Insight by: Simon McLoughlin, CEO at Uphold
In 2021, we saw a surge in fintech investments, with startups globally securing around $229 billion. Although rising interest rates and stricter economic conditions have cooled some of this enthusiasm, investments in the sector remain strong. In fact, a resurgence in investment activity is anticipated in the global fintech arena through 2025.
So, why do investors continue to commit substantial funds to this industry? The answer lies in the urgent need to modernize the existing international finance system. Designed for an era before the internet, it relies on outdated procedures, multiple intermediaries, and a hodgepodge of inconsistent regulations.
A cumbersome and costly system
Consider SWIFT as an example. Established in 1973, SWIFT continues to be the foundation for cross-border payments. It functions merely as a messaging system that allows banks to communicate transaction details. It was never intended for managing funds or processing transactions. Consequently, a “make do and mend” mentality has developed around international payments, leading to numerous intermediaries and local payment frameworks.
This outdated and fragmented system generates considerable friction in cross-border transactions, resulting in delays, elevated costs, and limited options for individuals and businesses outside major economic areas. Currently, fees for international transactions average 1.5% for businesses and can reach up to 6.3% for remittances, with payments taking several days to be received.
This situation hampers global commerce and worsens financial exclusion, particularly in the global south, where unstable local currencies and restricted access to standard banking services are prevalent.
Many of these issues could be alleviated through stablecoins, which could make transferring funds across borders as simple as sending an email. In fact, blockchain-based currencies have the potential to transform global finance.
Broadening access to fiat currencies
For individuals in nations with unstable economies or governments, stablecoins present a secure option for savings. Stablecoins tied 1:1 to a fiat currency like the US dollar offer consumers in these areas a trustworthy, transparent alternative that shields them from inflation and currency depreciation. This becomes especially crucial in the global south, where economic volatility often diminishes the value of hard-earned income and savings.
Research indicates that consumers in developing nations are also drawn to stablecoins due to a reduced risk of government interference with the currency. Many view stablecoins as increasingly akin to “digital dollars,” utilized for purposes ranging from savings to transactions to remittances in these regions.
Empowering small enterprises and freelancers
Stablecoins can dramatically lower the expenses and intricacies involved in international payments, allowing small businesses and freelancers to participate in the global marketplace more equitably. This shift opens up fresh avenues for entrepreneurship and economic development in burgeoning economies.
Recent news: Dubai acknowledges USDC and EURC as the inaugural stablecoins under its token framework
In our existing payment ecosystem, physical money does not traverse borders—only information does. When a payroll firm wishes to compensate a freelancer located in another country, it cannot do so directly and must resort to platforms like Stripe, which utilizes virtual bank accounts to navigate this limitation.
With stablecoins, payroll companies can make payments in any currency, leveraging crypto on- and off-ramps. For instance, a business might pay in dollars, which is converted to Tether’s USDt (USDT) and sent to the freelancer’s digital wallet, enabling them to hold onto it or convert it to their local currency. Stablecoins are emerging as essential tools for businesses to access global talent and bridge skill gaps.
Enhancing financial inclusion
By serving as an alternative to conventional banking methods, stablecoins also extend financial services to unbanked and underbanked populations. This can prove transformative in areas with scant access to traditional financial infrastructure or in nations lacking trust in their national monetary systems, like Argentina.
The Bank for International Settlements suggests that stablecoins can facilitate a wide array of payments and offer pathways to other financial services, acting as a stepping stone towards greater financial inclusion.
Thanks to their capacity to provide financial services wherever there is internet access, stablecoins are experiencing rapid growth in emerging markets. Their applications are swiftly expanding throughout Africa, Latin America, and various parts of developing Asia, where they are being employed as hedges against inflation, for remittances and cross-border transactions, and as simpler alternatives to US dollar banking. This growth trajectory is expected to persist in the coming years.
A boost for global commerce
Stablecoins are swiftly gaining traction, boasting a market capitalization exceeding $233 billion, with transaction volumes in 2024 reaching $15.6 trillion—outpacing Visa. In an increasingly unpredictable world, they provide a stable, low-cost, and rapid method for transferring funds across borders, thereby fostering financial inclusion and facilitating access to global talent for employers. Stablecoins represent a digital-first financial solution for a digital-first era and are well-suited to replace the current outdated international payments system.
Insight by: Simon McLoughlin, CEO at Uphold
This content is intended for general informational purposes only and should not be construed as legal or investment advice. The opinions expressed herein are solely those of the author and do not necessarily reflect the views of the organization.