Can Stablecoins Boost Remittances?

Image Source: Pexels 

Over the past decade, the global landscape for financial transactions has dramatically improved. Cashless payments have gained prominence through e-wallets, credit cards, and virtual credit cards. 

Meanwhile, traditional payment methods across borders have long been surrounded by issues related to high-flying fees and slow processing times. It is no wonder payments and remittances are witnessing a massive change as the digital revolution peaks. 

We don’t notice that the fintech revolution has already stretched further and faster than expected—thanks to the unstoppable boom in the cryptocurrency market. From the introduction of Bitcoin in 2009, cryptocurrencies started and proliferated in the following years. 

There are criticisms and controversies surrounding the market. Believers see cryptocurrencies as the digital stepping stone toward a decentralized financial system. But as of today, they have yet to fulfill their promise. Right now, they primarily serve as a type of investment, more volatile than a stock. Even so, they have started offering a new financial transaction method. 

Despite being relatively new to the market, one of the most popular examples is stablecoins. It has gained popularity in a very short period. Stablecoin holders view its usage for remittances as one of the most viable applications of cryptocurrencies. 

In this article, we will delve into the possibility of stablecoins reshaping the remittance industry. We will also explore how it can speed up cross-border transactions while expanding its presence to international markets. 

What makes stablecoins so important? 

Stablecoins are cryptocurrencies with a value pegged or tied to another currency, commodity, or financial instrument. It is similar to currency pegging in the Forex market, wherein a central bank sets a fixed exchange rate to which its domestic currency is pegged. 

So, the exchange rate becomes the value of the domestic currency compared to the pegged currency. Meanwhile, stablecoins can be pegged to various reference assets aside from currencies. These include exchange-traded commodities, gold, or another cryptocurrency. 

In theory, stablecoins can track the pegged asset’s value so it will not be subject to radical changes in the overall digital asset market. However, issuers have yet to prove the adequacy of stablecoin reserves to support value stability and prevent investors from losing the value of their holdings. 

Despite this, this cryptocurrency aims to be an alternative to volatile cryptocurrencies. Bitcoin (BTC) is an example since its massive price swings made cryptocurrency investments unsuitable for common transactions. 

Bitcoins for routine transactions, such as purchases for standard goods, may turn into speculative mania. Of course, BTC holders don’t want to pay 10,000 BTC or about $369,000 for a box of chocolates. Likewise, sellers don’t want to incur massive losses if the price of a single BTC takes a nosedive after receiving the BTC payment. 

Given this, stablecoins are more valuable as a medium of exchange. Its goal to remain stable may assure those accepting buyers and merchants to retain purchasing power in the short run. 

How the Price of Stablecoins Varies 

Unlike a typical cryptocurrency, stablecoins are not sensitive to the market as price changes remain limited. Generating price gains and incurring price losses are limited since it is pegged to a reference asset to maintain value stability. 

Also, a stablecoin does not yield dividends, making it incomparable to stocks, REITs, ETFs, and mutual funds. Unlike bonds and many other cryptocurrencies, they don’t earn on interest and value appreciation. 

Even so, you can pattern its behavior as a typical financial instrument with inflation. Its actual trading in the market in the US started only a few months ago. Making an assumption based on the short-run trend can be quite risky. Yet, the movement between stablecoins and inflation shows an evident inverse relationship. 

From June to July, inflation rebounded from 3% to 3.2%. It increased again in August to 3.7%, exceeding the 3.6% consensus. It stayed flat at 3.7% in September, driven by oil prices. In October, it went under control again as it dropped to 3.2%. 

In contrast, the price of a single stablecoin (STABLE-USD) dropped from $0.000031 in July to $0.000005 in August. Meaning it decreased six times, although the nominal difference was only $0.0000081. 

The price stayed flat at $0.000005 in September. From this trend alone, we can see its similarity to inflation. Both stablecoins and inflation did not change from August to September. It bounced back to $0.000006 in October. Currently, the value of stablecoins is at $0.00000608 as inflation decreases. 

