Have you heard about the Tether ($USDT)?
The U.S. Dollar Coin ($USDC)?
Binance USD ($BUSD)?
These are the top three crypto-related assets that many analysts have hailed as the “future of remittance.” They are called stablecoins.
Each asset ($USDT, $USDC, and $BUSD) is pegged to a fiat currency, hence why they are called fiat-collateralized stablecoins. This pegging mechanism aims to maintain a consistent value, so a stablecoin linked to the U.S. dollar will always equal $1.
Stablecoins are digital assets designed to minimize price fluctuations by pegging their value to more stable assets, such as fiat currencies like the U.S. dollar or commodities like gold. They are like turning paper money like the U.S. dollar into digital money. They are the “crypto” versions of paper money.
Due to the volatile exchange rate of other local fiat currencies against the U.S. dollar, sending and receiving money from other countries is quite expensive.
For example, let’s consider two friends, Ojo and Simon. Ojo lives and works in the United States, while Simon, who needs money, resides in Nigeria. He has asked his friend, Ojo, for help. If Ojo wants to send Simon some money (USD), the usual way is to send it through wires and automated clearing house (ACH) transfers.
The problem with these methods is that banks usually have intermediaries who charge fees for processing the transfer. The charge can be anywhere between 5%–10% of the sending amount.
In addition to the processing fee charged on Ojo’s side, when Simon wants to convert the money to Nigerian Naira (NGN), he will also lose some value of that money sent due to the volatile exchange rate, and the markup fees that companies collect.
With stablecoins, the network fee is paid only once on the sender’s side—which makes it cheaper for remittance.
In essence, stablecoins seek to provide cryptocurrency’s benefits, such as digital transferability, while avoiding the typical volatility of traditional cryptocurrencies like Bitcoin.
A Very Short History of Stablecoins
So, how did stablecoins come about anyway?
Stablecoins were developed as a response to the extreme price swings of early cryptocurrencies like Bitcoin.
In 2014, Tether ($USDT) became the first widely adopted stablecoin, pegged to the U.S. dollar to provide stability. Since then, other stablecoins, like the U.S. Dollar Coin ($USDC), have followed, becoming essential tools for reliable transactions and a bridge between crypto and fiat currencies.
Brock Pierce, Reeve Collins, and Craig Sellars are credited as the developers of Tether ($USDT) when all three of them worked on a blockchain project called Realcoin that was pegged one-to-one to the U.S. dollar; this later became Tether.
Are Stablecoins the Future of Remittance?
This is too early to answer, considering that the adoption of stablecoins worldwide is still low. And given the regulatory uncertainty surrounding crypto in parts all over the world—and especially in African regions where crypto companies are being prosecuted—the uptake of stablecoin for remittance has not panned out on a wide scale.
Yet, many companies are pushing for this to happen through a financial model called “hybrid finance” where traditional finance (TradFi) and decentralized finance (DeFi) are being shipped together.
Here are several compelling features that stablecoins offer:
- Price Stability: By pegging to stable assets, stablecoins attempt to reduce the wild price swings seen in other cryptocurrencies. This makes them a more predictable medium of exchange and store of value.
- Reliable Value Maintenance: Various mechanisms are employed to maintain their peg, such as holding reserve assets or using algorithmic controls to balance supply and demand.
- Global Accessibility: Being digital, stablecoins can be used anywhere in the world, providing an efficient alternative for international transactions.
Difference Between Stablecoins and Traditional Cryptocurrencies
While traditional cryptocurrencies like Bitcoin are infamous for their price volatility, stablecoins differentiate themselves through their pegging strategies to more stable assets. This peg is maintained through various mechanisms:
- Fiat-Collateralized: These stablecoins hold fiat currencies, like the U.S. dollar, as reserves. Popular examples include Tether (USDT) and TrueUSD (TUSD).
- Commodity-Collateralized: Some stablecoins are backed by commodities such as gold or silver, providing a tangible reserve.
- Crypto-Collateralized: These use other cryptocurrencies as collateral. Platforms like MakerDAO’s Dai (DAI) use this mechanism, where reserves may exceed the value of issued stablecoins to ensure stability.
- Algorithmic: These stablecoins control their supply via algorithms. Unlike central banks, these decentralized systems aim to maintain their value through programmatic means.
As stablecoins continue to evolve, their integration into payment systems and their impact on financial transactions will be critical to watch.
Current State of Cross-Border Remittances
Cross-border payments are essential for international economic activity, but they come with significant challenges. One primary issue is high transaction fees, which can average around 6.4% per transfer.
Additionally, the slow processing times are detrimental, often taking up to five days to complete a transaction. As earlier highlighted, this delay is partly due to the complex system involving multiple intermediaries and heightened fraud prevention protocols set by banks.
The SWIFT (Society for Worldwide Interbank Financial Telecommunications) system, one of the most widely used international payment infrastructures, requires transfers to pass through up to three correspondent banks before reaching their final destination. This not only prolongs processing times but also increases the chances of errors and added costs.
Limitations of Existing International Payment Systems
The existing international payment systems, like SWIFT, are not always efficient. They were designed decades ago and have not kept pace with advancements in global financial technology.
Despite its dominance, SWIFT has been criticized for its lack of transparency, limited accessibility, and the high costs involved with its use. These issues hinder its ability to offer fast and cost-effective remittance solutions.
Market Size and Growth of Stablecoin Transactions in Remittances
As an alternative, stablecoins are steadily gaining traction in the realm of cross-border remittances—despite the low adoption rate globally.
