The Token Economy: Do Faster, Cheaper Cross-Border Payments Even Need Crypto?

When boosters of cryptocurrency talk about the ways it can turn traditional finance into obsolete finance, cross-border payments are inevitably the first thing they mention.

There are reasons. SWIFT has left sending money from one country to another expensive, slow to the point of days, and unavailable 24/7. It’s a bit ridiculous in a day and age in which you can buy anything from a comforter to a car from your smartphone at 4:30 a.m. on a Sunday. And that will only get worse as real-time payments tools like FedNow and The Clearing House’s RTP network come online.

Cross-border payments also haven’t been a bugaboo of crypto enthusiasts. Particularly when it comes to remittances, there has been plenty of mainstream interest and advocacy ranging from MoneyGram to the United Nations, which made a reduction in remittances a sustainable development goal four years ago.

So, why haven’t cross-border crypto payments happened at scale yet?

Easy in Theory

Sending cryptocurrencies like bitcoin or stablecoins like USD Coin or Tether’s USDT from one wallet to another is anywhere from quick to instant, with fees that can range from a couple of dollars (on bitcoin’s clogged and expensive network) to pennies or even fractions of a cent for tokens like Algorand’s algo, Stellar’s lumens, Ripple’s XRP or even bitcoin over the Lightning Network.

And they don’t see borders. San Diego to San Francisco is no different than San Diego to Sweden.

Ripple, which caters to banks doing back-end transactions, has the basic technique down. Users can buy XRP tokens in the amount to be sent, transfer them from one wallet to another, and immediately sell the XRP for the local currency. The process is so fast that even crypto’s wild price volatility doesn’t have a noticeable impact.

Stablecoins make the process even easier, but they are outside the control of central bankers, who fear that they will let people avoid fiat currencies altogether — which is an issue both domestically and across borders. It’s why the European Union’s Markets in Crypto-Assets (MiCA) legislation will cap stablecoin transactions at $200 million a 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 to Climb

So, what’s the problem?

For one thing there’s the actual complexity of do-it-yourself crypto transactions. Handling digital wallets, negotiating exchanges and the like throw up a barrier that requires instruction and a certain degree of tech savvy to master.

A bigger problem is regulation and the lack thereof. Sending crypto wallet to wallet is easy. Off-ramping it into fiat is not. Payments processors and money services businesses (MSBs) are required, as heavily-regulated banks are still wary of getting involved until there’s an actual legal framework in place.

Anti-money laundering (AML) compliance is also a growing area of interest to regulators, and companies that want to use crypto for retail cross-border payments need clarity and certainty.

Growing Competition

The fear of stablecoins is a big factor in the explosion of interest in central bank digital currencies (CBDCs) over the past few years. About 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 pushing aggressively for one.

In June, the Bank for International Settlements (BIS) — a big proponent of fixing cross-border payments — released a report that said: “Our broad conclusion is captured in the motto, ‘Anything that crypto can do, CBDCs can do better.’”

Read more: BIS Says CBDCs Can Do Anything Crypto Can, but Better

There has been growing attention, and many regional tests, on how to make CBDCs work across borders, which would solve the speed and cost issues as well or likely better than cryptocurrencies — if it can be made to work technologically and politically.

However, SWIFT isn’t sitting still. In April, it joined The Clearing House and EBA Clearing in launching a pilot program for real-time, cross-border payments.

See more: Cross-Border Real-Time Payments Pilot Launched by EBA, SWIFT, TCH

“Aside from delivering a simple and transparent service for end users, our key aim is to keep things easy for financial institutions,” said EBA Head of Service Development and Management Erwin Kulk at the time. “The fact that there is no need to connect to a separate payment system should make the service very attractive.”

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