Stablecoins: a safer bet for cross-border payments and remittances?
Since the beginning of 2017, over 100 stablecoin projects have been announced. It’s predicted that 2019/20 will see more stablecoins come live than ever before. This new technology offers the promise of a secure and stable decentralised system that could drive everything from cross-border lending to financial planning. The industry is keen to know more and to assess whether stablecoins can help the remittance industry take the next step.
It’s widely accepted that cryptocurrency price instability and market speculation have resulted in a volatility that is simply incompatible with vital financial functions. However, stablecoins move the dial and may be the catalyst for the creation of a new global remittance ecosystem.
What are they?
A stablecoin is a type of digital currency based on blockchain technology which anchors its value to a cryptocurrency, national fiat currency, exchange-traded commodities, or composite indices of goods and currency. Stablecoins are specifically designed to minimise the volatility of the price of the coin, relative to its peg.
There are broadly two types of stablecoin: trusted and trustless. Trusted is where an entity issues its own token on a blockchain, and declares that, for every one in circulation, there is one US$ (for example) in reserve in its bank.
Trustless stablecoins, on the other hand, eliminate counter-party risk by instead being collateralised with cryptocurrencies that aren’t owned or controlled by a single central entity and can be validated by public blockchain. They rely on a smart contract and are seen as much more secure because they are decentralised and not reliant on human interactions.
A future role in remittances
Celo is an open platform that makes its financial tools accessible to anyone with a mobile phone. Anca Bogdana Rusu joined the team working on Celo in 2018, having previously spent eight years at the World Bank and IFC working on private sector development, financial inclusion and digital finance. She believes that stablecoins can have a big influence on the future of cross-border payments and remittances.
“One of the biggest barriers to the adoption of cryptocurrencies as a medium of exchange is volatility,” explains Rusu. “Volatility is also one of the main reasons that regulators have warned against the purchase and use of cryptocurrencies in places as diverse as Lebanon, Kenya, Brazil and the Philippines. The Central Bank of Mexico specifically brings up price volatility and information barriers for the end user regarding price drivers as a reason for not authorising licensed financial institutions to work with cryptocurrencies.”
“Stable-value currencies aim to address this barrier - of both usage and regulation - whilst also removing price risk from financial contracts denominated in those currencies. Stablecoins offer many benefits for transferring value compared to fiat currencies. They enable faster payments at lower costs with 24/7 global access - not only for the end user but for the money transfer industry. Think about liquidity management for payments. With a digital asset you would not need to prefund accounts in the destination 48 hours in advance. This is expensive and locks up capital. I’m talking about instant settlement and freeing up funds.”
Rusu thinks that the technology can boost financial inclusion by involving new customers previously left out due to the cost of sending money. Being able to move liquidity in real time reduces the pain of banks 'derisking' countries and communities; achieving the industry goal of cutting 3% from the cost of remittances by 2030. It looks a powerful solution.
“In addition, these new digital assets can be programmed allowing for new and more efficient forms of financial services,” Rusu adds. “Right now, those who remit funds have little control over how the funds are being spent. But with the use of smart contracts, the industry could enable remitters to determine the end use of the money. For example, remittance senders will be able to ensure their children’s school fees or their family’s medical bills will be a priority.”
“And that’s the most important value proposition for the cross-border payments and remittances industry when it comes to stablecoins. People remember how you make them feel. Remittances are often the most durable connection between the migrant and the home community. If you, as a remittance provider, are able to strengthen that connection, they will remember your brand. Speed and cost aside, that meaningful experience will make people come back.”
Engaging with communities
Celo’s mission is to enable a monetary system that creates the conditions for prosperity for everyone, reaching out to the one in three adults globally that are currently not financially included.
“To address this issue, it became clear early on that a volatile crypto asset would not be very useful as a means of payment, despite its other benefits,” says Rusu. “Celo is a platform for the creation of stable-value assets, pegged to fiat currencies such as Dollars or Pesos, and implemented by an algorithmic reserve-backed stabilisation mechanism. Enabling a family of stable-value assets, as opposed to just one currency, could allow the creation of regional and utility assets that would foster local economies and enable people to hedge price-risk with respect to the local goods and services they use regularly.”
Uniquely, Celo is oriented around providing the simplest possible experience for end users, who may have no familiarity with cryptocurrencies, and may be using low-cost devices with limited connectivity.
For the past year or so, Celo has been working with communities around the world in order to understand exactly how the company’s technology can improve the lives of the underbanked. The Celo team has met with hundreds of people from Kenya to Argentina, from refugees in Tanzania and economic migrants in Colombia, to industry experts in the Philippines, women entrepreneurs in Mexico, and many more.
Interviews, observations, and pilots have allowed Celo to learn what matters most to individuals across the world when it comes to their finances. “These insights have directly impacted both protocol and application design decisions, as we aim to better serve the end users and the partners building on top of the Celo protocol,” adds Rusu.
Stablecoin projects have the potential to transform remittances, adding value all along the chain and ultimately enhancing end user experience. One to watch as we enter an exciting new decade.
Celo’s Dr Markus Franke will be discussing stablecoins and their relevance in the modern remittance ecosystem at the 2019 IAMTN Global Summit, which takes place in London on 2-3 October. Dr Franke heads up Celo’s European operations and is responsible for protocol economics.
To find out more about the agenda and register, please visit the event website.