Standard Chartered: Can Stablecoins Fill Payment Gap?

The global financial system's struggles with cross-border payments have created an opening for digital currencies, according to new research from Standard Chartered's digital asset trading unit Zodia Markets.

As traditional correspondent banking relationships continue to decline, a trend first identified by the Financial Stability Board in 2015, stablecoins have emerged to fill the void. 

These digital tokens, backed by fiat currency reserves, now process US$425bn in monthly transactions.

G20 roadmap challenges

The rise comes amid stalled progress on the G20's roadmap for payment system improvements. 

Launched in November 2020, the initiative aimed to make cross-border transfers cheaper, faster and more accessible by 2027. 

Yet the Bank for International Settlements reports that payment costs remained static through 2024, with no use case achieving the target cost of 1%.

This failure of traditional systems affects a vast market. The World Bank estimates 1.4 billion people remain unbanked globally, conducting annual transactions worth US$20tn. 

Meanwhile, remittance flows reached US$857bn in 2023, creating new opportunities for alternative payment solutions.

Market structure and regulation

In this environment, stablecoin issuers have flourished. Tether, whose USDT token is backed by US dollar reserves, has captured 73% of the US$163bn market. 

The firm's profitable business model, which generated US$5.2bn in the second quarter of 2024, benefits from returns on its dollar holdings in the current high interest rate environment.

Circle's USD Coin (USDC), maintaining a 21% market share, operates alongside USDT on multiple blockchain networks. 

Higher fees on Ethereum have driven migration to other chains, with Tron now accounting for 50% of USDT circulation compared to Ethereum's 40%.

Three significant bills aimed at creating parameters for bank issuance of stablecoins were brought forward during the Biden administration. Progress on regulation is expected under the Trump administration in early 2025.

Settlement innovation

The advantages of stablecoins have become apparent following the shift to T+1 settlement for US and Canadian equities in May 2024. 

This compressed timeline created challenges for Asian investors managing currency transactions, leaving narrow windows for foreign exchange dealing during their trading hours.

Investors face distinct choices in adapting to T+1 settlement. Executing through custodians offers the benefit of liquidity timing but limits best execution options. 

Setting up US trading desks maintains execution control but brings operational challenges and potential liquidity constraints. Pre-funding enables execution at optimal times but increases costs and creates operational complexity.

Standard Chartered's Zodia Markets and Cumberland, a digital asset trading firm, demonstrated these capabilities through test trades using Circle's USDC and Novatti's Australian dollar-backed AUDD stablecoin. 

The trials showed how digital currencies enable foreign exchange transactions outside traditional market hours.

Technical infrastructure

The technical infrastructure underpinning stablecoins differs fundamentally from current settlement systems. 

While traditional platforms run on centralised databases managed by firms like Montran in the US and SIA in Italy, permissionless blockchain networks allow users to prioritise transactions through variable gas fees – similar to airline yield management pricing.

This model has gained traction even in jurisdictions with volatile currencies. In Turkey, where the lira's 12-month foreign exchange volatility reaches 22 compared to 14.4 for the Brazilian real, stablecoins provide access to offshore exchanges and enable 24-hour settlement capability.

Cumberland research shows 99.3% of stablecoins are linked to the US dollar, compared to 88% of traditional foreign exchange transactions. This concentration exceeds the dollar's 40% share of global cross-border payment flows.

The limitations of existing infrastructure are evident in traditional systems. Continuous Linked Settlement, established in 2002 as an industry utility for wholesale foreign exchange settlement, supports just 18 currencies - representing 10% of global currencies but 80% of trading volume.

“The risks can be assessed using frameworks similar to those applied to deposits, e-money and money-market funds,” says Nick Philpott, Co-founder and Head of Partnerships at Zodia Markets. 

Rating agency S&P evaluates stablecoins based on credit, market, custody and operational risk factors.

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