When cryptocurrency advocates talk about how to transform traditional finance into outdated finance, cross-border payments are inevitably the first thing they mention.
There are reasons. SWIFT has made sending money from one country to another expensive, slow for days and not available 24/7. It’s a bit ridiculous at a time when you can buy anything from a duvet to a car from your smartphone at 4:30am on a Sunday. And that gets worse when real-time payment tools like FedNow and The Clearing House’s RTP network come online.
Cross-border payments have also not been a bogeyman of crypto enthusiasts. Regarding remittances in particular, there has been a lot of mainstream interest and advocacy, from MoneyGram to the United Nations, which four years ago declared reducing remittances a Sustainable Development Goal.
So why haven’t cross-border crypto payments happened on a large scale yet?
Easy in theory
Sending cryptocurrencies like Bitcoin or stablecoins like USD Coin or Tethers USDT from one wallet to another goes from fast to instant, with fees ranging from a few dollars (on Bitcoin’s congested and expensive network) to pennies or even Fractions of a cent can be enough for tokens like Algorand’s Algo, Stellar’s Lumen, Ripple’s XRP or even Bitcoin via the Lightning Network.
And they see no limits. San Diego to San Francisco is no different than San Diego to Sweden.
Ripple, which is aimed at banks conducting back-end transactions, has the basic tech under control. Users can buy XRP tokens in the amount to send, transfer them from one wallet to another, and immediately sell the XRP for local currency. The process is so fast that even crypto’s wild price volatility has no noticeable impact.
Stablecoins make the process even easier, but they’re beyond the control of central bankers, who fear they’ll make people avoid fiat currencies altogether — which is a problem both domestically and across borders. For this reason, European Union legislation on crypto asset markets (MiCA) will limit stablecoin transactions to $200 million per day. And there are very serious stability concerns, especially since the Terra/LUNA stablecoin ecosystem collapsed in May, taking $48 billion with it.
The fences for climbing
So what’s the problem?
First, there is the actual complexity of do-it-yourself crypto transactions. Dealing with digital wallets, negotiating exchanges and the like presents a hurdle that requires guidance and a certain level of technical know-how to overcome.
A bigger problem is regulation and the lack of it. Sending crypto wallets to wallets is easy. Shutting it down in Fiat is not. Payment processors and Money Services Businesses (MSBs) are needed as heavily regulated banks are still reluctant to get involved until an actual legal framework is in place.
Anti-Money Laundering (AML) compliance is also a growing area of concern for regulators, and businesses looking to use crypto for cross-border retail payments need clarity and certainty.
Fear of stablecoins is a major factor in the explosion of interest in central bank digital currencies (CBDCs) in recent years. Around 100 countries, including all major economies, are considering, testing or building CBDCs. In the United States, President Joe Biden’s executive order calling for a comprehensive crypto regulatory framework requires a CBDC recommendation, and the European Central Bank (ECB) has been aggressively pushing for one.
In June, the Bank for International Settlements (BIS) — a big proponent of regulating cross-border payments — released a report stating, “Our overall conclusion is summed up in the motto, ‘Anything crypto can do, CBDCs can do better. ‘”
Continue reading: BIS says CBDCs can do everything crypto can, but better
There has been growing attention and plenty of regional testing of how CBDCs can work across borders, which would solve the speed and cost issues as well as, or probably better than, cryptocurrencies — if it can work technologically and politically.
However, SWIFT is not sitting still. In April, it launched a pilot program for real-time cross-border payments together with The Clearing House and EBA Clearing.
See more: Pilot project launched for cross-border real-time payments by EBA, SWIFT, TCH
“Besides providing a simple and transparent service for end users, our main goal is to keep things simple for financial institutions,” said EBA Head of Service Development and Management Erwin Kulk back then. “The fact that it doesn’t require a connection to a separate payment system should make the service very attractive.”
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