Beyond Borders: The Role of Stablecoins in Global Payments
Cross-border payments have become more crucial as the world becomes more interconnected and globalized. Nevertheless, traditional payment systems are slow, expensive, and ineffective, raising the entry barrier to commerce and economic growth. Recently, the introduction of stablecoins has presented a potential solution to the above challenges.
Stablecoins are digital currencies designed to provide users with price stability by being backed by specific ‘stable’ assets or using algorithms to regulate their supply based on demand. They bridge the gap between fiat currencies like the US dollar (USD) and mainstream cryptocurrencies like Bitcoin (BTC). The ability of stablecoins to maintain price stability while offering the mobility and utility of cryptocurrencies enables them to provide a fast, cost-effective, and secure way to transfer funds across borders.
In this blog post, we will explore stablecoins basics that make them price-steady and how they transform cross-border payments. Besides, we will discuss UniPass’ wise choice of stablecoins and future trends in stablecoin payments.
Keeping it Steady: Stablecoin Basics
Price stability is of paramount importance for businesses and freelancers due to several key reasons:
For businesses, predictable pricing is essential for effective financial planning and budgeting. Fluctuations in currency values, as seen in mainstream cryptocurrencies like BTC, can introduce uncertainty and hinder a company’s ability to forecast costs accurately. Stablecoins offer a solution by providing a consistent value, allowing businesses to make informed decisions, set transparent pricing structures, and maintain financial stability.
Freelancers, who often rely on a steady income, benefit significantly from price stability. The assurance of receiving a fixed value for their services eliminates the risk of crypto volatility and fiat currency inflation. This stability allows freelancers to plan their finances, set fair rates for their work, and ensure that their earnings maintain a predictable value. Ultimately, stablecoins empower freelancers with a reliable and transparent means of conducting their tasks, fostering confidence and financial security in an otherwise dynamic market.
How Stablecoins Achieve Price Stability
Stablecoins achieve stable prices by being pegged on a 1:1 to fiat currencies, other cryptocurrencies, commodities, and algorithms. Let’s discuss each in detail.
Fiat-Backed Stablecoins
Fiat-backed stablecoins maintain stability by pegging their value directly to traditional fiat currencies, like the US dollar. Each issued stablecoin is backed by an equivalent fiat currency reserve held in custody. Examples include USDC (USD Coin), which is pegged to the US dollar, and Tether (USDT), known for its 1:1 peg to the US dollar, ensuring a stable value through the backing of real-world currency reserves.
Crypto-Collateralized Stablecoins
Crypto-collateralized stablecoins are backed by other digital currencies. Since the reserve currency is also vulnerable to high volatility, crypto-collateralized stablecoins are overcollateralized — that is, the value of the reserve currency or currencies exceeds the value of the minted stablecoins.
For example, a crypto worth $5 million can be held as a reserve to mint a $2.5 million worth of stablecoin, insuring against a 50% depreciation in the underlying asset’s price. MakerDAO’s Dai (DAI) stablecoin is a typical example of a crypto-backed stablecoin. It’s backed by Ethereum (ETH) and other digital currencies worth 150% of the DAI coins in circulation.
Commodity-Backed Stablecoins
Commodity-backed stablecoins tie their value to physical assets such as precious metals and commodities. An example is PAX Gold (PAXG), a stablecoin backed by gold. PAXG’s value remains steady as it directly tracks the market value of physical gold. This approach provides intrinsic value and stability to the PAXG, making it an attractive option for users seeking a secure store of value.
Algorithmic Stablecoins
Algorithmic stablecoins may or may not maintain reserve assets. Their distinguishing feature is keeping their value stable by regulating their supply via algorithms — computer programs based on predefined rules. The mechanism is similar to that of central banks — only that the latter set their monetary policies publicly based on commonly accepted parameters. As such, algorithmic stablecoins can easily lose their pegs in crises, like what happened to TerraUSD (UST) in May 2022.
Zooming Through Transactions
With their unique attributes, stablecoins effectively overcome traditional banking hurdles, providing businesses and freelancers with swift and efficient transaction experiences. Unlike traditional payment systems that often involve lengthy processing times, stablecoins enable near-instantaneous transactions. For instance, it takes an average of 30 seconds to process payments with UniPass. On the contrary, it can take up to 2 days for PayPal to process Direct Deposit payments from your payroll provider or client.
In addition to speed, stablecoins offer the advantage of lower transaction fees. Traditional cross-border transactions are often burdened by hefty fees imposed by banks and Web2 payment processors. The absence of third-party involvement in stablecoins streamlines the transaction process, translating into cost savings for users. For example, PayPal charges businesses transaction processing fees between 1.90% and 3.49%, plus a fixed fee per transaction. On the other hand, UniPass charges transaction costs of as low as $0.01 for receiving USDT and USDC payments on the Polygon network.
Essentially, stablecoins revolutionize the transaction landscape by providing a seamless and cost-effective alternative to traditional banking methods. Their speed and affordability make them a powerful tool in overcoming the challenges associated with cross-border payments, aligning with the demands of a globalized and interconnected world.