Image Source: Yahoo Finance 

Meanwhile, the movement of other stablecoins, such as Tether (USDT-USD) and USD Coin (USDC-USD) are almost unaffected by inflation. This is because they are patterned with the US Dollar. Take their three-month trends as examples. 

However, their general trend in the past three weeks has been downward. This movement is mainly due to the view that the Fed is already done with policy rate tightening and may start cutting rates in 1H24. Currently, the US dollar index is $103.20, a 0.2% from the last Forex trading day. It appears to be heading to a monthly drop of 3%, the biggest since November 2022. 

Image Source: Yahoo Finance 

Image Source: Yahoo Finance

Inflation negatively affects the USD, so USDT and USDC were supposed to have a downtrend. Yet, the former had an uptrend in the past three months, while the latter remained almost the same. Thanks to the prudent action of the Fed to combat inflation.

The series of interest rate hikes raised various loan rates, such as mortgage and VA loan rates. But, it helped stabilize US treasury yields and maintain the relative strength of the US dollar. 

How Stablecoins Can Revolutionize Remittances 

Remittances are a crucial component of the global economy. Its positive impact is more evident in labor-intensive and emerging countries, comprising about 10% of their GDP. Many of their citizens working in other countries send money to their loved ones via cross-border transfers. These are then accounted for as remittances. 

Notwithstanding the disruptions caused by the pandemic, remittance flows in low and middle-income countries amounted to $540 billion in 2020, registering only a marginal 1.6% decrease compared to 2019. 

In 2021, it bounced back to  $597 billion, an almost world record recovery rate of 8.6%. In 2022, the amount increased to $647 billion, exceeding the $625 billion consensus for the year and pre-pandemic levels. 

Despite the Russo-Ukrainian War, sustained global inflation, and the hard lockdown in China, it was impressive. Thanks to the solid labor market that allows migrant workers to make international transfers. 

Aside from that, the fintech revolution has started to transform the remittance landscape. Traditional options, such as banks and money transfer operators (MTOs), have been criticized. Some disadvantages are their frequent delays, costly transaction fees, and unfavorable exchange rates. 

It is especially difficult for those in emerging economies as access to financial institutions remains limited. This inconvenience makes cross-border money transfers slower and more expensive than usual. 

Given all these, the increasing prevalence of e-wallets and wire transfers like PayPal, Venmo, Pioneer, Google Pay, and Apple Pay are excellent innovations ahead of the fintech revolution. They may become more accessible as e-commerce expands. They may soon replace MTOs as many countries strive for a cashless society. Yet, senders and receivers still shoulder conversion fees, which vary with exchange rates. Also, nearly 3 billion people worldwide were still offline in 2022. 

And now, cryptocurrencies, particularly stablecoins, are poised to enter the remittance industry. They can maintain a stable value since they are pegged to stable assets like the USD. In turn, they can help stabilize currency conversion charges to lessen the impact of exchange rates. They can also be sent and converted quickly and safely across countries since they are based on blockchain technology. 

Most importantly, they can address financial inclusion problems that traditional banks and MTOs face. Data from the World Bank shows that 1.4 billion people worldwide were unbanked in 2022. 

Meanwhile, 850 million individuals had no official identification. Given these, stablecoins are expected to become a convenient alternative. They can also work hand-in-hand with e-wallets accepting cryptocurrency transactions since they are accessible via smartphones.  

Potential Challenges of Using Stablecoins for Remittances 

Stablecoins show promising results for the remittance industry. Even so, we must consider several issues and dangers before allowing it to penetrate the mainstream remittance market. 

A major challenge in the stablecoin market is limited or almost no regulation and monitoring. Unlike traditional banks and MTOs, stablecoin holders are not subject to the same level of scrutiny. This limitation raises concerns about the legitimacy of its stability and security. 

Additionally, consumers may be susceptible to counterparty risks if issuers go bankrupt since these are not backed by insurance. It may be logical since stablecoins are based on blockchain technology.

