Imagine a world where every payment made was instant, so cheap you didn’t even think about its cost. How would that impact your life and build a better future that’s more interconnected?

This is the reality that the fintech industry is stepping into - In an increasingly interconnected world, the ability to move money quickly and cheaply across borders is more crucial than ever. Traditional financial systems, while improving, often fall short of meeting this growing need. These are some of the demands that have given stablecoins a rise in demand, a digital currency running on blockchain rails designed to maintain a stable value through a pegged mechanism, most commonly on a fiat currency such as the USD. These currencies are rapidly reshaping the landscape of cross-border transactions.

The stablecoin market has experienced explosive growth, expanding from under $10 billion in 2020 to over $160 billion today, with trading volumes exceeding $1T in a single month. This surge isn't just about impressive numbers; it reflects a fundamental shift in how businesses and individuals approach global money transfers.

Source: CoinMetrics

Source: a16z state of crypto report

Why the rapid adoption? The answer lies in three key factors:

1. Speed: Stablecoins enable near-instantaneous transactions, a stark contrast to the days or weeks often required for traditional international transfers.

2. Cost: Transaction fees for stablecoins are typically a fraction of those associated with conventional banking systems.

3. Accessibility: In regions with limited banking infrastructure, stablecoins offer a viable alternative for conducting international transactions.

The impact of this shift is particularly pronounced in emerging markets. In parts of Africa, the Middle East, and Latin America, businesses often struggle with limited access to US dollar liquidity. This constraint can lead to significant delays in international payments, sometimes stretching to months. Such inefficiencies not only limit individual businesses but can also stifle broader economic growth.

To fully grasp the potential of stablecoins, it's essential to examine their impact across different payment types:

Wholesale Payments: While the majority of bank-to-bank transfers settle quickly, the most time is spent in the final leg of crediting beneficiaries. Stablecoins could streamline this process, reducing delays to near instant for large financial institutions.

Retail Payments: The global average cost for retail cross-border payments ranges from 1.5% to 2.5%, exceeding international targets set by the Financial Stability Board (FSB) for 1%. Stablecoins offer a path to significantly reduce these costs.

Card payments: Credit cards typically charge businesses 1.5% to 3.5% of each transaction. When you consider the average small restaurant only makes a profit margin of 3% to 6%, we’re talking about half of their profit to process the payment.

“Your margin is my opportunity” - fintech companies leveraging stablecoins today have an insane opportunity to disrupt and give back more to businesses, and even payers if you consider the reduced cost that can be given as cash back to payers to incentivize them to use digital currencies. Businesses make more profits and payers get more rewards, win-win.

Remittances: Perhaps most critically, the average cost of sending remittances globally stands at about 6.5%, more than double the UN's Sustainable Development Goal target of 3% by 2030. Cutting prices by at least 5 percentage points can save up to $16 billion a year, thats $16B more to the people who need it most.

What is even more surprising is that cash tends to be faster overall than sending digital payments in remittance, and that’s because it doesn’t involve banks and other intermediaries.

Source: WorldBank Remittance Report, December 2023

Finally some regions have it worse than others, SSA tends to score as the worst region for speed and cost overall.

Source: WorldBank Remittance Report, December 2023

Conclusion

It's important to note that the rise of stablecoins doesn't signal the end of traditional banking. Rather, it represents an evolution - a new set of tools that can complement and enhance existing financial infrastructure. Forward-thinking financial institutions are already exploring ways to integrate blockchain technology and stablecoins into their operations, recognizing the potential for faster settlements, lower costs, and increased transparency.

Looking ahead, the key to maximizing the potential of stablecoins lies in finding ways to effectively integrate them with existing systems. The goal is not to replace current financial rails but to create a more efficient, inclusive global financial ecosystem capable of supporting our increasingly digital and interconnected economy.

Continue to part 2 of this series.