Commercial Remittance with Stablecoins (Borderless Crypto Banking)

Categories: GeneralPublished On: July 14th, 20206.2 min read

How stablecoin transfer works

Stablecoin transfer works by moving currency conversion and cross-border remittance into the digital asset space. This allows them to benefit from a multitude of advantages baked into the blockchain technology underpinning the digital asset space, and escape a world of unnecessary fees and idelays. In the past, remittance across a national border might go something like this.

Bizco owes $1m to CompanyCorp. The remittance is made via the international banking system through tools like SWIFT, meaning Bizco tells their bank to move $1m from their account to CompanyCorp’s account at another bank in a different country where they use Euros or Yen, not US dollars.

Both banks take a cut. Whichever one handles the currency conversion takes another cut, and usually offers a conversion rate less favorable than the market rate. Both banks take a long time, up to a week and sometimes more. The process is slow and expensive.

Now, Bizco can just buy $1m worth of crypto, whether by creating their own stablecoin or utilizing an existing offering, and pay it straight to CompanyCorp’s account. They need to withdraw the dollars from their bank to make their initial purchase, and CompanyCorp needs to change it into their own country’s fiat currency at their end when they move it off the exchange. But other than that, the whole process takes place on a digital exchange that doesn’t need the say-so — or the fees — of the traditional financial world. With decentralized blockchain technology there’s no need to rely on third parties to arbitrate or guarantee transactions, meaning payments can be much more secure — and much faster.

There’s obviously good reason for companies to do transactions like this in stablecoins: they won’t lose value on the way to the payment.

Stablecoin transfer: the pros and cons

Stablecoin transfer is susceptible to the following problems:

Blockchain transactions are not overseen by a central authority, meaning only the party with access to the receiving address can return a mistaken payment.
Some exchanges are less secure than others; centralized exchanges are less secure, but have better liquidity, while for decentralized exchanges the reverse is true. (This problem can be mitigated to some extent using wallets, which can also be linked to fiat bank accounts
Ease of use. The UI of many exchanges is a far cry from the intuitive, attractive interfaces we’re used to dealing with. Less of an issue for business than for consumers, this still makes a difference.

However, they also deliver the following decisive advantages:

Lower transaction fees. There’s no additional cross-border transaction fee and no currency conversion fee to pay, and crypto baseline transaction fees are low.
They’re inflation-proof and stable. Pure cryptocurrencies are volatile — just look at Bitcoin’s valuation history. And fiat currency is always susceptible to inflation. But stablecoins retain the value of their underlying asset, meaning when they’re based on a price-stable asset they can remain stable for decades.
They’re fungible. Stablecoins can be transferred anywhere near-instantly, making them a vastly preferable form of cross-border payment for both remittance and investment.

Cost comparisons: stablecoin vs traditional remittance

Of the advantages offered by stablecoin, cost is the most clear and immediate. The option to stop spending money when you could keep it has universal appeal. But how do the real costs stack up?

Typical traditional cross-border remittance incurs fees for processing, cross-border transactions, and currency conversions, as well as waiting times of up to a week and sometimes more. In 2015, McKinsey found that:

Cross-border transactions ‘represent 20% of total transaction volumes in the payment’s industry, yet they generate 50% of its transaction-related revenues.’
Retail users ‘typically pay a fee of €20 to €60 [$22 to $65]’ on top of the currency conversion spread
Average transaction time was three to five business days — ‘although most cross-border payments could in theory be executed in one to two days.’
‘60 percent of business-to-business (B2B) payments require some kind of manual intervention, each taking at least 15 to 20 minutes.’

Globally, the average remittance cost is around 7.5%. The markup for currency conversion differs between companies — with Western Union it’s around 1.5%.

Traditional remittance is a cash cow that takes a week to do a few minutes’ work and charges you 9% or more of your principal for the privilege.

By contrast, stablecoin remittance is shockingly inexpensive. On Kraken, fees vary based on volume; they top out at 0.20% of principal: over forty times cheaper than traditional remittance.

Current state of stablecoin remittance

Stablecoin remittance is still in its early stages, but growing rapidly. The traditional remittance structure still accounts for the vast majority of business and consumer remittance activity despite its clear shortcomings.

Traditional crypto brought to the table instant, very low-cost transfers, but was too unstable to be attractive to businesses and despite its creators’ intentions has largely been used to store rather than to exchange value. But stablecoins offer something different: price stability inherited from their underlying asset, and the instant, low-cost transfers of a trust-less blockchain.

Stablecoin remittance is expected to grow through B2B first. Consumers will typically wait until a product is user-friendly before large numbers adopt it, and crypto exchanges are still a niche way to pay. Suspicion, ignorance and unfamiliarity with the interface will all deter the hundreds of thousands who send regular remittances to relatives and friends across borders, and they will remain loyal Western Union customers or TransferWise enthusiasts for some time to come.

Businesses, however, will move to stablecoins much faster. A greater willingness to engage with new technologies when there is clearly profit in doing so partly explains this. But businesses stand to gain far more money than consumers because the sums involved in remittance are vastly larger. Nine percent of half a million dollars is worth learning to use new tools for.

Typically, new tools like this are adopted by smaller businesses first — not ‘mom and pop’ operations, but growing SMEs (Small and Medium Enterprises) looking for an edge. Very large enterprises tend to come to the party a little later and buy facilitated enterprise solutions that service their whole organization, and we can expect to see the same pattern play out in the stablecoin remittance space.

What services should businesses be looking towards?

We’d expect to see businesses demand: