Stablecoins and the new payment landscape

• In 2023, stablecoins settled $10.8 trillion worth of transactions, of which $2.3 trillion was related to organic activities such as payments, cross-border remittances

• Today’s payment giants face significant disadvantages, including high transaction costs, slow settlement times, and limited transparency, although stablecoins also have their advantages

Introduction

Currently, the global payment infrastructure is being modernized and improved, which will provide users with faster and cheaper payment methods. Stablecoins are increasingly being used to build robust crypto payment systems, facilitate remittance payments, and simplify cross-border transactions. In 2023, the total amount of transactions settled by the stablecoin market exceeded $10.8 trillion - $2.3 trillion if "non-organic" transactions, such as robots or automated transactions, are excluded. On an adjusted basis, transaction volumes grew 17% year-on-year, meaning stablecoins are quickly catching up to today’s largest incumbent payment networks.

While incumbent payment networks enjoy some important advantages in terms of liquidity and network effects, as competition has increased, the average cost of remittance payments has fallen by more than a third over the past 15 years, according to the World Bank. However, the average cost of sending $200 globally is still 6.35% of the amount sent, totaling about $54 billion per year. In contrast, the average transaction cost of sending remittances using stablecoins is much lower, at only 0.5% to 3.0% of the amount sent, and there is potential for costs to fall further due to continued innovation in new technologies.

As technology makes it easier for merchants and users to adopt new payment methods, incumbent payment networks have become more vulnerable to fintech challengers. The integration of stablecoins into existing payment systems is an example of the increasing application of cryptocurrencies to the real economy. However, we believe that to expand the role of stablecoins, some of the technical complexities of blockchain need to be simplified, and clearer regulation is needed to ensure consumer protection and promote broader financial inclusion.

The future king?

Stablecoins have become a hot topic recently, especially after the Markets in Crypto-Assets Regulation (MiCA) came into effect in Europe on June 30. USDC became the first dollar stablecoin in the region to meet MiCA standards, while Circle's euro stablecoin EURC also met MiCA compliance requirements. Traditional financial institutions are also deploying stablecoins in the region or planning to do so. This includes Societe Generale's digital asset unit Forge, which launched an institutional version of the EURCV stablecoin, and Deutsche Bank's asset management team DWS, which manages about 1 trillion euros (about $1.09 trillion) in assets, plans to launch a new euro stablecoin in 2025.

These developments could have a significant impact on efforts to establish an intra-European digital payment network. Other jurisdictions are also preparing their own stablecoin regulatory frameworks, such as Hong Kong, which will enact relevant legislation after the end of a public consultation period. Meanwhile, the United States is working to establish rules in this area, with relevant bills in both the House and Senate. Former House Speaker Paul Ryan pointed out in a commentary in the Wall Street Journal that stablecoins can not only help maintain the dominance of the US dollar, but also solve the problem of growing national debt. Former Comptroller of the Currency Brian Brooks (formerly Coinbase Chief Legal Officer) has a similar view, saying in the Wall Street Journal that stablecoins help maintain the US dollar's status as the world's reserve currency.

Therefore, stablecoins have become an important new tool to enhance the existing global payment system. In 2023 alone, the amount of funds involved in cross-border commercial transactions, international commerce (retail) and global remittances will reach a staggering $45 trillion. (See Figure 1) As these markets continue to grow, estimates by category from the International Fund for Agricultural Development, FXC Intelligence and Statista indicate that this amount could rise to $76 trillion by 2030. Today, the traditional infrastructure that handles such large cross-border financial flows has many inefficiencies that increase costs and slow down the flow of funds across borders.

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The existing payment landscape consists of a variety of different entities, but we roughly divide them into four categories. While many of these players represent existing systems, some of them are working to embrace (or at least try to) incorporate stablecoins into their existing workflows. The four main categories include: Automated Clearing Houses: representing electronic networks used to process bank transfers and other financial transactions (mostly domestically or within sovereign borders), Large credit card networks: such as Visa, Mastercard and American Express in the United States, or UnionPay in China, International bank payment networks: such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the Cross-Border Interbank Payments System (CIPS), Mobile payment systems: such as PayPal/Venmo in the United States, Alipay (and WeChat Pay) in China, and the Unified Payments Interface (UPI) in India, which provide digital payment solutions and peer-to-peer (P2P) transactions.