Moreover, blockchains are not exempt from the threat of fraudsters and hackers. Even the two largest cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH), did not avert the risk. In 2022, they were embroiled in scams amounting to $3.8 billion. 

This year, hacking and scamming continue, with several instances costing companies hundreds of millions. The largest hacking incident happened to Euler Finance, reaching $197 million. As of November 19, the total value of the top crypto hacking incidents reached $550 million. 

Another potential issue is that many individuals may use stablecoins for illegal activities, such as terrorism financing and money laundering. Indeed, the anonymity and decentralized nature of Stablecoins is a double-edged sword. While it secures the identity of users, it makes it almost impossible to trace the flow of funds that criminals may utilize. 

To that end, the government may have to heighten its regulatory scrutiny on the usage and flow of stablecoins for remittances.  

Costs and Benefits of Stablecoins Vs Traditional Remittance 

To weigh the costs and benefits of Stablecoin and traditional remittance methods, we can make a hypothetical example of an individual sending $1,000 from the US to another country. 

Stablecoins 

• The sender can buy $1,000 worth of USDC, USDT, or STABLE on a crypto exchange for only 0.5% or $5. 
• The sender will send the chosen Stablecoin to the recipient's cryptocurrency wallet in the other country. 
• The recipient will convert the chosen cryptocurrency into local currency with a fee of only 0.5% or $5. 
• The total cost is only 1% or $10, so the recipient may expect to receive $990. 

Traditional Remittance Method 

• The sender will go to a money transfer operator (MTO) or a bank and pay a transaction fee of 4% or $40 to send $1,000 to another country. 
• The recipient will receive the money in local currency. However, a currency exchange of about 2%, or $20, will be deducted from the remaining $960. 
• The total cost is about 6% or $60, so the recipient may expect to receive $940. 

As we can see, the stablecoin remittance is a cheaper alternative to traditional remittance. People may save $50 or 83%. Also, stablecoins are faster and can complete remittance transactions within minutes. These will be recorded on a public blockchain. It can increase financial inclusion for many households who need access to banks and wire transfers, especially in developing nations. 

Stablecoins and Traditional Banks Can Work Hand-in-Hand 

The continued emergence of stablecoins has presented potential competition with traditional banks and wire transfer operators. But it may also open opportunities for banks to enhance their remittance services. 

Contrary to traditional remittance methods, which can be tedious and expensive, stablecoins can speed up transactions, lower fees, and expand cross-border payment accessibility. To that end, banks should take part in the stablecoin ecosystem to keep up with remittance modernization. That way, they can provide a better customer experience. 

Stablecoins can allow banks to streamline remittance services and lower transaction costs. By including these in their systems, banks can make their remittance services more efficient and affordable. 

This is a must for anyone regularly sending money to loved ones in different countries. 

Doing so will allow it to beat traditional remittance services, which can be slower and more expensive. 

In addition, stablecoins can help reduce cross-border payment risks. These include currency fluctuations that can lower the value of the money sent. These can also ensure the stability of payment throughout the transaction. 

Moreover, using stablecoins will enable banks to develop their own stablecoins. That way, they can create their digital currencies pegged to a reference asset. It may take a long time, but it can be fruitful by providing a new method to store and transfer funds. With their existing customers and brand recognition, banks can promote Stablecoin adoption. 

And with their own stablecoins, banks can have more control over their remittance process. Banks may employ digital currencies to facilitate cross-border transactions between customers. They won’t have to seek the assistance of third-party intermediaries. Hence, they can reduce transaction costs and speed up payments to improve customer experience. 

Key Takeaways 

Cryptocurrencies, mainly stablecoins, are poised to revolutionize global remittance flows by providing a cheaper, faster, and more accessible transaction method across borders. Yet, several challenges and concerns must be addressed, especially in legality and security. The process may be lengthy, but it can be advantageous if implemented. As the stablecoins market expands, issuers must minimize risks to reach their full potential as a financial inclusion tool.

This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice. Benzinga does not make any recommendation to buy or sell any security or any representation about the financial condition of any company.