We can avoid cross-border payment friction by using stablecoins, according to Mastercard, But is this a good or a bad thing?
Why cross-border payment friction
Back 50 years ago, the immediate transfer of money from one bank account to another was usually impossible. First you had to get your checkbook and a pen and write a check from your bank account. Then you had to mail the check to the other entity. The other entity would have to deposit the check into their bank account. Then they would have to wait for the check to clear.
Cross-border payments were even worse. Not only did you have to do all of the above (and account for the time it takes to send the check from one country to another), but you also had to deal with currency exchange.
And even if you used more “modern” methods than check writing, the process was still pretty manual. Typing transfer instructions into a Telex machine. Transferring money from the sending bank to the receiving bank via “correspondent banks.” Processing the transfer at odd local hours to meet the other bank’s regular business hours. Oh, and manual government monitoring of foreign transfers.
Things are a lot better today. Rather than one to three weeks, many transfers complete in one to three business days. While some are faster, other’s aren’t.
One to three business days isn’t fast enough.
Mastercard’s solution: stablecoins
Mastercard, which 50 years ago was known as MasterCharge, is one of four companies offering a much faster solution based upon stablecoins.
“[Michael] Miebach highlighted Mastercard’s backing of Open Standard and its recently issued U.S. dollar-backed stablecoin….
“Mastercard is one of the four integration paths through which businesses can get started with OUSD. The other three are Stripe, Coinbase, and Visa.”
Stablecoins are a form of cryptocurrency, pegged to specific real-world currencies such as the U.S. dollar. Because crypto transactions are instantaneous once they are recorded on the ledger, money can move much more quickly. No three-week wait to get your money from one country to another.
“For cross-border B2B transfers, stablecoins provide a solution for speed, cost and currency exposure. Stablecoins settle in seconds at a fraction of the cost of traditional cross-border wire transfers. In markets where local currencies are depreciating, stablecoins preserve purchasing power, access dollar-denominated liquidity and protect against inflation…”
So what could go wrong?
Four problems with using stablecoins for cross-border payment
There are potential drawbacks to using stablecoins for cross-border payments.
- Converting to and from fiat currencies. If all of us, including the banks, used U.S. dollar denominated stablecoins, there would be no problem. But you have to transfer the money to stablecoins before sending, and then transfer it out of stablecoin (potentially into euros or a non-U.S. currency) after sending. And those processes aren’t necessarily as instantaneous as moving stablecoins across borders. Add in the conversion fees, and there’s still friction.
- Regulations. Different countries impose different regulations on stablecoin transfers. Some ban “crypto-fiat” off-ramps. Some require collection and transmission of sender/receiver identity information, and hold up the transaction if any of this is missing.
- Various risks. A fiat-backed stablecoin is only as safe as its issuer’s reserves. Market stress can affect this. And temporary issues in the market sometimes result in a “stable” coin not maintaining its 1:1 exchange rate with the fiat currency in question.
- Lack of protection. Blockchain transfers are instantaneous and final. There’s no appeal procedure like you have with traditional financial institutions. If you send the stablecoin to the wrong wallet, tough.
If you are risk averse, then instantaneous stablecoin transactions are NOT for you.
