Can Stablecoins Bridge the Payments Liquidity Gap?

Digital currency could solve some knotty problems plaguing cross-border payments.

A chasm persists within payments liquidity, posing a significant challenge for payments companies and fintechs providing cross-border transactions.

Traditional models, which rely on prefunded accounts and correspondent banking networks, have demonstrated that they are often inefficient and costly. In 2023, the global average cost of sending payments to low and middle-income countries was 6.2% per transaction, significantly higher than digital-payment alternatives.

Despite advances in fintech technology and the development of inventive techniques to sidestep traditional international payments infrastructure, liquidity constraints remain a bottleneck, limiting the speed and efficiency of global payments.

Enter stablecoins—virtual assets that maintain a stable value relative to a specific asset, typically a major global currency like the U.S. dollar or the euro—which now offer a novel solution to this ongoing challenge. As stablecoins gain traction in mainstream financial applications, they are emerging as a tool to enhance liquidity and enable real-time settlements for cross-border payments providers.

Prefunded Limitations

Most cross-border payments systems operate on a prefunded basis. Payment service providers (PSPs) must maintain liquidity in all supported jurisdictions, locking up capital to facilitate transactions.

This approach presents several challenges for payments companies. First, it is immensely capital-inefficient, and businesses often have to tie up significant funds in multiple accounts across regions and currencies. These accounts are often subject to significant market fluctuations, which reduces the ability of businesses to allocate resources dynamically.

Cross-border payments revenues reached $240 billion in 2022, a 17% increase from the previous year. The rising transaction volumes inevitably cause an increase in operational complexity, with payments companies struggling to increase their liquidity in all jurisdictions as demand for payments rises and falls in an unpredictable manner. In addition, each jurisdiction enforces its own version of cumbersome compliance and reconciliation requirements.

Alongside these concerns are a number of high costs for stakeholders. Banks and PSPs incur high fees from intermediary banks, impacting both businesses and consumers.

Given these constraints, the industry is actively seeking alternatives that allow real-time access to liquidity without requiring large capital reserves.

‘Real-Time’ Settlements

In traditional cross-border transactions, “real time” often refers to payment initiation rather than actual settlement. Legacy banking systems typically take two to three days for final clearing, with intermediaries adding further delays. True real-time settlement means instantaneous finality, where funds become
available immediately upon transaction execution.

Stablecoins, particularly those pegged to fiat currencies, provide a mechanism for immediate transfer and settlement without reliance on multiple intermediaries. By leveraging blockchain technology, stablecoins offer an alternative to pre-funded accounts, providing instant liquidity when and where it is needed.

Liquidity is the backbone of financial transactions. Without immediate access to funds, businesses face various challenges incurred from delayed payments. These challenges include suppliers experiencing cash-flow issues due to delayed settlements, increased credit risk exposing businesses to counterparty risk, and smaller fintechs struggling to expand to new jurisdictions and compete with larger, more established institutions, due to capital constraints.

The International Finance Corporation estimates 65 million firms suffer from cash-flow issues due to late payments, restricting their ability to invest and grow.

Stablecoins provide a stark contrast, offering a decentralized and programmable approach to liquidity. In December, Starlink turned to stablecoins to address challenges in receiving payments from emerging markets. It used Bridge, acquired by Stripe, to accept transactions from all corners of the globe.
Many businesses in emerging markets still face slow international settlements and high foreign-exchange fees due to reliance on traditional banking rails.

Through the use of stablecoins with blockchain networks, transactions that once took days through pre-funded accounts now settle within minutes, significantly improving liquidity and ensuring smaller businesses can compete with larger financial institutions. Liquidity challenges are always being addressed, but what we are seeing with stablecoins is the real-world introduction of a technology that rapidly enables greater financial inclusion for smaller players in the payments ecosystem.

Practical Implementation

It’s one thing to laud the appropriateness of stablecoins as an alternative. A whole other challenge is working with stakeholders to integrate them into cross-border payments infrastructure effectively.

The first major consideration is compliance—how to navigate a complex regulatory environment to ensure adherence to anti-money-laundering and know-your-customer requirements. Related to, but not synonymous with, this process is ensuring that stability and security mechanisms are in place to mitigate volatility risks, particularly for algorithmic stablecoins.

Interoperability is another major challenge. Payment networks must support stablecoins seamlessly across different jurisdictions and financial infrastructures. Likewise, widespread adoption will require collaboration between fintechs, banks, and regulators to build trust in stablecoin transactions.

The future of stablecoins in cross-border payments will be shaped by several trends already playing out across the developed and developing world. One of the most significant developments is the rise of central bank digital currencies.

These could either compete with or complement stablecoins, with the latter potentially serving as an intermediary between traditional finance and state-backed digital assets. This is very much the order of the day in the world’s most advanced economies. The digital Yuan is already a reality, and talk of a U.S. federal reserve of Bitcoin is now part of the economic zeitgeist.

A Promising Solution

At the same time, programmable money is a significant catalyst for innovation in the payments industry. Smart contracts encoded within stablecoins and other cryptocurrencies can automate compliance, fraud detection, and risk management, thus removing friction from international transactions.

Parallel to this, decentralized-finance protocols continue to evolve, offering alternative liquidity solutions that bypass the constraints of the banking-infrastructure status quo.

Meanwhile, the financial sector is witnessing the emergence of institutional stablecoins, as major banks and corporations explore issuing their own digital currencies to streamline settlements and enhance transaction security. Together, these trends signal a shift toward a more integrated and versatile future for cross-border payments.

The payments-liquidity gap remains a critical hurdle in global finance, but stablecoins offer a promising solution. By enabling real-time settlements and seamless liquidity for pre-funded accounts, stablecoins can restructure the foundations of cross-border payments. As regulatory frameworks mature and industry adoption increases, stablecoins may become a cornerstone of a more efficient and inclusive financial system.

—Nkiru Uwaje is chief operating officer and cofounder at MANSA.