5 min read

October 21, 2022

The Future of Using Stablecoins for Payments - PayTech Connect

XanPay Blogs - Future of Stablecoins

Our CEO Jeff recently spoke at the PayTech Connect in Singapore and the conversation focussed on stablecoins and their use for payments. The event was a big success and the speech was followed by a Q&A session where Jeff answered the questions posed by the audience (industry leaders). 

XanPay has been specializing in settling cross-border currency and cross-border payments specifically with cryptocurrency. To date, we have settled over $6 billion worth of global APAC commerce using mostly stablecoins. Stablecoins, technically a cryptocurrency, is designed to be stable, theoretically. We as a company believe that stablecoins can create better financial inclusion, lower transaction cost and increase the transaction hygiene. 

Ahead, we look into the aspects explained by Jeff with regard to Stablecoins and how it affects eCommerce.


Table of Contents

 
 
What is a Stablecoin?

A stablecoin is technically a cryptocurrency designed to minimize price volatility, and it's done by pegging a unit of a stablecoin with a unit of a more stable asset. In traditional finance, we call this having a fixed exchange rate. One example of traditional finance is the Hong Kong dollar. You can argue that the Hong Kong dollar is technically a stablecoin as it always trades between 0.12 to 0.13 US dollars. Moreover, there is an entity that maintains this fixed exchange rate called the monetary authority of Hong Kong or the Hong Kong monetary authority.

In reality, stablecoins come in all shapes and sizes. There are stablecoins backed by nation-state currencies like the US dollar and the Euro. Likewise, there are stablecoins backed by gold and silver and even stablecoins backed by volatile cryptocurrencies like Bitcoin and Ethereum using a mechanism of over-collateralization. For now, we will be talking about nation-state-backed cryptocurrency, mostly the US dollar. The way tether and USDC circles maintain their fixed exchange rate is by allowing us as businesses to send them $10,000 in US dollars via a bank transfer and then they issue us 10,000 units of their stablecoins in circle or tether, on the blockchain.


How are Stablecoins Useful?

It turns out the reason stablecoins are useful is the same reason why cryptocurrencies are useful in general. With cryptocurrencies, you can send and receive money in a parallel financial network, “the blockchain”. But think of it as a parallel financial network where there is no intermediary and because of this, cost and speed are significantly reduced. You may be wondering why is this useful. The reason is that we are in APAC and over 60% of all of the commerce in the Asia Pacific is actually cross-border commerce. So it’s commerce that goes from one country and ends in a different country.

Right now, there are two ways in which cross-border commerce is done. The first way is called Correspondence Banking. This is where banks are sending telegraphic transfers to each other using messaging, protocols like Swift, and that is predicated on your country. Some countries don't support this and then some countries only support going in but not going out. So the second type of cross-border settlement is done via a process called Netting off, where payment companies basically set up their own treasuries in all of these different countries. And then they never actually do an FX trip. They don’t move any money across borders. They're simply sending money here and receiving it there, and then netting it off with a parent entity to facilitate and mimic the process of cross border. 

So for cross-border, both these methods are actually okay for relatively larger transactions. But if you were to take a look at the total quantity of cross-border transactions, actually 80% of the number of transactions will be under a thousand US dollars. So these are relatively smaller amounts. 

Most of the GTV (gross transaction volume) across the region is small. So when it comes to settling smaller transactions, these two existing methods still do not really do and facilitate that in a very efficient way. It forces businesses that have to settle these smaller transactions to actually have to deal with a lot of intermediaries, which forces them to pay higher fees. Now with stablecoins, this is obviously not the case. 

In this parallel financial network, the same businesses can now process a payment on their own. They can process their own transactions from their customers at negligible, variable costs and essentially no fixed cost.


So What Does this Actually Mean and Entail?

What we're seeing as a company is that when it comes to crossborder, the economy of scale exists, but there's definitely an underserved group of merchants. SMEs that are often looked at from a very high level, get charged a higher percentage based off the transactions that they process. So as a large company, you get lower rates, whereas as an underserved business, you often get charged higher fees as a total of your gross merchandise value.

What makes up this cost in traditional finance? There are fixed costs like settlement cost, telegraphic cost, transfer costs, and interchange costs. Because of these smaller amounts per transaction, these fees, and these fixed costs actually start accounting for a larger percentage of that transaction itself. And then there's the variable cost like fx and arbitrary payment costs. Because payment companies also charge something on top of that. Due to this, underserved businesses are charged a higher percentage of their gross transaction volume. 

So with stablecoins, any business - big or small can benefit from selling your transactions at no fixed cost. This is sort of the first benefit of sending and receiving stablecoins as a business. The second benefit of using stablecoins that is worth looking into is that it brings down your fraudulent chargeback rate to zero. 

 

What is a Fraudulent Chargeback?

Let us look into an example of fraudulent chargeback. Let’s say that you are in America and you are selling shoes through an online store. A customer visits your store and types in their credit card information. The customer orders ten shoes, enters their credit card information and proceeds to pay. The payment company then tells you that the customer is going to pay for the shoes and you ship their order. 

The customer now tries to do a fraudulent chargeback. The moment he finds out that the shoes are being shipped, he calls the bank saying that he didn’t authorize the purchase of these ten shoes and wants his money back. So now it is up to the bank/financial intermediary to refund his money. And more often than not, the customer who sent the money for these transactions gets their money back. 

So what just happened here? The customer will get those ten shoes for free and you won’t even get paid. This is a loss on the inventory and this cost essentially is called a fraudulent chargeback. From a technical perspective, the reason why this was possible is that when the customer made the payment you did not have access to or custody of the transaction funds.

 
What Went Wrong?

The funds were sitting with a financial intermediary who decided to refund the fraudulent customers. Now, this could not have happened with stablecoins as with stablecoins, the customer needs to download an app on his phone and you will directly receive stablecoin payments as a customer without any intermediary ever holding and taking custody of these funds. 

The moment the customer sends the payment you no longer have to worry about fraudulent chargeback risk. When it comes to fraudulent chargeback, the risk is that a lot of businesses that do smaller cross-border transactions face fraudulent chargeback that translates into higher costs for the consumers at the end of the day. With stablecoins, since everything is settled in a peer-to-peer transaction without intermediaries, the risk is negligible.

Stablecoins and the Xan Group

At this point, in 2022, it is quite apparent that stablecoins have grown in terms of market cap and the general usage has grown exponentially. Cryptocurrency marketplaces are volatile in general and you can see this quarter on quarter. However, throughout the bear and bull markets, the stablecoin volume and market capitalization have grown. And so, this is even more evident that stablecoins have an alternative use case other than cryptocurrency speculation. 

For XanPay and XanPool, this use-case is cross-border payments. So when it comes to cross-border payments, it is just an act of enabling payments that enables commerce. When it comes to commodity services, businesses really care about the price and the speed. They also care about the convenience of using this service. XanPool and XanPay support a thousands of merchants across the region and we have full confidence that stablecoins have already outdone the traditional payments and traditional banking on the price and the speed front.


Adoption of Stablecoins

In our opinion, the only thing that is stopping the wider adoption of stablecoins is the convenience quotient. Right now, the market believes that stablecoins are not “convenient to use” because more often than not when people say that something is inconvenient, what it usually means is that they are unfamiliar with its usage. This generation and the upcoming generation, can send and receive stablecoins by simply downloading an app on their phone. In essence, you can have your offshore US dollar bank account by downloading an app. For the future generation, going to the bank, standing in line for half an hour and paying $50 for telegraphic transfer to someone overseas is going to sound absurd.

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