In Africa, where many international banks have scaled back or exited the market, cross-border payments are often moved through multiple local banking entities, opening the door to errors and delays. In India, international payments get bogged down by manual intervention and in South Korea, cross-border payments above a certain amount require a range of weighty additional documents.
For multinational companies exposed to emerging markets and complex currency countries, cross-border payments are a painful headache to which stablecoins, the digital currency that moves on blockchain and is pegged 1:1 to sovereign currencies to combine the speed of the internet with the value and stability of traditional money, could be a powerful antidote.
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 Bruno Mellado, Global Head of Payments and Receivables at BNP Paribas.
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” he says.
“Stablecoins provide greater liquidity particularly for firms focused on real time payments,” adds San Francisco-based Kammy Tsang, Senior Director, Head of Global Cash Management at PayPal, which has created the stablecoin PayPal USD (PYUSD), most recently adopted by YouTube to pay its US-based creators. “In the last three months, PYUSD surpassed US$1bn in intercompany transactions on chain. Rather than intercompany settlement passing through multiple entity hubs subject to each jurisdiction’s banking hours, a wallet in multiple entities means transactions are done in less than a few hours,” she says.
Payments in tokenised deposits remain a tiny part of the global banking industry and research from EY-Parthenon estimates only 8% of (primarily B2B) corporates have used stablecoins to date. But treasury teams at multinationals working in complex currency countries are increasingly exploring how stablecoins can support cross-border accounts payable and receivable. Treasury teams are asking if they should begin accepting stablecoins as payments and how to build capabilities and develop an informed strategy.
Regulatory uncertainty
Stablecoins have exploded into the payments mainstream thanks to new regulation. America’s GENIUS Act has created a federal framework that mandates stablecoins are backed by strict reserve and transparency standards and puts oversight of the industry with banking regulators. In Europe, the EU’s Markets in Crypto-Assets (MiCA) regulation sets legal parameters for stablecoin payments, requiring issuers to partner with licensed financial institutions, and the UK is also developing a regulatory framework for stablecoin issuance.
But commentators warn that the regulatory environment is still far from certain.
Risks and concerns include scalability and interoperability across large networks, as well as fragmented platforms and standards and varying global approaches. Mellado points to Turkey as an example where the growing market for dollar stablecoins is 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.
A recent paper from Standard Chartered predicts US$1trn could potentially move from emerging markets into stablecoins in the next three years with analysts at the bank predicting a high risk that deposits in Egypt, Pakistan, Bangladesh and Sri Lanka will flow into stablecoins as local depositors seek an external store of value with consequences for local economies.
Countries (like Turkey, Morocco, China) are increasingly worried that if stablecoins are used in international payments it will encroach on their own economies, agrees Mellado. 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.”
Which stablecoin?
Commentators believe corporates are most likely to access stablecoin-based payment services through their existing banking relationships but they still need to weigh up which stablecoin to use, distinguish between the different stablecoins and find an issuer they trust. Banks’ clients, unlike stablecoin users, are protected by anti-money laundering rules, minimum capital and transparent reporting requirements, and a central bank backstop.
PYUSD is issued by Paxos Trust Company, a New York Department of Financial Services chartered limited purpose trust company, is a regulated stablecoin with one-to-one backing in US dollars and highly liquid short-term US government securities. Elsewhere Klarna, the Swedish “buy now, pay later” lender has entered the fray, launching KlarnaUSD on a blockchain created by payment company Stripe for international payments.
Meanwhile financial institutions are debating whether to issue their own stablecoin, join a consortium or distribute existing stablecoins. For example, although BNP Paribas will accept other regulated stablecoins, the team are also developing their own initiatives with banking consortiums like Faro, and Qivalis which is exploring developing a European stablecoin.
In the last three months, PYUSD surpassed US$1bn in intercompany transactions on chain. Rather than intercompany settlement passing through multiple entity hubs subject to each jurisdiction’s banking hours, a wallet in multiple entities means transactions are done in less than a few hours.
Kammy Tsang, Senior Director, Head of Global Cash Management, PayPal
A wave of bank-backed stablecoins could introduce new competition into a market currently led by a handful of dollar-denominated options comprising Circle and Tether (USDC, USDT) PayPal’s PYUSD and euro-backed EURC. But Mellado says treasurers should be wary of the most-used dollar-pegged stablecoin, Tether. Tether is issued by a business incorporated in El Salvador, making it difficult to scrutinise its disclosures and reserves, and leaving institutions unsighted on the real value of the assets that underpin the digital currency. “We find corporates are not keen to use Tether and we actually advise them not to because of the lack of a framework.”