Currently, stablecoins facilitate approximately 30% of global remittance transactions, and their usage is rapidly increasing. In 2023 alone, stablecoins were involved in transactions worth around $10.8 trillion, with a significant portion dedicated to payments and cross-border transactions.
This was driven by the benefits stablecoins offer, such as lower fees, faster transaction speeds, and increased transparency. For example, stablecoin transaction volumes were estimated at $450 billion per month, making them a competitive alternative to traditional systems like SWIFT and wires.
The benefits that stablecoins offer are pushing both businesses and individuals towards considering them as a viable option for international money transfers.
The next logical step in understanding the future of cross-border remittances with stablecoins involves exploring their advantages and potential challenges.
Advantages of Stablecoins for Remittances
Furthermore, some top advantages of using stablecoins for remittance, from a commercial standpoint, include:
Lower Transaction Costs and Faster Processing Times
One of the most notable benefits of using stablecoins for remittances is the significant reduction in transaction costs.
Stablecoin transactions average between 0.5% to 3% per transaction. This cost efficiency makes stablecoins advantageous for low- and middle-income countries, where every saved dollar is crucial.
Additionally, stablecoins facilitate faster transaction processing. Traditional remittances can take several days to process due to the involvement of multiple intermediaries. Stablecoin transactions, on the other hand, are almost instantaneous, completing within minutes.
Reduced Reliance on Intermediaries
Stablecoins also reduce the reliance on intermediaries. In traditional remittance processes, banks and financial institutions play a significant role, leading to increased costs and potential delays.
By leveraging blockchain technology, stablecoins eliminate the need for these intermediaries. With platforms like Palremit that offer access to stablecoin remittance, anybody can send and receive stablecoins by simply opening an account.
24/7 Availability
Another significant advantage of stablecoins is their availability and transparency. Traditional financial systems operate within specific hours and are subject to national holidays, which can delay transactions. Stablecoins, however, are available 24/7, allowing for uninterrupted money flow anytime, anywhere.
Transparency is a key feature of stablecoins as they operate on public blockchains. This transparency ensures that every transaction is recorded and traceable, reducing the risk of fraud and providing an immutable record of all transfers. Users can verify transactions in real time, increasing trust and reliability in the system.
Challenges and Risks of Stablecoins as Remittance
As much as stablecoins offer an enticing way to send remittance, it is important to bring a balanced perspective to the argument for stablecoins. So, if stablecoins become widely adopted as a remittance channel right now, what are the risks?
Regulatory Uncertainties and Compliance Requirements
Stablecoins are digital assets pegged to stable assets like fiat currencies. Their regulation remains a grey area in many jurisdictions. Different countries have varied approaches to regulating stablecoins, leading to compliance challenges for issuers.
Without a global regulatory framework, adopting stablecoins for remittance can be challenging, especially in emerging markets, where stablecoins might disrupt financial stability.
Technical Vulnerabilities and Security Concerns
Stablecoins, like other digital assets, face technical risks. One major issue is that software flaws can allow the unauthorized creation of stablecoins, disrupting their value.
Collateral theft is also a threat—if hackers find weaknesses in a stablecoin’s smart contract, they can steal the funds backing it.
Data oracles, which track market values, are another target, where attacks can shut down services or alter prices for an attacker’s gain. These risks show the need for strong security measures and protections.
Reliance on Underlying Pegged Assets and Potential Stability Risks
Stablecoins, especially commodity-collateralized stablecoins, keep their value by linking to stable assets like currencies or metals, but if these assets fluctuate, stablecoins can “depeg,” losing their stable value and causing market uncertainty.
Algorithmic stablecoins face extra challenges, as they use automated systems to stay stable. If these systems fail, it can lead to extreme volatility or even collapse.
This is why fiat-pegged stablecoins are the best options, yet countries have to accept them and regulate them as legal financial assets first.
What is the Outlook for Stablecoins?
Now that we’ve learned about the many perks (and cons) of using stablecoins for remittance, what are the chances that they will get adopted worldwide? What needs to be in place for stablecoins to become a staple in remittances?
Integration with Financial Systems
Stablecoins could transform cross-border payments by linking smoothly with current financial networks. Major platforms like Visa and Stripe are exploring ways to support stablecoin transactions, offering a familiar experience for users.
Efforts are underway to blend traditional banking with decentralized finance (DeFi) so stablecoins can be used without disrupting existing systems. Tools for automatic currency-to-stablecoin conversion are also emerging, easing cross-border payments.
Potential in Emerging Markets
Stablecoins offer stability in emerging markets with volatile currencies, providing a reliable alternative for consumers and businesses. In regions with high remittance flows, stablecoins can reduce costs and speed up transactions.
Options like USDT and USDC create competition, often leading to better rates for users. The transparency and efficiency of stablecoins are supporting their rapid growth.
Future of Digital Payments and Financial Inclusion
Stablecoins are shaping the future of digital payments, offering a stable, low-cost way to exchange value.
This is especially beneficial for unbanked populations, giving them access to financial services.
Features like gasless transactions and low fees on platforms like BNB Chain are boosting adoption.
On Palremit, you can tap into our system of hybrid finance, switching easily from crypto, stablecoins, and fiat currencies that you can use to receive and transfer money across borders.
Access fiat-pegged stablecoins like $USDT and $USDC without hassle on our platform, as well as other crypto options and networks that bring the cost of remittance down. As stablecoins become more common, they are likely to build a more inclusive and resilient financial system.
Be at the center of it. Download the Palremit app on Google PlayStore or Apple Store to enjoy seamless financial transactions on the go. The app now allows you to swap money between USDT and other local currencies, so you can start using your money without borders.
