets - but ensuring that the US is not left behind as digital assets evolve. However, debates on CBDCs reveal partisan divisions, and also policy progress faces challenges amid potential government shutdowns. In Europe, Fabio Panetta, the Governor of the Bank of Italy, has stressed the potential hazards of forgoing the issuance of a digital euro, accentuating the importance of diminishing dependence on international payment networks such as Visa and Mastercard. He has pointed out the difficulties confronted by EU initiatives striving to rival these networks, acknowledging increased costs even in the presence of Interchange Fee Regulations. Panetta has also reflected on the BigTech threat, emphasizing competition, privacy concerns and the risk of tech companies launching their digital currencies, so posing risks to the payment system, monetary sovereignty and financial stability. Whilst privacy concerns around the digital euro are acknowledged, the true worry lies in stablecoins enabling BigTech to undermine central bank power. And despite Panetta's role in the Bank of Italy, he also continues to play a crucial role in EU wholesale DLT payment initiatives.
So, what is the future for stablecoins and digital payments services and products? In a financial landscape reshaped by digital assets, stablecoins emerge as revolutionary game-changers. As traditional cross-border remittance grapples with hurdles (i.e. vested interest from traditional players, high fees and sluggish transactions), stablecoins, which are tethered/linked/pegged to fiat currencies, emerge as a transformative force. With these considerations in mind, the question beckons: Are these digital instigators laying the groundwork for a fresh era of financial stability, or are we at the edge of unforeseen challenges that might reconstruct the core of our monetary systems?
This article first appeared in Digital Bytes (5th of December, 2023), a weekly newsletter by Jonny Fry of Team Blockchain.