Stablecoins: Bridging the Global Dollar Divide

Introduction

You’ve probably heard that stablecoins can speed up global money transfers. But what's often overlooked is their profound impact on accessing money itself. In our previous article, we discussed three critical issues in global money movement: access, speed, and transparency. Today, we’re delving deeper into the first challenge: access.

In this article, I’ll explore:

• Why people worldwide struggle to earn, hold, and pay in their preferred currency.
• How stablecoins democratize access to USD through the internet.
• How infrastructure providers like TransFi are scaling this access and enhancing its utility.

Understanding the Problem of Access

Transferring money usually requires a financial institution to hold your funds in an account, particularly in the currency you prefer. Without this capability, global financial freedom remains out of reach for many. This restriction limits opportunities for individuals and businesses alike, hindering economic growth and financial inclusion.

Stay tuned as we uncover how stablecoins are transforming the financial landscape, making dollars accessible to everyone, everywhere. By leveraging digital innovations, stablecoins are breaking down traditional barriers and opening up new pathways for financial participation on a global scale.

Problem 1: A Quarter of the World’s Population is Still Unbanked

According to the latest World Bank Findex Index (2021), a staggering 24% of the world's population, roughly 1.4 billion people, don't have a bank or e-money account. This exclusion denies them access to essential goods and services.

However, there's a silver lining. In regions where traditional banking is scarce, smartphone usage is booming. Take sub-Saharan Africa, for example. The International Monetary Fund reports that only 43% of people there have access to a traditional bank account. Yet, according to the GSMA, 55% have a smartphone connection, and this number is expected to soar to 86% by 2030.

This is the access issue that many people think about, and it's a significant opportunity for stablecoins to shine. Unlike traditional banking, using stablecoins only requires an internet connection – no bank account needed.

But there's another dimension to the access problem, one that involves the type of money itself.

Problem 2: Billions Have Bank Accounts, But Can't Access US Dollars

The USD is a coveted currency. It's stable, widely accepted, and dominates global commerce. For businesses and consumers alike, it offers more buying power and better protection of stored value. Let's explore why this demand exists.

Protecting Value

In 2023, annual inflation hit a staggering 65% in Turkey and soared to over 200% in Argentina. While these are extreme examples, they underscore a broader issue: many local currencies weakened significantly against the US dollar after the Federal Reserve raised interest rates. The bottom line is that if your business holds capital in a currency like the Argentine peso, its value erodes much faster than if you held it in dollars. Similarly, a contractor in the Philippines working for a global company might prefer to be paid in dollars, as they offer greater spending power and stability compared to Philippine pesos. This preference for dollars is driven by the need to protect earnings from the volatility and devaluation associated with local currencies, ensuring better financial security and purchasing power.

Network Effects

The value of a currency increases with its user base. The US dollar, the world's reserve currency, dominates global trade and finance. In 2022, it was involved in 88% of all foreign exchange trades, according to the Bank for International Settlements. Additionally, over 40% of Swift payments are made in US dollars. For businesses, holding dollars simplifies transactions with international suppliers and partners who often prefer dollars over other currencies.

Despite its advantages, accessing US dollars outside the US is challenging. To understand why, we need to explore how this access is traditionally provided.

Why Can’t a US Bank Directly Provide Dollars to Someone Abroad?

Broadly, it’s because many US banks haven't developed robust international distribution networks to offer their services compliantly. Instead, accessing dollars outside the US involves a complex web of correspondent banks, local payment companies, and fintechs.

Imagine you walk into your local bank branch in Argentina. That bank doesn't have a master account with the Federal Reserve Bank, so it can only enable you to hold dollars through a relationship with a correspondent bank—another bank in the US that has its own account with the Federal Reserve. Or perhaps your Argentine bank is a correspondent of a Mexican bank, which in turn is a correspondent of a US bank with a Federal Reserve account. Or maybe you're a customer of a fintech company that partners with the Argentine bank, which is a correspondent of the Mexican bank... and so on. This creates a long chain of friction, causing various challenges for businesses:

This creates a long chain of friction, causing various challenges for businesses:

Difficulty In Opening an Account

Every link in the chain must conduct 'know your customer' due diligence. Opening a business account with access to international payment rails can take 6-12 months, posing a real problem for startups where speed is crucial. Even multimillion-dollar businesses face resource-intensive processes to access US banking rails, often employing large banking and treasury teams to manage and maintain this access.

Higher Fees

Each party in the chain needs to be compensated, making it costly for businesses to access US dollars.

Increased Counterparty Risk

Each additional party introduces more third-party risk. If one party fails, it can trigger a domino effect, causing others in the chain to fail—a scenario we've seen play out in recent banking crises.

Understanding this convoluted system sheds light on why getting direct access to US dollars from a US bank is so challenging for individuals and businesses abroad.

How Stablecoins Are Revolutionizing Global Dollar Access Via Internet?

In the past decade, fintechs have significantly expanded access to financial services for consumers and small businesses. Today, if you want to send $100 from California to someone in London, you don't need to visit your local bank branch. You can simply use your phone to find the right fintech app.