It is important to note that although Fedwire’s funds transfer system settled $1.09 quadrillion in 2023, we excluded it from our list because the network primarily serves Federal Reserve System member institutions, including large banks, corporations, and U.S. government agencies. It primarily settles large and time-sensitive transfers in real time and does not handle small retail payments or remittances, which is what this report focuses on.

Analysis

Electronic networks, such as ACH (Automated Clearing House) in the United States or SEPA (Single Euro Payments Area) in the Eurozone, are among the largest payment systems on our list. In many countries, such systems help facilitate large-scale networks of interbank funds transfers between domestic financial institutions. They typically include direct deposits and bill payments, but in recent years, many systems have also added peer-to-peer (P2P) and business-to-business (B2B) transactions.

According to Nacha (formerly the National Automated Clearing House Association), in 2023, the ACH network in the United States settled $80.1 trillion in transactions, up 4% from the previous year. Historically, ACH transactions settled within 1-2 business days, but now increasingly offer the option of same-day settlement. It is important to note that China also has a credit card payment processing system called UnionPay, which also operates a large Chinese interbank network. UnionPay's interbank payment system processed 279.5 trillion RMB (about $39.5 trillion) in transactions in 2023.

Meanwhile, credit cards rank high on our "payment dominance" list because they are deeply embedded in the spending habits of many consumers, especially in developed countries. The credit card borrowing process has been simplified in many places, and users often receive attractive sign-up rewards. However, these payment giants can charge retailers fees of up to 3.5%, which are increasingly passed directly to consumers. In addition, users may pay an average interest charge of 20% annual percentage rate (APR) (in the U.S.) on outstanding credit card debt.

Credit card companies also typically charge users a 1% international fee on cross-border transactions, making these payment entities very lucrative for overseas spending. Visa reported in its 2023 annual report that it processed $12.3 trillion in payment transaction volume (excluding $2.5 trillion in cash withdrawal transactions) last year (fiscal year ending September 2023), while Mastercard reported in its 2023 annual report that it processed $9.0 trillion in total U.S. dollar transaction volume.

Traditional bank payment networks such as SWIFT and CIPS currently dominate the interbank cross-border payment space, and remittances are often made through these networks. SWIFT is a secure messaging platform that connects more than 11,000 financial institutions in more than 200 countries. However, unlike the ACH, SWIFT does not perform settlements (fund transfers).

These networks are only used to send and receive secure messages, providing transaction details to each party to confirm and allowing them to update their respective ledgers. CIPS was launched by the People's Bank of China in 2015 to compete with SWIFT and make cross-border RMB transactions more efficient. For many years, SWIFT and CIPS have together supported most cross-border payments between financial institutions around the world.

Finally, mobile payment systems are the newest entrants, offering peer-to-peer (P2P) transactions both domestically and internationally. Convenience is one of their biggest advantages, as they often offer a more user-friendly interface than traditional banking methods for transferring money. Some mobile payment systems also have integrated social media components. Mobile payments are often real-time, which is a major advantage for both senders and receivers as it reduces the risk of chargebacks. However, P2P payments only appear instant because they typically exist within a closed ecosystem, so such transactions are simply adjustments to the vendor’s ledger.

However, the downside is that these systems often require a pre-existing banking relationship and/or credit card to work, so users remain dependent on the traditional financial system. This poses a barrier for low-income people who may not have access to such services. Mobile platforms may also collect a large amount of personal and financial data, which raises privacy concerns.

