In Africa, where most international banks have either exited or significantly scaled back their operations, cross border payments now pass through multiple banking entities that move the money from one to the other sequentially, creating ample room for errors and delays. For example, in India international payments get bogged down by manual intervention and in South Korea, cross-border payments in Won above a certain amount, require weighty documents.
Globally, around 75% of global payments in main currencies settle within the hour but that gets much slower for all other currency countries where treasurers would rather not hold the local currency unless they have local operations. In some exotic currencies, there may not even be enough liquidity to exchange to dollars or euros and some jurisdictions come with risks repatriating funds back to treasury altogether, explains Mellado.
Navigating payments in these countries using stablecoins which have no settlement windows, time zones or banking hours; that go wallet-to-wallet on a blockchain eliminating many correspondent banking or FX intermediaries, could be truly transformative.
“For all payments outside a mainstream currency, stablecoins offer the opportunity to make things faster and more predictable, often in combination with local instant payment schemes” says Mellado.
But although he notices real interest from multinational corporations active in these more complex markets, he says the evolving landscape still requires careful navigation. For example, the regulatory environment is far from settled, and scalability and interoperability across networks isn’t possible yet, meaning paying in stablecoins isn’t viable for most corporate payments.
For example, he notices a growing market for dollar stablecoins in Turkey juxtaposed by regulatory unknowns like the ability of corporates using stablecoins in the country to pay other businesses or transfer into local currency. “Banking partners who have to advise on the rules, still need to do more due diligence to ensure safe and sustainable stablecoin payments,” he says.
Moreover, countries (like Turkey, Morocco, China) are increasingly worried that if stablecoins are used in international payments it will encroach on their own economies. They have begun drawing up their own regulation that could limit their use. “Companies using stablecoins may not be operating in a future-proof state,” he warns. “It will take time, and only when the regulation is clear and compliance risk eases, can we say we have a new, tested payment rails to do business.”
Mellado also highlights risks around stablecoins like Tether, the dollar-pegged stablecoin. Tether represents the majority of the stablecoin market, but the issuer is not backed by an applicable regulatory framework that allows institutions to understand the composition of its reserves, leaving banks like BNP Paribas unsighted on the real value of the assets that underpin it.
In contrast, he says Circle, which represents around 20% of stablecoin flows and is growing very fast, is more geared towards business grade applications. It operates under US and European licences and follows guidelines that BNP Paribas can understand and support even though users still have counterparty risk – like with a bank.
Although BNP Paribas accepts regulated stablecoins, it is also developing its own initiatives with banking consortiums like Faro and Qivalis which are developing stablecoins.
Another key challenge for treasurers includes prefunding the liquidity. Most corporate payments are done on intraday bank lines – a payment run in the morning is not always funded with money waiting in the account but relies on bank credit.
But stablecoins are instantly redeemable instruments: they are not credit products; there is no overdraft, netting or delayed settlement. If corporates are making payments using stablecoins they must have the money to underpin the transaction upfront and put it on the instrument. And it’s not interest bearing either.
“Reusing and converting the stablecoins at a high frequency may lower the cost of liquidity, but corporates still need to put the money on the table first. We’ve found that treasurers are not keen on this prefunding model.”
Mellado also believes that while fees are very limited today, these are likely to go up in the longer term: stablecoins celebrated low costs will morph into a fee-based model levied at different points on the chain – like, for example, when it comes to converting to fiat currency.
“It’s normal in a new business that there are no fees, but once a use case develops, so do the fees may catch up,” he concludes.
