In 2023, we have seen stablecoins - cryptocurrency designed to have a relatively stable price, typically by being pegged to a commodity or fiat currency – being embraced by some of the biggest payment players like
Visa and
PayPal.
Despite being less than a decade old, more than 11 trillion in stablecoins were
settled on-chain in 2022, accounting for around 70% of
all blockchain transactions, according to
Castle Island Ventures. The role of stablecoins in global money movement is growing and looking to 2024, this trend seems likely to continue.
A major reason for this is that they give fintechs and their merchants a solution to issues around settlement time, high foreign exchange fees, and payments out of business hours.
Available 24/7 on blockchains, stablecoins allow for payments to be made faster, more cost-efficiently, and at a global scale. These benefits are clear, but many businesses remain tentative about getting involved in this burgeoning digital currency.
Finextra spoke to Chris Harmse, co-founder at BVNK; Yiannis Giokas, senior director, Moody’s Analytics; and Andrew Thomas, commercial solutions director, Freemarket about how they’re considering or currently using stablecoins, where the opportunities are,
and what is holding the market back.
How are fintech firms currently using stablecoins?
The primary use case for stablecoins at the moment is cross-border payments, particularly when emerging markets or exotic currencies are involved.
Harmse describes this as the first “painpoint” that stablecoins solved for BVNK and its merchants: “We were working with EU and UK payment service providers (PSPs) and merchants who were contracting with local market PSPs to do card processing for them.
Those local markets’ PSPs generally didn’t have cross-border payment capability. Payments would be processed in the local markets and money would get stuck there. Effectively, we started doing cross-border payments by providing on-ramp infrastructure in the
local market. So we collect in the local currency, get it into stablecoin, move the money on the blockchain, off-ramp and settle in Euros and GBP – at three or four times the speed it would have taken via traditional banking networks.”
B2B payments provider Freemarket, are in the process of integrating stablecoins into their product. For them, the decision to offer stablecoin payments has been driven by customer demand. Thomas says: “The use and development of stablecoins is one of our
key priorities. We're seeing more and more volume and need from our customer base for the use of stablecoins particularly as a complement and replacement for cross-border transactions on the Swift network, because of the speed and the price of the settlements.”
Giokas adds that “many payment providers we work with are trying to reduce settlement time and want to be able to operate when the markets are closed or during weekends. If you try to settle that kind of transaction today, it takes T+3 to settle but if you
are settling in stablecoins, it’s almost instantly, 24/7.”
Harmse adds another use case: using stablecoins as treasury assets. Andrew Thomas agrees and says: “Interestingly, this year, I've seen more customers and clients of ours willing to run their complete treasury in stablecoin as opposed to off-ramping on-ramping
into fiat whenever they require it.”
Finally, Giokas, who has observed the use of stablecoins in trade to provide a temporary stable position, provides another use case and mentions that: “Individuals and cooperations trading cryptocurrencies are using stablecoins because if they had to off-ramp
to US dollar, or any other currency, and on-ramp again, there would be a lot of fees and a load of delays. It will affect their ability to trade fast.”
What areas of potential growth are there for stablecoins?
No longer just a high-speed bridge for cross border fiat payments, increasingly, stablecoins are appearing at the end of the payment journey too, as a payout currency for consumers or a settlement currency for businesses.
Earlier this year,
Visa announced they were extending their stablecoin settlement capabilities to merchant acquirers like WorldPay. Harmse says this
opened up a whole new settlement option for merchants and avoids the inefficient on- and off-ramps entirely, simplifying the experience: “Visa has unlocked a new 24/7 settlement rail, which reduces the need to prefund for a lot of issuers. In doing so, they’ve
also really rubber-stamped stablecoins as a global settlement currency.”
Businesses accepting retail payments in stablecoins, particularly in markets where crypto adoption is higher like Latin America and Asia, is an area where Harmse also sees growth potential, as well as any process with a cross-border payments “headache” involved.
He explains how as a result of this opportunity, BVNK launched a “crypto payments gateway” in 2022, where they enable B2C businesses to accept stablecoins at checkout.
What is stopping stablecoins from gaining ground?
While the utility of stablecoins for fintechs is increasingly clear, the global regulatory landscape is less so.
In the EU, a unified framework for crypto assets is being developed with the Markets in Crypto-Assets Regulation (MiCA), covering licensing, supervision and enforcement, while similar proposals in the UK aim to bring stablecoins in scope of the existing UK
Payment Services Regulation. In the US, regulators are taking more of an enforced approach, though a
newer bill might be on the cards for 2024.
For financial services businesses who rely on their licenses and approvals to operate, the risk of non-compliance could be high.
On this, Giokas says: “Some of the larger customers are waiting for the dust to settle on the regulatory aspect.” However, he adds: “In APAC things are moving much faster, like Japan, Singapore, and other places where the regulators are more open to this type
of innovation.”
Singapore, Hong Kong, and Dubai are also highlighted by Harmse for their stablecoin regulation being “forward thinking.”
Harmse adds that, in general, “you’re seeing a lot more people get used to the risk and direction of travel despite all the noise around them being about regulation.”
For some financial services businesses, partnership is a way to go to market with stablecoin services without having to go through the long, complex process of obtaining new regulatory approvals or manage ongoing compliance. There are increasing numbers
of fintechs, like BVNK, that offer ‘crypto as a service’ or embedded crypto payments so that other fintechs can build assets like stablecoins into their services without having to touch the crypto.
Embedding crypto payments means that fintechs can offer a diverse range of payment options to their customers, including stablecoins, without having to build from scratch or take on technical and compliance overheads. This could allow for the growth of stablecoin
in areas already mentioned, but also in places like retail, making it easier for people to make payments this way.
Reputation of stablecoins has been another stumbling block, yet, Thomas believes that this is changing: “Perceptions of the word 'crypto', among those outside of the payments space, can carry negative connotations. But those views are positively evolving
and it’s becoming more and more accepted. I think we’ll reach that tipping point relatively soon.”
Yet one major issue remains.
“Instability,” says Giokas when asked what the main drawbacks of this technology are. “That's one of the reasons that we recently launched a product in that space, because when someone purchases a stablecoin, that is one that represents a fiat currency,
they expect that this token will behave like the fiat currency but that's not always true.
“There is a lot of volatility, and that volatility can be as low as 3% or more. But if you look at the US dollar-euro currency pair where the volatility is below 1%. So for an everyday person in the payment space, they expect marginal volatility and with
stablecoins, they might see over 3%. So that promise of stability is not yet given.”
However, Giokas concludes: “The market is still maturing, so you have to cut it some slack. It’s a very new technology that is not yet at the level of maturity as fiat currencies.”