Decentralized Light Presence

These traditional systems have established the processing networks and infrastructure for most of the global transaction volume. However, they also have some important disadvantages, such as high transaction costs, slow settlement times and limited transparency. For example, bank transfers involve multiple intermediaries. Stablecoins, on the other hand, run on public blockchains and rely on transparent processes to prevent fraud and resolve disputes in a decentralized manner through consensus. This is often cheaper, faster and easier to track.

Of course, there are trade-offs with using stablecoins. For example, stablecoins run on blockchains, providing almost instant settlement, but this makes fraudulent transactions difficult to reverse. The proliferation of multiple blockchains may also lead to fragmented stablecoin liquidity, which may expose users to the costs and risks of bridging from one chain to another. Finally, the user experience (UX) of cryptocurrencies itself can be cumbersome and too complex for the average user. The good news is that this complexity has begun to be gradually abstracted through smart wallets and payer architectures (which shift gas fees from users to decentralized applications). Still, we expect it may take years for users to fully adapt to these systems and use stablecoins end-to-end.

In the meantime, existing systems still enjoy huge advantages, such as significant transaction volume brought by a large user base. That is, network effects are very important because it is easier to make payments using a platform that already has a large number of users. A report by McKinsey & Company showed through surveys that banks have an advantage over fintech companies in maintaining consumer trust. For stablecoins to be widely accepted, not only will regulatory issues need to be addressed (see the “Killer Apps” section below), but user trust will also need to be established.

Fortunately, technology has lowered the cost for users and merchants to adopt new payment methods. This has left traditional payment giants vulnerable to fintech challengers. In fact, according to the World Bank, increased competition has reduced the average cost of remittance payments by more than a third over the past 15 years. (See Figure 3) Recent tests conducted by the Bank for International Settlements show that tokenization can facilitate faster and more secure cross-border transactions. However, the average cost of sending $200 across borders is still 6.35% of the remittance amount, with annual fees totaling approximately $54 billion.

In contrast, the average transaction cost of using stablecoins for remittances is much lower, at only 0.5-3.0% of the remittance amount. The broadness of this range reflects that while the direct costs of transferring stablecoins on some networks (such as Ethereum Layer-2) may be very low, there may be other costs. For example, converting local fiat currency to stablecoins or vice versa may incur exchange and/or conversion fees when the platform provides the service. However, as network size and/or adoption increase, this may also reduce future fees by increasing transaction volume and reducing the cost per transaction for providers. Therefore, the overall cost of stablecoin transactions may continue to be optimized.

Filtering out the noise

Stablecoins are often referred to as the "killer app of cryptocurrency" because of their potential for mainstream commercial applications and comparative advantages over traditional payment rails (such as speed and cost). This label is intended to express the promise of stablecoins to attract a wider consumer base to blockchain technology.

However, the reality is that the main use case for stablecoins today is to allow crypto investors to trade digital assets between centralized and decentralized exchanges. This is why the market capitalization of stablecoins is often used as a proxy for liquidity in digital asset markets, as its growth equates to increased depth and price stability in the broader crypto market. Of the $10.8 trillion in transactions settled in all stablecoins in 2023, most of this volume tends to be used for trading purposes.

To take a more conservative approach, we filter total transaction volume based on the criteria outlined in a blog post published by Visa in April 2024—a response to Nic Carter of Castle Island Ventures. They argue that stablecoin transaction data can be noisy due to “non-organic activity and other artificial inflationary behavior.” Therefore, they “adjust” stablecoin transaction volume by (1) removing duplicate transactions from smart contract activity and (2) filtering out bot-driven and automated transactions. To achieve the latter, they only include transactions from accounts that “initiated less than 1,000 stablecoin transactions and transferred less than $10 million” in a 30-day period.

It’s important to note that Visa’s on-chain analytics dashboard only publishes 30 days of data, which makes comparisons with other payment systems difficult. So we did the heavy lifting, applying their criteria to filter stablecoin transaction data over the past five years in the hope of gaining valuable insights. In 2023 alone, we found that stablecoins still settle more than $2.3 trillion in “organic” transactions per year, which may still include transactions but are more concentrated in payments, P2P transfers, and remittances. For example, of this adjusted amount, cross-border B2B transactions on the blockchain, while only accounting for $843 million, are forecast by Statista to grow to $1.2 billion in 2024.

