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Should Western Union be worried about stablecoins?

8 min reading

It seems like Stablecoin is used in a speculative crypto environment. Hence, the real question remains will this change?

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Remittances are small remittances, usually $1,000 or less, that people in the diaspora make to loved ones back home. These payments have become a form of survival not only for displaced families, but also for developing countries themselves, which have received less and less development assistance and direct investment over the years. Total remittances this year have reached $589 billion, according to the World Bank. Currently, stablecoins are mainly used in the speculative crypto economy, not the stationary economy. Cryptocurrency exchanges that do not have access to the banking system rely on stable coins such as Teter (USDT) and USD-Coin (USDC) to replace proto-dollar accounts. Stable coins also serve as building blocks for decentralized financial instruments (DeFi).

Significant real-world use of stablecoins, particularly wire transfers, would be a huge boon for the stablecoin sector. But before that can happen, there are some major challenges that must be overcome.

To be honest, crypto is now a money transfer tool, albeit a specialty product. In a recent document, economists Ken Rogoff, Carmen Reinhart and Clemens Graf von Luckner found that the lower limit of 1.3% of all LocalBitcoin transactions on an equal footing relates to the use of Bitcoin for cross-border payments. The author points out that bitcoin transfers often involve countries like Nigeria that have exchange controls so bitcoins should be avoided.

The advantage of stablecoins over Bitcoin is that they don't suffer from Bitcoin's wild volatility. In fact, remittance company MoneyGram is currently experimenting with it.

The first of two major barriers to stablecoin translation everywhere is the dual transition problem.

Problems with double jump

Most of the world lives in a world of bank accounts. Our salary arrives in our bank account. We buy our necessities as accommodation or food by EC card or bank transfer. Everyone lives in the world of money. We make money and buy goods with physical currency.

But no one lives in the world of stable coins. With the exception of a few privileged residents of the crypto economy, no one receives a salary in stablecoins. Of course, no one bought dinner with them. (Using crypto-linked payment cards for purchases doesn't count as these cards sell crypto to fiat at the last minute and pay with bank money.) This is the crux of the matter. For most bank transfer users around the world, transferring stable coins forces them to temporarily leave their preferred financial environment. Senders have to jump out of cash or bank accounts onto rails for coins to stabilize. People who receive stablecoins must return to the world of bank accounts or physical money.

This extra jump is uncomfortable. First, they need some technical and financial experience to get up to speed. No internet accesses? Forget it. Second, they are expensive. Jumping in and out of stablecoins doubles the forex transaction fees associated with money transfers. In her latest testimony to the US Senate, financial regulation expert Alexis Goldstein found out how much it costs to double a kiosk. Using the US-Europe remittance corridor as an example, Goldstein found that US money transfer broadcasters who purchased a $200 theater stablecoin from Coinbase had to pay a $2.99 fee. The $200 was then sent to a European recipient who had to pay $2.99 to sell the Coinbase theater for one euro.

It already costs $6. Goldstein's figures don't include any variance – the difference between the bid price and finding a Coherbase tether – which adds to the stable coin transfer fees. In contrast, a traditional $200 transfer from Wise, MoneyGram, or Western Union is just a one-step transaction. Dollars should be sold for euros and that's it. A single hop is always cheaper than a double hop.

Problems with usage fees

The double hop problem, which hinders the transfer of stablecoins, is compounded by the issue of usage fees. Platforms like Ethereum, which are evidence-based, require crypto miners to pay a transaction validation fee. At the time of writing, I had to shell out a hefty $23 digging fee to transfer $100 to the USDP stablecoin I own. That is a very expensive translation. User fee issues can be avoided by sending money transfers to stablecoins via the emerging Layer 2 Ethereum architecture, such as Optimism or Polygon protocols. However, the transition from stablecoins from the base tier of Ethereum to Layer 2 and vice versa leads to gravely expensive fees. It is also technically complex and time consuming.

The competing blockchains Tron, Avalanche, and Solana provide an alternative way to avoid Ethereum's user fee problems. This blockchain relies on proof of security, which is much cheaper than proof of operation. But even if remittances manage to target stablecoins in a way that minimizes user fee issues, the annoying double-hop problem will persist. Switching to stable coins and returning them is always more expensive than a one-time transfer.

A few developments could minimize the double-hop problem and help make stablecoin translations more competitive than regular ones.

Banks and stablecoins closer

One way to solve the dual transition problem is to work more closely with stable coins and bank accounts. If banks allow customers to automatically withdraw stablecoins from their accounts for free (as we have done with cash) and also to deposit stablecoins freely, then people making stablecoin transfers will no longer have to pay double fees.

For example, let's say Manuel, an immigrant living in the United States, wants to send money to Maria in Honduras. It starts with withdrawing $200 in Wells Fargo approved coins from your Wells Fargo bank account for free. He then sent it to Maria, who deposited the $200 worth of stablecoins directly into her bank account in Honduras. Maria then asked her bank to convert the money into a Honduran Lempira so she could pay the rent. This currency exchange is the only transaction in the entire chain that requires a bank fee.

While free bank to stable coin transactions will allow cheap wire transfers, it's not clear that this option will ever emerge. After all, banks don't want to lose business to stablecoin issuers unless they are stablecoin issuers themselves.

Stablecoins invade the real world

The second way to minimize the double jump problem is to increase the number of real-world situations in which stable coins are accepted. If Manuel's native American salary had been paid in stable coins, say in a tether, then he would not have to convert one US dollar into a teter when transferring money to Maria. Or, if Maria could buy groceries and other basic items with stablecoins, she wouldn't have to switch from stablecoins to Lempi.

Expanding the scope of real transactions with stable coins is not as easy as it sounds. What makes payment networks useful is the fact that other people are already connected to them. With no initial user pool, the chances of a new payment network breaking through are slim.

Crypto economy growth

If the arrival of stablecoins in the real world is not possible, there is a third way to multiply stablecoins: by increasing the number of people living in the burgeoning crypto economy.

Today, the crypto economy is occupied by crypto enthusiasts, speculators and people who work in the industry. If there was more to be done in the crypto economy - entertainment, job opportunities, communication - more and more people from the real world would "migrate" to it. Beginners must accept the de facto standard for payment, stable coins.

If Bob, who resides in one area of the crypto economy, wants to transfer Alice's $200 to another region of the crypto economy, coins or tether USD are the most convenient options. Adding a blockchain-free broker like Western Union to the mix would be a step back. This would introduce an expensive double jump, similar to a real-world stablecoin translation that introduces a double jump.

Currently, the problem of multiple hops and user fees prevents stablecoins from becoming a competitive tool for money transfers. There was still a lot to do if they wanted to go anywhere.


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