Cross border payments are the backbone of global trade, it allows businesses, individuals and governments to conduct transactions across countries. Traditional cross border fund transfer systems are usually slow, expensive, and complicated due to multiple intermediaries and the banks involved, regulatory requirements, and currency exchange complexities. These restrictions are addressed with digital currencies like cryptocurrencies, stablecoins, and Central Bank Digital Currencies (CBDCs). They offer faster money transfers, with lower transaction fees and higher transparency.
What Are Digital Currencies?
Digital currencies are the forms of money that exist only in the digital form, which means there is no physical cash involved. Digital currencies can only be transferred digitally, and all transfers are automatically recorded in digital ledgers, making them highly traceable. There are multiple types of digital currencies in the market including cryptocurrency, CBDCs and stablecoins.
Cryptocurrencies
Cryptocurrencies are decentralised digital currencies powered by blockchain technology. They allow faster and more secure fund transfers across borders and that too at lower fees when compared to the traditional systems. They are not issued and regulated by any central body and their value is defined by market forces. Making them highly volatile and hence could be too risky for common men. Moreover, they are facing regulatory challenges in various regions. Some of the popular cryptocurrencies are Bitcoin, Ethereum, and Ripple. Main highlights of cryptos are
- Faster Transfers
- Lower Costs
- No Middlemen
- Borderless Transactions
While cryptocurrencies offer great benefits, their volatility and regulatory uncertainty make them less ideal for businesses and individuals who need stable international transactions. That’s where stablecoins come in.
Stablecoins
Stablecoins are the digital currency whose value is pegged to any stable assets like the US dollar. This addresses the major volatility issue but still retains other benefits of cryptos. In simple words, they combine the best features of cryptocurrencies and traditional money.
Why Stablecoins Are Gaining Popularity for Cross-Border Payments
- Stable Value
- Faster than Bank Transfers
- Lower Costs
- Easy to Use
Some of the Popular Stablecoins for International Payments
- USDT (Tether)
- USDC (USD Coin)
- DAI
Many businesses and individuals are turning to stablecoins for their low fees and fast transaction speeds, making them a preferred choice for cross border transactions.
CBDCs
Central Bank Digital Currencies (CBDCs) are an alternative to cryptos, launched by central banks. Since they are developed and backed by the central banks, they possess the same value as that of the traditional currency of the country. Making them less volatile and hence are completely secure and safer of common men.
More than 130 countries across the globe are working on their CBDCs, which shows the importance of CBDCs in the future. Few countries including the Bahamas, Jamaica and Nigeria have fully launched their CBDCs and are focusing on expanding their retail CBDCs. Larger countries like China and India have launched their pilot programs.
How CBDCs Can Improve Cross Border Payments
- Officially Backed by governments
- Lower Costs
- Faster Transactions
- Improved Security
CBDCs look very promising and have huge potential to improve international trade, reduce transaction times, and lower costs but are still in the early stages.
How Digital Currencies Are Revolutionising Cross-Border Payments
Faster Transactions
Digital currencies can provide pretty fast cross border transactions, traditionally that used to take days can now be settled in minutes. Moreover, the transactions can conducted during non banking hours, so no need to wait for banking hours.
Lower Transaction Costs
Traditional cross border payment systems are known for higher fees due to the intermediaries and banks involved plus the currency conversion price. But with digital currencies one can skip the dependency on banks and intermediaries, resulting in considerably lower transaction fees.
More Transparency
Blockchain records all transactions publicly, reducing fraud and also allows users can track payments in real time. Making it a pretty transparent system, unlike the traditional system that involves a complex system which makes it very difficult to track things.
Enhanced Security
Digital systems use modern security measures like advanced encryption, ensuring that transactions cant be altered and tampered with.
Increased Financial Inclusion
Digital currencies can be used by people where traditional banking infrastructure is not available as it does not need a bank account to send and receive money.
Digital currencies can revolutionise cross border payment systems. Both cryptocurrencies, and CBDCs, are capable of making transactions faster, cheaper, more secure, and more accessible to everyone.