Stablecoins represent the next step in this financial evolution. They enable global access to digital dollars via the internet, reducing the need for intermediaries and minimizing friction. This innovation is driving rapid adoption, especially in payment use cases. In 2022, stablecoins settled over $11 trillion on-chain, nearing Visa's transaction volumes. Moreover, a Mastercard study found that more than a third of Latin Americans have used stablecoins for payments, including in countries like China, Russia, and Europe where traditional methods are costly and time-consuming. One such stablecoin, PayPal USD (PYUSD), was recently announced by payments giant PayPal, marking a major step in the global adoption of stablecoins.

While compliance steps are necessary to hold a stablecoin wallet with a central exchange or payment provider to meet AML and KYC obligations, stablecoins offer significant benefits for global businesses and traders. They allow companies to reach new customers and pay suppliers in regions without access to local fiat banking, mitigating risks associated with volatile local currencies.

However, stablecoins also introduce new risks, such as counterparty risk linked to issuers and their capital reserve management. As the industry matures and regulatory frameworks solidify, we can expect clearer rules and greater trust, bolstered by large institutions like BlackRock and JPMorgan offering stablecoin-based financial products.

In summary, stablecoins are transforming global financial access, offering businesses and consumers a powerful tool to navigate the complexities of international commerce. By leveraging these stable assets, businesses can overcome traditional financial barriers and participate more effectively in the global economy.

The Role of Stablecoins in the Broader Crypto Ecosystem

Stablecoins are a unique asset class within the cryptocurrency market. Unlike volatile cryptocurrencies like Bitcoin and Ether, stablecoins maintain a stable value by being pegged to real assets such as fiat currencies or precious metals. This stability makes them an attractive option for users who seek the benefits of virtual currencies without the price volatility. As a type of cryptocurrency, stablecoins play a crucial role in the broader crypto ecosystem by providing a stable and reliable means of exchange for users, regardless of fluctuating crypto prices. Additionally, stablecoins also serve as collateral for the crypto market, providing stability and liquidity for other cryptocurrencies and bridging the gap between the traditional financial world and the crypto world through their peg to real assets. This highlights the value of the stablecoin as a reliable and secure form of digital currency in the ever-evolving crypto landscape, with a central entity acting as the fiat reserve custodian to ensure stability and security through third party verification.

Among the most popular stablecoins are USDT tokens (Tether), USDC (USD Coin), and DAI. These types of stablecoins are widely used in the crypto market for trading, remittances, and as a store of value. Their role in providing liquidity and stability in the crypto ecosystem cannot be overstated.

USDT, for example, is one of the most traded digital currencies in the world, with a market capitalization that rivals many traditional financial instruments. Similarly, USDC has gained widespread adoption due to its regulatory compliance and transparency.

The Role of Infrastructure Players in Empowering Global Access

Infrastructure players like TransFi play a pivotal role in expanding access to stablecoins, making them indispensable for modern businesses.

If your business is involved in sending and receiving stablecoins, you'll need a reliable way to reconcile payments, generate reports, and ensure audit compliance. At TransFi, our dedicated product team has designed a user-friendly back-office platform tailored for large payment teams managing stablecoin transactions.

You'll likely require access to multiple stablecoins across various blockchain networks. That's where TransFi shines. We partner with leading stablecoin issuers like Circle and Paxos, providing seamless access to different stablecoins through a single API platform. Our global framework of licenses and regulatory approvals ensures compliant access to stablecoins in various markets.

At TransFi, we're here to support your journey in the dynamic world of stablecoins. With our comprehensive solutions, we make stablecoin transactions smoother and more accessible, helping your business thrive in the global marketplace.

FAQs

What are the various types of stablecoins?

Stablecoins come in different forms, each with its unique properties and mechanisms for maintaining a stable price. The types of stablecoins include:

1. Fiat-collateralized stablecoins: These are backed by fiat currencies like the USD. For example, USD Coin (USDC) is a stablecoin backed by US dollars held in reserve. Each USDC token represents one USD, maintaining price stability. Other fiat-backed stable coins are Binance USD (BUSD), Tether (USDT)
2. Crypto-collateralized stablecoins: These stablecoins are backed by other cryptocurrencies. DAI, for instance, is a stablecoin backed by Ethereum (ETH) and other cryptocurrencies. It uses smart contracts to maintain its stable value.
3. Algorithmic stablecoins: Unlike collateralized stablecoins, these rely on algorithms to manage the supply of the stablecoin, adjusting it to maintain a stable price. Eg. USDD and FRAX.

Beyond Access Comes The Power of Exchange

So, that's my perspective on how stablecoins can solve the access problem and bring us closer to global financial freedom. But this is just the beginning. After access, the next crucial step is exchange.

In our upcoming blog posts, we'll dive into how stablecoins are revolutionizing value transfer worldwide. We'll explore how TransFi is partnering with businesses to facilitate global money movement at the speed of the internet. Our products—Collections, Payouts, and Ramp —play a pivotal role in this transformation.

With TransFi Collections, businesses can seamlessly gather stablecoins from various sources, ensuring efficient reconciliation and reporting. Our Payouts solution enables instant, secure disbursement of funds to recipients anywhere in the world. And with Ramp, businesses can easily convert between different stablecoins and fiat currencies, simplifying cross-border transactions.

Stay tuned to learn how TransFi is not just providing access but also empowering exchange, driving a new era of global financial connectivity.

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