Around the World with Stablecoins
The adoption of stablecoins significantly enhances blockchain technology’s global reach. As digital currencies designed for cross-border transactions, stablecoins transcend geographical limitations, allowing users to engage in secure and swift international transactions. Unlike traditional banking systems that involve complex processes and exchange rate fluctuations, stablecoins eliminate the need for intermediaries and mitigate the impact of exchange rates.
The impact of stablecoins on international transactions is profound. Businesses and freelancers can seamlessly send and receive funds globally without the delays associated with traditional banking. The technology brings much-needed transparency, security, and efficiency in cross-border transactions. This global accessibility fosters financial inclusion, enabling individuals and businesses in different parts of the world to participate in the digital economy.
Cutting Out the Middleman: Decentralization Matters
Blockchain’s point-to-point payment power is a game-changer in the financial landscape, eliminating the need for transaction intermediaries. Traditional payment systems involve multiple intermediaries, each adding complexity and cost to the process. With decentralized stablecoins, transactions occur directly between parties, streamlining the payment flow and ensuring efficiency.
Decentralization also plays a crucial role in lowering the cost of transactions. Traditional financial systems often impose substantial fees due to the involvement of various intermediaries and complex processes. By cutting out the middleman, blockchain technology reduces transaction costs significantly. Users benefit from more affordable cross-border transactions, enhancing the appeal of decentralized stablecoins for businesses and individuals alike.
UniPass’ Wise Choice of Stablecoins
UniPass’ strategic decision to settle payments in stablecoins reflects its comprehensive approach to addressing volatility, high transaction costs, lengthy processing times, and inflation concerns:
Mitigating Crypto Volatility
UniPass strategically opts for stablecoins to settle payments due to their inherent price stability. Unlike mainstream cryptocurrencies prone to significant value fluctuations, stablecoins ensure the settlement value remains steady and predictable.
Lowering Transaction Costs
Stablecoins typically involve lower transaction fees than traditional cross-border payment methods, contributing to UniPass’ goal of offering efficient and affordable financial services.
Facilitating Swift Cross-Border Transactions
UniPass leverages the speed and efficiency of stablecoins to streamline cross-border transactions. The near-instantaneous nature of stablecoin transactions enhances the overall user experience, reducing processing times and meeting the demands of a globalized world.
Beating Inflation of Fiat Currencies
UniPass recognizes the value of stablecoins in protecting against the inflationary nature of fiat currencies. By choosing stablecoins, UniPass ensures that the stored value retains its purchasing power over time, offering users a hedge against the depreciation associated with traditional fiat currencies.
Future Trends in Stablecoin Payments
On August 7, 2023, PayPal announced the launch of PayPal USD (PYUSD), backed by USD deposits, short-term US treasuries, and other cash equivalents. PYUSD is designed to contribute to the opportunity stablecoins bring to payments, and it can be redeemed 1:1 for USD.
“The shift toward digital currencies requires a stable instrument that is digitally native and easily connected to fiat currency like the US dollar,” said Dan Schulman, president and CEO of PayPal.
Afterward, on September 5, 2023, Visa expanded its stablecoin settlement capacities to the Solana blockchain and partnered with merchant acquirers Worldpay and Nuvei. By exploiting stablecoins and high-performing blockchains, Visa aims to enhance the speed of cross-border settlement and enable its merchants to send and receive money from its treasury quickly.
“By leveraging stablecoins like USDC and global blockchain networks like Solana and Ethereum, we’re helping to improve the speed of cross-border settlement and providing a modern option for our clients to send or receive funds from Visa’s treasury easily,” said Cuy Sheffield, Head of Crypto, Visa.
The adoption of stablecoins by PayPal and Visa indicates the growing desire of Web2 payment processors to deploy stablecoins and blockchain technology in their internal and customer-facing activities.
The initial applications of stablecoins centered around transferring value across blockchains to support cryptocurrency economy use cases (mostly trading and B2B payments between crypto companies). As these companies improve their UX and UI, and as cutting-edge stablecoin-focused payment platforms (like UniPass) emerge, stablecoins will be utilized for any cross-border disbursements in the future.
Final Thoughts
In conclusion, stablecoins have emerged as a transformative force in cross-border payments, addressing the shortcomings of traditional systems by providing speed, cost-effectiveness, and stability. Their pivotal role in fostering financial inclusion and transparency is reshaping global transactions and empowering businesses and freelancers with efficient alternatives to navigate the challenges of a rapidly evolving digital economy.
UniPass’ strategic choice of settling payments in stablecoins demonstrates a forward-thinking approach to mitigating crypto volatility, lowering transaction costs, and facilitating swift cross-border transactions. As industry giants like PayPal and Visa embrace stablecoins, the future trends in stablecoin payments indicate a broader integration of digital currencies into mainstream financial systems. This shift reflects the recognition of stablecoins as a digitally native and reliable instrument for enhancing the speed and efficiency of cross-border settlements.
About UniPass
UniPass offers a comprehensive stablecoin payment solution. Enjoy gas-free payments, and the ability to process batch transactions with one-click. Confidently manage, transfer, purchase, and store your stablecoin with the UniPass wallet.