These adjusted transaction volumes grew by 18% in 2022 and 17% in 2023. This is a faster growth rate than any of the aforementioned payment systems, and exceeds PayPal’s payment volume in absolute terms. In fact, even after adjusting for “non-organic activity,” stablecoins processed about a fifth of Visa’s payment volume last year and more than a quarter of Mastercard’s, representing a huge growth since stablecoins were introduced. Notably, adjusted stablecoin volume is about $1.7 trillion year to date (about 10% of total stablecoin volume), compared to $1.3 trillion in the first seven months of last year—organic activity has increased by 28%, as growth continues to accelerate.

Killer Apps

Despite the huge volume associated with stablecoins, the market capitalization of this space remains relatively modest at $164 billion, despite having grown by 26% since the beginning of the year. (See Figure 6.) Despite this, stablecoins currently only account for 7% of the $2.3 trillion crypto market cap. Some market analysts have speculated that the stablecoin market could grow to nearly $3 trillion over the next five years. While this number seems high, as this estimate is close to the current size of the entire crypto market, we believe it is still within the realm of possibility when we consider that this figure is only equivalent to 14% of the U.S. M2 money supply ($21 trillion) (currently 0.8%).

The biggest obstacle to achieving these predictions remains regulation. Back in 2020, the Financial Stability Board (FSB) published a set of “High-Level Recommendations on the Regulation, Supervision and Monitoring of Global Stablecoin Arrangements” (final report due in July 2023), under a G20 mandate. These recommendations are shaping the development of stablecoin regulation in many jurisdictions. In fact, MiCA has already legalized the issuance of stablecoins in Europe, based on its strict rules and operational guidelines. In Asia, several places either already have stablecoin frameworks, such as Singapore and Japan, or plan to launch them soon, such as Hong Kong. Nevertheless, consistent regulation across borders may increase user confidence and lead to a more predictable overall market environment.

In the United States, there are currently two bills that have not yet been passed in the House of Representatives and the Senate, respectively: the Payment Stablecoin Clarity Act of 2023 (CPSA23) and the Loomis-Gillibrand Payment Stablecoin Act (LGPSA). While both bills set specific reserve requirements for stablecoin issuers and include extensive customer protection provisions, they differ in their specific regulatory approaches. CPSA23 stipulates that stablecoin issuers should be regulated by appropriate federal or state regulators, while LGPSA provides a comprehensive federal regulatory regime. More specifically, LGPSA sets a maximum limit of US$1 billion for stablecoins issued by non-depository trust companies. Entities exceeding this amount need to register and obtain approval from depository institutions, and their regulation will be more similar to that of banks.

Conclusion

As the payments landscape continues to evolve, traditional banking systems, credit cards, and even mobile payments are under greater pressure to adapt to changing customer demands. Stablecoins aim to bridge the volatile world of cryptocurrencies with traditional finance by maintaining price stability (mostly pegged to the US dollar). However, these tokens have only really started to be used on a large scale for low-cost money transfers in the past 2-3 years, despite being officially launched in this space in 2015. Despite having some key comparative advantages over existing systems in terms of speed and cost, stablecoins still need to be integrated with the existing financial system to facilitate their use in everyday transactions.

We believe stablecoins represent the next major leap forward in payments and capital flows, especially as it becomes increasingly easy for merchants and other entities to integrate this technology into their economic workflows - even compared to just a few years ago. Recently, Coinbase announced a partnership with payment provider Stripe to offer USDC for cryptocurrency payments and fiat-to-cryptocurrency conversions on Base, and Visa, Mastercard, and PayPal have also launched their own stablecoin initiatives in recent years. Others worth mentioning include Shift4, Nuvei, Worldpay, and Checkout.com. That being said, stablecoins need clearer regulation and a smoother cryptocurrency user experience to more firmly establish their potential.