After 17 years, the Lewes Pound, a local currency pegged to GBP and accepted in shops and businesses in the small town of Lewes on the English south coast, will be shut down for good on 31 August as digital commerce has made the demand and attraction of the physical currency obsolete.
While not a stablecoin in its current distributed ledger form, the Lewes Pound was, nevertheless, similar in many aspects including being pegged to a major currency. However, the main difference is that the Lewes Pound has now lost its use case. Stablecoins have not. At least, not yet. As national payment infrastructures become more interoperable and networked on a regional, and soon global, scale, stablecoins may start to lose their perceived ‘indisputable’ advantages in the cross-border sector.
Will the rug be pulled from under stablecoins by incumbent instant payment schemes?
The stablecoin use case
Stablecoins have been the biggest fintech buzzword of late. From Stripe’s acquisition of Bridge, to Societe Generale issuing a euro-denominated stablecoin, to Wyoming State issuing one of its own ($WYST) – it seems everyone is betting on stablecoins.
And why wouldn’t they? According to Axios, stablecoins transaction volumes have been $6trillion or more annually. Not to mention a variety of use cases that are being explored, the biggest of which is cross-border payments that run outside of the traditional banking rails in what is, supposedly, a quicker, cheaper and more efficient, programmable digital rail.
In fact, Circle, the issuer of one of the most popular stablecoins – USDC – recently established the Circle Payment Network to enable real-time settlement of cross-border payments using regulated stablecoins, albeit presumably mostly using its own USDC.
In addition to cross-border payments, they also provide some of the liquidity lifeblood for the crypto industry. Furthermore, stablecoins purportedly offer a means to preserve wealth in economies whose currencies are not stable and inflation is high (but government intervention is low?).
Cause for stable optimism
Low government intervention can be helpful for the adoption of alternative payment methods like stablecoins, but it isn’t necessary. The new US administration has been signaling a change in regulatory attitudes towards crypto as a whole, and stablecoins in particular. In March, US Treasury Secretary Scott Bessent came out strongly in favour of stablecoins as a way to maintain USD dominance (how far have we gone from crypto bros predicting the end of the USD as a currency, let alone a dominant global reserve?).
The OCC has clarifieda variety of cryptocurrency activities which are permissible for national banks and federal savings associations, including certain stablecoin activities. Given that the GENIUS and the STABLE acts are both working their way through the US legislative machine, albeit not without hiccups, increased clarity is likely to fuel further engagement by institutional investors in stablecoins.
Local payment rails dust themselves off and turn to the cross-border market
Stablecoins have been touted to be the next big thing in the cross-border sector for a while. So much so, that some enthusiasts in the industry have seen this use case as a done deal, as if nothing could stop them. However, what these enthusiasts have failed to consider is that existing technology can also be developed and worked on to tackle the same cross-border challenges. Cue interoperable national payment schemes. Payment’s network of networks.
As more countries and governments opt into regional and global interoperable payment initiatives, one question arises. If financial institutions (and connected non-bank FIs) can send money to any connected account on their existing rails in seconds, will stablecoins become superfluous in the cross-border payment scene?
Nexus Global Payments: the new kid on the block
In April, Project Nexus, a four-year-old endeavour, from the Bank for International Settlements became Nexus Global Payments (NGP)– a not-for-profit organisation, incorporated in Singapore by Project Nexus’ central bank partners, to ‘operationalise and manage’ the connection of multiple domestic instant payment systems (IPS) globally through one network.
Not to be outdone by their ASEAN counterparts, European central banks recently concluded the experimentation phase of Project Meridian, showing that a ‘synchronisation operator’ can coordinate effectively payment-vs-payment settlement in FX and across assets and markets. It also showed that the synchronisation operator is independent of the ledger type (i.e. DLT or otherwise). This means it can also synchronise between payment schemes and alternative payment methods where these are dominant.
Creating a multilateral, international payment scheme is not without its challenges, but it creates significant opportunities for the institutions that are connected to these networks to reduce much of the costs they currently face and eliminate the time lag associated with cross-border payments.
Central banks’ ownership of NGP means the network will be governed and operated within boundaries that these central banks are comfortable with. There would be much less regulatory uncertainty, or political meddling (fingers crossed), so participants can plan on the longevity of the network. All the things stablecoins are not.
Furthermore, central banks are slowly becoming more confident in allowing non-banks to participate directly with their instant payment systems. That means the benefits of Nexus can be made readily available to payment service providers and, indeed, the card networks themselves. After all, domestic payment systems do not have an adoption problem.
The innovation boost from interoperability initiatives are significant for companies that already specialise in cross borders. For example, Wise, with its relentless focus on international transfers cost reduction, would no longer use any banking partner to move money across Asia, and manage its treasury operations entirely independently further reducing its base. In fact, they may become primarily KYC and AML experts, managing the onboarding and risks associated with cross-border without the need for complex banking infrastructure.
It is not far-fetched to imagine the open banking sector is also set to benefit from this. Given that open banking uses the same national payment rails, we could, for example, see cross-border pay-by-bank merchant offerings take away volume from popular travel or expense card providers.
The race is on
Consumers, and small business owners, are rail agnostic. Payments are expected to simply work, and work fast. Whether they run on national infrastructure or on new digital tech is of little importance. Nevertheless, consumers still feel more comfortable dealing with the banking brands they know and trust.
Therefore, with stablecoins being viewed as ‘just another word for crypto’ for those who have never heard about them, in a race where this evolving tech is going up against the familiar bank or financial service provider for payment needs, the latter wins nine times out of 10.
Stablecoins are facing an uphill battle. They need to prove their long-term stability as their issuance is growing and ensure they continue to find ways to boost adoption. And they need to do so fast – Project Nexus already has a head start given that it is supported by central banks – the same banks who these days, thanks to the crypto-friendly US administration’s trade policies, care much more about facilitating global trade.
It’s quite possible that stablecoins lose this race if NGP and other similar payment initiatives are rolled out successfully. In that scenario, stablecoins will no longer be used in a cross-border scenario (except perhaps for very exotic currencies). Given how facilitating cross-border payments is stablecoins’ main purpose, they may just end up, as far as the ordinary consumer is concerned, like the Lewes Pound.
