With the advent of Web3, the mechanics underpinning global commerce are ripe for reinvention, according to Banking Circle, which is taking the first step along that path with the addition of stablecoins to its payments rail.
Digital currencies may seem the polar opposite of the highly regulated world of cross-border payments.
But for an industry the Bank of England predicts will be worth more than $250 trillion by 2027, cross–border payments remain one that is endemically plagued by slow transaction times and high fees.
Currently, most cross-border transactions flow through a “correspondent banking” system, where no actual money changes hands at all. Instead, a bank on one side of the world has an agreement with a bank on the other side of the world, which uses its own funds to honour a payment in its local currency.
“It’s a system that in many ways is built on promises and IOUs,” says Mishal Ruparel, head of virtual asset services at Banking Circle, a company that is trying to disrupt this centuries-old system.
“Money isn't actually moving anywhere, it's just a sort of handshake agreement between two banks.”
The process becomes slower and more costly with each extra bank involved in the transaction, with delays and network fees piling up for businesses. That is a particular problem for payment merchants domiciled in the US, Australia, Hong Kong or Singapore: “If you’re trying to send money to Australia, it's probably quicker to fly with a bag of cash than it is to actually route the payment through the traditional network,” Ruparel remarks.
Banking Circle is seeking to short-circuit this system with the addition of stablecoins to its payments rail, a move that promises to free merchants of their dependency on traditional payment corridors.
Instead of relying on correspondent banking, the introduction of stablecoins means merchants can complete high value transactions quickly and securely via the blockchain. With stablecoins’ value pegged to fiat assets such as the US dollar, the approach also means merchants do not have to worry about the volatility and risk associated with cryptocurrencies such as Bitcoin and Ethereum.
Ruparel explains: “So for one of our clients sending a payment to Australia, running through a stablecoin on a blockchain will be far quicker and more efficient.
"With correspondent banking networks, it could end up going through five different banks, taking one to three days. Blockchain in many ways resolves that — it's almost instant, it’s real-time.”
Leveraging connections into crypto liquidity providers, Banking Circle provides a bridge between merchants’ fiat bank accounts and stablecoins to offer faster transfers than traditionally available — and without lumping merchants with any of the normal network fees. The nature of the blockchain, which provides a public record of all transactions, also gives merchants more transparency into transfers, and therefore more certainty.
“Blockchain replaces trust with truth,” explains Ruparel. “It's there, it's recorded, it's instant.”
Banking Circle’s adoption of stablecoins offers a route into the Web3 market for ambitious payments merchants without the usual IT investment costs doing it themselves would incur.
Ruparel believes it is “critical” that payments providers have the ability to process digital currencies in the same way as fiat currencies, as the age of Web3 promises to upend the existing cross-border transfer system.
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Use of stablecoins on public blockchains has surged since 2020, with its primary use case being for international payments, according to Juniper Research, which predicts the digital money transfer industry will grow from $2.5 trillion this year to $4.4 trillion by 2027.
“These [stablecoin] currencies have the potential to lower payment barriers thanks to their cheaper, real-time, or near-real-time peer-to-peer money transfer capabilities made between digital wallets, which would pose them as direct competitors to instant payment schemes,” its Digital Money Transfer & Remittances report states.
Part of the opportunity is the unlocking of international growth opportunities for SMEs in countries where correspondent banking is not well established.
“It’s very difficult for that business to trade in different geographies because their bank doesn’t have the necessary reach,” Ruparel explains. “One of the things that blockchain does very well is it’s very good at opening those doors.”
One risk of leaving the traditional payment rails of correspondent banking is a lack of regulation, with the crypto space long seen as the “Wild West” of the financial world. However, regulators are showing a growing appetite to engage in this space, particularly around stablecoins and central banks’ own digital assets.
The EU has introduced markets in cryptoassets (Mica) regulation, while in the UK, a bill to regulate stablecoins as a payment method is progressing through parliament. Meanwhile an international body of securities regulators has issued guidance stating that stablecoins must adhere to the same safeguards as traditional currencies.
While the sector still lacks a single global standard, Ruparel says “all the regulators are moving in this space”, meaning mass adoption will not be far behind in the longer term.
For Banking Circle, Web3 is a potential game-changer for international payments — not by replacing trusted banks with volatile cryptocurrencies, but by using stablecoins to speed up and simplify transactions, all with the backing of banks and regulators.
For now, the addition is likely to augment rather than replace alternatives for most customers. But by adding stablecoins to its payments capabilities Banking Circle will be there to support clients early in this journey.
Sponsored by Banking Circle. To find out more, read the whitepaper: As crypto evolves, how should Banks approach CBDCs & stablecoins?