The Path to Stability: How Stablecoins Can Drive Borderless Business Across Europe
As their benefits across the world of business are becoming clearer, stablecoins may soon emerge as a leading asset in leveraging transactions beyond borders.
As Europe moves away from the age of the Covid-19 pandemic, it's clear that the acceleration of digital transformation that businesses across the continent have experienced is here to stay. Although friction still exists when transactions take place in different currencies, the growth of stablecoins is likely to solve a problem experienced across borders.
"Global stablecoins could drive further innovation in payments, responding to the need for cross-border payments and remittances that are more efficient and cheaper," said Fabio Panetta, Member of the Executive Board of the ECB, in a speech at Il Salone dei Pagamenti in 2020. "Indeed, the Financial Stability Board has proposed a roadmap to enhance cross-border payments that recognises a role for sound global stablecoin arrangements."
As the data shows, the global stablecoin market reached a total market capitalisation of $107 billion in the summer of 2021, as the use cases for digital currencies became more widespread.
Now, as their benefits across the world of business are becoming clearer, stablecoins may soon begin to emerge as a leading asset in leveraging transactions beyond borders, without the costly use of middlemen to broker agreements.
But what are stablecoins? And how can their flexibility aid the growth of European business? Let's take a look at a cryptocurrency innovation with great potential:
The growth of stablecoins.
Stablecoins are closely related to the wider world of cryptocurrencies like Bitcoin and Ethereum. Although the likes of Bitcoin would be largely unsuitable for businesses to broker transactions in — due to the digital currency's significant volatility — stablecoins experience no such wild price swings.
Stablecoins are stable because they're backed by fiat currencies, or tangible assets like gold. This means that the money you put into a stablecoin transfer will be the money your recipient gets, minus some small fees incurred for brokering the transaction.
Significantly, when a product order is placed from a customer overseas or a B2B transaction is brokered between two countries with different financial infrastructures, there will be no need to worry about foreign exchange rates pushing up the total purchase or transaction costs.
In its recent report entitled Digital currency in Europe — What is the opportunity for issuers?, Visa highlighted the opportunity businesses had for around the clock immediate settlements with stablecoins.
"Borderless payments that settle in minutes, are irreversible, nearly free and highly secure can be much faster and more efficient than sending money through the existing channels, especially for some markets with very limited existing payment infrastructure," the report noted.
Stablecoin transactions can cost just a fraction of a penny, regardless of the scale of money being moved from account to account. Furthermore, these payments can be fully processed in a matter of seconds. Of course, fiat currency transactions are generally subject to a flat fee, as well as an additional 1.5% to 3% charge for each transaction.
We're already seeing specialised services being developed to support a range of stablecoin transactions at B2B level, and BitPay has emerged as a prominent choice for borderless transactions.
The blockchain payment service provider works with stablecoins like DAI, USDC, BUSD and PAX to offer fast and flexible transactions.
Elsewhere, blockchain exchanges like Kine Protocol have also ramped up their incorporation of stablecoins, offering multicurrency free switching across digital currencies — enabling enterprises to seamlessly broker deals in a range of stablecoins before converting them into the digital currency of their choice without the presence of fees.
Kine's multiple blockchain solutions span networks covered by Bitcoin, Ethereum, and Polygon. The exchange is also registered on Binance's Smart Chain, which makes it possible to transfer a broad range of assets seamlessly across borders no matter what currency is favoured by the other party.
Overcoming the inefficiencies of traditional payments.
Another key advantage of stablecoins, and the blockchain technology that drives them is that there are reduced counterparty risks due to there being no need for intermediaries. The sender and receiver have the freedom to transact directly with each other rather than via a middleman. This can help to get rid of a potential point of failure, as well as a costly extra step in the transaction.
Because B2B transactions generally require the presence of a middleman to facilitate them, this can cause them to become expensive, slow and restrictive — so much so that McKinsey data suggests that as much as $2 trillion is made annually from the facilitating of payments.
It's these extreme hurdles facing the financial system that prompted the creation of Bitcoin in 2009, with its pseudonymous creator, Satoshi Nakamoto stating in the cryptocurrency's whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System that fiat infrastructures were fundamentally flawed.
Bitcoin leveraged a global payments network that could be used freely without the need for a gatekeeper in control of the entire network. However, with the cryptocurrency's popularity came major volatility and sprawling price rises.
Following on from the blueprint set out by Nakamoto, stablecoins are pegged to fiat prices, meaning that they can be an ideal asset for overseas transactions. This represents a significant opportunity for businesses across Europe as they adapt to the post-pandemic push towards digital transformation, and the opportunities beyond borders that it brings.