Payment: The race between stable coins and CBDCs
The future of trade and supply chain finance is tokenised_Part 2
Payment is one of the most impactful areas of blockchain technology. For the first time, payment can be made on a Peer-to-Peer basis, remotely, at a fraction of the costs of existing cross-border payment and as easy and fast as sending a text or email. Business to Business (B2B) payment is a large market that is bank-dominated. New B2B payment firms like TransferWise and AirWallex bring great customer experience and cost savings but still need to rely on bank’s payment rail.
Regulatory landscapes for crypto payment vary among countries. However, banks and traditional financial firms are increasingly turning to cryptocurrencies for international payment:
- JPM Coin, a cryptocurrency run on private blockchain Quorum reportedly went live in late 2020 after 2 years in development. It is initially used to settle within the JP Morgan’s international network.
- Paypal announced that they would launch a service to allow customers to spend Bitcoin and other cryptos at 26 million merchants on its network in 2021. This is anticipated to bring crypto currencies to the mainstream.
Visa has been working with blockchain technology for several years and filed a few patents. One of the most recent developments was the collaboration with the issuer of stablecoin USDC which enables B2B payment within the Visa network.
Indeed stablecoins have been one of the most exciting developments in blockchain space. The last year has seen a huge increase in stablecoins in issuance and uses. Some of the most prominent and relevant for global trade are:
- USDC is a stable coin guaranteed by off-chain deposit of USD. The crypto currency is therefore fiat-backed. The deposit is regularly audited. Through a partnership with Visa (above) and Coinbase we expect it to become a major player in the B2B payment space.
- Dai, like USDC, pegs 1:1 to USD through an on-chain collateralised lending mechanism. Anyone can generate Dai by depositing Eth (which powers the Ethereum blockchain) and other acceptable collateral with a smart contract. It is expected that real-world assets such as invoices and loans could eventually be accepted as collateral, thus vastly increase the use of Dai in the real economy.
- Diem is a stablecoin to be issued by Diem Association which was set up by Facebook and 26 other organisations. It is pegged 1:1 against USD and targets specifically at the unbanked in emerging markets.
These developments have partly prompted the Central Bank Digital Currency (CBDC) efforts by many countries. China started Digital Yuan project many years ago and now piloting the digital currency in a number of cities.
The Digital Yuan could challenge the USD hegemony as China is the largest economy in real terms and the largest trading nation. Other CBCD projects include e-krona (Sweden), Digital Euro and those from the likes of Japan, Thailand and Australia, albeit at different stages of development.
In a few years, we are likely to see these digital tokens playing a major role in international trade. By that time, regulatory regimes will have evolved. Conversions back and forth to national currencies will become easier through services such as PayPal. It is also likely that other digital tokens like the above stable coins will widely be accepted, not just CBDCs.
Visa estimates that $120 trillion in payments annually are made using checks and wire transfers, costing as much as $50 each, regardless of the size of the transaction. Since stable coins settle on a blockchain, transactions can close in a little as 20 seconds and, importantly, can be done for nearly free. Visa believes its vast array of merchants could choose to use this nearly instant alternative form of payment.