In contrast, he says Circle, which represents 20% of stablecoin flows, is more business ready. It operates under a European licence and follows guidelines that banks like BNP Paribas can support. “Because of this, risk is limited. Even though users still have counterparty risk, like with a bank,” he says.
Will corporate treasurers issue their own stablecoins? Commentators don’t expect many companies to begin issuing their own stablecoins. If companies hold different coins, they won’t be able to exchange them, reducing the interoperability.
Prefunding the liquidity
Enthusiasts hail the instant settlement, 24/7 characteristics of stablecoins will support liquidity. The blockchain technology allows for smart contracts and automation, allowing treasurers to integrate just-in-time liquidity management and automated payment workflows, freeing up capital for investment and strengthening their balance sheets. Moreover, PayPal’s stablecoin is recognised as a cash or cash equivalent and is not distinguished on the balance sheet.
But a key challenge for treasures includes the fact corporates cannot access funds held as reserves backing stablecoin and they must prefund the liquidity. Most corporate payments are done on intraday bank lines – a payment run in the morning is not funded with money waiting in the account, but relies on bank credit. But stablecoins are fully backed, 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 – bank deposits, tokenised or traditional, qualify for interest payments, whereas stablecoins can’t pay interest under US and European law.
“Stablecoins may lower the cost of liquidity, but corporates still need to put the money on the stablecoin first. This means they may have to sell mutual funds earlier to put on a stablecoin to make a payment. We’ve found that treasurers are not keen on this,” says Mellado.
He also believes that fees are likely to go up in the long-term and stablecoins celebrated lost costs will morph into a fee-based model levied at different points on the chain – like, for example, 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,” he warns.
Still, low costs remain the most compelling argument in their favour. Expensive money transfer services will face cheap competition and credit card companies, long criticised for the high fees they charge merchants, will be disrupted. EY‑Parthenon found that 41% of organisations that have used stablecoins reported cost savings of 10%+, primarily driven by efficiencies in cross-border payments spanning both receiving payments from suppliers and making outbound payments.
Getting started
For corporate treasurers keen to step into the future, Tsang highlights the importance of getting acquainted with the basics first. She suggests treasury teams begin by establishing a stablecoin business strategy that highlights where the technology could solve specific problems like payment delays, inefficiencies or reducing paper heavy workflows. She also suggests a pilot project shaped around low risk, but high visibility use cases with limited scope. From this it’s possible to track key metrics like speed, transparencies, efficiency and savings, and it also provides a launch pad off which treasury will be able to then integrate and scale adoption across business units and regions with an eye on connecting the systems together, governance and access control.
Another key step involves risk assessment, she continues. “It involves deciding how much to hold in stablecoins. At PayPal, we did a comprehensive risk assessment that went through rigorous approval process.”
Diving further into the details, she suggests that before adoption treasurers should investigate the DLT types, compliance considerations, regulatory status and data privacy requirements – in short a whole gamut of specific features – of any stablecoins they’re considering. This should include the accounting standards for holding stablecoins in specific jurisdictions – depending on its terms, stablecoins may meet the definition of a financial asset and be subject to different accounting frameworks. For example, PayPal’s policy classifies PYUSD as a cash equivalent, which provides clarity over cashflow and reporting implications to use and hold it.
Tsang also urges corporates to start the conversation with wide range of stakeholders, including banks, industry players, fintechs, and other treasurers too. “Our infrastructure was not built overnight and aim for execution and learning over perfection. It’s a greenfield with lots of people fuelling the ecosystem, so appreciate pioneer-to-pioneer discussions and embrace the idea of building it together because many smart people are working on how stablecoins can revolutionise commerce.”
Usability is another pillar. This means ensuring treasury doesn’t have to leave its existing payment ecosystem to start using stablecoins but has the ability to tap into solutions that bridge the gap between their core ERP and TMS, and blockchain-based payment rails and wallet infrastructure. More corporates will be willing to adopt stablecoins if they were integrated into their ERP, she reflects. “Evaluating the stablecoins fit involves building internal capacity including forming a digital assets taskforce, training teams, and evaluating platform integrations with existing financial systems, including ERP,” she says.
Finally, she links success to finding a visionary within the company willing to champion the technology and drive integration; someone prepared to put in the groundwork because they are passionate about the long-term benefits.
“Success requires a pioneer willing to champion stablecoins, not just as a new payment method but as a new financial instrument,” she concludes. “It really is a cross functional initiative, and although the business assessment starts with treasury it needs many teams to bring it to fruition. Above all, it requires somebody who is prepared to say yes.”
