Although cryptocurrency is still in nascent stages, 91% of crypto holders believe it’ll become as common as card payments. Despite making major strides, existing electronic payment systems suffer in regards to cost, efficiency and access.
Legacy systems still fall short of providing access to financial services to 1.7bn adults or efficient cross-border retail payments. Blockchain technology brings the benefits of faster settlement, access to new customers and lower barriers to entry.
Blockchain networks handle international transactions in minutes as opposed to the traditional days or hours. They can settle transactions for under $0.01, considerably cheaper than traditional payment card networks. The rise of stablecoins has highlighted shortcomings in traditional cross-border payments. Studies show that distributed ledger technology improves the efficiency of cross-border payments and blockchain technology could help banks save $27bn by 2030 on international transactions.
Cross-border payments matter. They account for 15%-20% of ecommerce value. Small- and medium-sized enterprises, making up 90% of businesses and 50% of jobs globally, need easier access to international payments. Remittances are a $589bn market and a major source of capital for developing countries. They are also a lifeline for 281m migrants. Cryptocurrency is making a dent in this market, dominated by international operators, with Africa seeing $562m worth of cryptocurrency inflows. Although various forms of cryptocurrencies are used for payments, stablecoins and central bank digital currencies have won favour for their stability. Stablecoins are primarily used for trading, lending or borrowing digital assets, but could become used widely as a means of payment if well designed, interoperable and buttressed by regulatory guardrails.
Payments giants are taking notice: Visa’s network allows people to settle transactions in USD Coin, a dollar stablecoin, and Moneygram partnered with Stellar to offer stablecoin for fiat remittances in India. International remittances cost an average of 6.4% for $200. A transaction could involve up to four intermediaries. Fluctuating exchange rates exacerbate inefficiencies. And the burden is disproportionately borne by underprivileged segments, with fees for cross-border retail payments reaching 10%.
The Financial Stability Board wants to get remittance fees to the UN sustainable development goal of 3% and 1% for retail fees by 2027. International stablecoin transactions cost less than 0.1%. Sending crypto to another user on the Binance Smart Chain costs between $0.01-$0.10.
Cross-border retail payments can take days to clear due to the number of intermediaries. Crypto transactions clear within seconds; a great way to meet the FSB’s target of clearing 75% of transactions within one hour.
All financial institutions must have a cross-border payments option, for retail, wholesale and remittances. Cryptocurrencies can address access challenges such as multilateral settlement eligibility and the lack of correspondent bank relationships.
Users must be provided with information about how much a transaction will cost, how long it will take, its status as well as terms of service – all automatically visible in a blockchain’s public ledger.
These improvements are consistent with the G20 Roadmap for enhancing cross-border payments and its four challenges and targets, covering cost, speed, access and transparency, to be met by 2027.
CBDCs offer ‘the unique advantages of central bank money: settlement finality, liquidity and integrity,’ with emerging markets leading on adoption. Interoperable CBDCs are key for cross-border payments. Interlinking CBDC systems through a hub and spoke or single system might bring more improvement to the market than compatibility or single access points. International co-operation in early stages is necessary to address underserved cross-border corridors. Crypto for payments regulation should follow a risk-based approach specific to the tool’s structural features, usage and risks.
With risk management and regulatory guardrails, stablecoins and CBDCs could become the go-to payments solution for cutting edge technology, such as in the metaverse. Stablecoins have been critical to decentralised finance’s. The future of payments, backed by new digital currencies, is looking bright.
Rana Kortam is Director of Global Public Policy at Binance.