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Stablecoins: The New Horizon of Cross-Border Payments Globally

Cross-border payments

Cross-border payments are at the heart of a rapidly evolving financial ecosystem. The current traditional financial methods that are often slow, fee-laden, and constantly struggling to meet the demands of a highly globalized international economy. Stablecoins: Digital assets on Blockchain designed to maintain stable value by pegging it against traditional currencies or other real world assets such as gold. Stablecoins are a game changer in rendering international transactions faster and less expensive for businesses looking to streamline their operations.

Why Stablecoins?

What about stablecoins? This is another fundamental concept on how to make a secure cross-border transaction via bridging the gap between traditional finance and the blockchain revolution. While Bitcoin and Ethereum prices are notoriously unstable, stablecoins such as USDC carry a peg to more stable assets like the USD or EUR. This link acts as a stability anchor in the often turbulent waters of overseas payment that businesses have to wade through regularly. More so, stablecoins can lower transaction fees and speed up transactions, so they are better than the existing money transfer and therefore ideal for international payments.

What Are the Benefits of Using Stablecoins for Cross-Border Payments?

1. Long time to settle: It can sometimes take a few days for money to move across borders, especially if it goes through intermediary banks. Because of the Blockchain technology behind, it takes nearly no time to perform Stablecoin transactions. Critical speed for merchants who require processing funds to deposit quickly to take advantage of opportunities or pay off obligations in short order1

2. Cost Efficiency: The fees of foreign exchange transactions and international wire transfers costs money! Using stablecoins allows to cut transaction costs substantially, since they frequently bypass traditional banking networks with their fees.

3. Accessibility: In many regions of the world, access to traditional banking is difficult to obtain. Businesses are able to take part in global economy using stablecoins as an alternative where traditional banking is a big problem.

4. It is a more secure method: The blockchain technology used in the building of stablecoins allow every transaction to be recorded meaning all transactions are transparent and cannot be tampered with. This transparency can be a major driver to build trust between business partners, and also prevents fraud thanks to blockchain’s security-based functionalities.

Stable Coin Use Cases in Cross-Border Payments

Here are a few of the ways in which international businesses can make use of stablecoins to streamline cross-border transactions:

a. Local Market Fiat Currency > Settled with Stablecoins: In some instances, a business may prefer to take payments in their local fiat currency and convert those funds into stablecoins for holding purposes or any other required use.

b. Local Market Fiat Currency > Stablecoins > Fiat Currencies: This involves changing a local fiat currency into a selected stablecoin and then using the stablecoin to settle payments in other major fiat currencies, e.g., USD, GBP or euro.

c. Using Stablecoins/Cryptocurrency > Settled in Fiat Currencies : Businesses can choose to settle traditional bank settlement (that is, bank account transfer) with the use of stablecoins or other cryptocurrencies.

Type 2 FX Business Using Stablecoins Example

The second one is more easily applied with an example of an FX (foreign exchange) business that uses a stablecoin which converts fiat funds into a different fiat currency:

1. Customer (an FX/CFD broker or a corporate treasury) opens an account with a fintech platform such as Binusu for cross-border payments.

2. The customer places an order to transfer money from one country to another through leveraging the fintech’s OTC desk operation platform.

3. The customer then agrees to the platform quote and goes on deposit funds with one of the nations banking partners of the fintech company, depending on what nation they are sending from. All these are details shared between the customer and the fintech company.

4. The money that is deposited in the bank account of the fintech company through partner bank and through the fintech company the funds are converted into a stablecoin, for example USDT which is now held by the fintech company . The fintech will then convert the stablecoin to fiat currency of the receiving country and deposit the funds directly into that customer’s bank account or within a vaulting wallet in their ecosystem.

This demonstrates the potential of stablecoins when it comes to frictionlessly making cross-border payments, by removing the necessity of a plethora of intermediaries and streamlining the payment process.

A cross-border treasury flow: An example of KES-UGX using USDT

To incorporate a practical example of cross-border treasury flow between the Kenyan Shilling (KES) and the Ugandan Shilling (UGX), an illustration using USDT (Tether, one of the most popular stablecoins which is generally pegged to the US dollar) will be used as follows;

Scenario

Let’s say for instance a Ugandan has supplied goods to be paid for in Kenya i.e…. 1,000,000 UGX. How the transaction may have been done using stablecoins:

1. Original Conversion: A Kenyan company goes to a fintech platform and says that they just want to convert their KES into UGX.

2. Deposit: The Kenyan company deposits 40,000 KES in a bank with whom they have partnered with through the fintech platform.

3. Stablecoin Conversion:- The partner bank converts the KES to USD at a current exchange rate which is 1 USD = 1 USD equivalent thereafter sending it back to Fintech platform converting them back into USDT.

4. USDT to UGX Conversion: The fintech platform receives the USDT and completes the transaction by converting it to UGX using its liquidity pool or exchange partners. It for example changes 40,000 KES to 1,000,000 UGX on that concurred rate.

Ugandan supplier gets 1,000,000 UGX in their local currency paid to them.

The above flow demonstrates a way in which stablecoins can streamline cross-border treasury functions, helping businesses to avoid the inefficiencies of the traditional banking system.

The Road Ahead for Cross-Border Payments

While international commerce is growing more than ever, the urgency for advanced breakthroughs in the space of cross-border payments increases. This transition is set to make Stablecoins lead the march. These payment gateways not only simplify the payments but also easy on pocket to use for all scale business.

Further, with time we can see an even bigger adoption space as the regulatory frameworks around cryptocurrencies and stablecoins evolve. Further governments and regulatory bodies getting involved, because they are also realizing that designating these digital assets as currencies could help banking services occur in a much more efficient and less expensive way for international payments.

In summary, stablecoins are not a craze they are leading us into the future of cross-border payments. Stablecoins accelerate international trade offering speed, cost efficiency and enhanced access aiding to create a much more connected and efficient global economy. On the horizon, stablecoins still promise complete transformation of the financial sphere and its footprint is not a shadow of a doubt!

Morris Gitonga

If you need whitepapers, pitch decks, press release, marketing plans or blog articles contact me on Morris@coinweez.com, Get in touch for OTC trading/cross-border payment deals too!

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