Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
Today, the vast majority of money movement activities execute through banks. International wire transfers are done via bank messaging systems like SWIFT or SEPA, while local transfers employ direct debit, ACH, Interac, card-to-card (C2C) and other types of payments.
Notably, the banking sector is one of the world's slowest areas of innovation. The near-monopolistic status quo these financial institutions enjoy renders their spirit of innovation lazy and complacent. Like government monopolies have few incentives to improve the quality of their service because mandatory taxation fills the coffers regardless of performance, banks find themselves in a similar position.
The Stagnation of the Banks
Until a couple of decades ago, there was no real competition in the money transfer business. Among private enterprises, Western Union made a dent in the industry. But let's be honest: it was just an overpriced retail solution that still required physical presence to perform transactions. Then came along PayPal. The company revolutionized online commerce by making retail payments fast and seamless. The online payments industry changed forever and finally made banks rethink their strategies. Locally, quicker and more convenient payment methods started appearing within online banking portals. In Canada, Email Money Transfers (also known as Interac e-Transfers) required only the recipient's email address and thirty minutes' worth of patience—a definite improvement upon checks and branch visits. Russia leapfrogged a couple of generations of payment technology and offered direct card-to-card payments: all you needed to perform an instant transfer was the recipient's Visa or Mastercard number. But these were all improvements in the retail sector. What about large value transfers?
An individual or a business willing to remit more substantial sums of money is still stuck with the banks. The situation has improved thanks to novel payment institutions and virtual banks like Transferwise or Revolut. They offer convenient online interfaces, better forex rates and fast transfers among its members. However, for someone who deals with international money movements regularly, the same issues persist. Namely:
- Increased KYC/AML: as these virtual banks have no branches and cannot talk to clients face-to-face, they have to enhance compliance procedures to approve accounts. This often results in slower processing times and a broader set of documentation required to be qualified.
- Transaction scrutiny: to send an international payment, you have to provide a rationale for it in the form of a contract, purchase or sale agreement, invoice or similar documentation. If you don't satisfy the compliance department, your transaction may be blocked.
- Slow settlement: the European payment system, SEPA, has greatly improved settlement times in recent years and forced the international transactional authority, SWIFT, to follow suit. Same-day bank transfer settlements are finally a thing in 2020. But it still takes time to submit a wire request and wait for the approval. Sending outside of business hours or on weekends? Forget about it.
- Privacy concerns: due to the ever-imposing KYC/AML regulations, transactional privacy in the banking system is virtually non-existent. In many jurisdictions, any transfer of $10,000 or higher is subject to a mandatory government report. Because banks have to comply to keep their license, your business is on a watchlist by default.
- Asset freeze: even when you think that your documentation proves the case for your business above and beyond, the compliance officer performing a random check on your account, may not feel this way. When you need it the most, your account and all its assets may be frozen until you comply with further demands.
Bitcoin's Technological Leapfrog
Luckily, today we have an entirely new money to solve most of these problems—bitcoin. You don't need to ask for permission to use it, no matter the transfer amount or destination; settlement times don't depend on business hours; asset forfeiture, when possible, is a lot more complicated. The advantages of bitcoin as a store of value have already convinced many that it's on its way to becoming the next reserve asset of the world. Amid the economic calamities of today, the global currency reset is almost guaranteed.
But the use of bitcoin is accompanied by some inconveniences when it comes to business operations. Due to its relatively small market cap, the asset is highly volatile. Exchange order books are thin compared to those in traditional financial markets and so can be used to move the ticker price in any direction by a single dedicated player. It's true that as the market matures, short-term volatility may decrease over time. However, due to bitcoin's economic properties, namely its finite, hard-capped supply, many believe that its upwards volatility is here to stay.
"Bitcoin is designed to pump forever."—Matt Odell
Even if you're not as optimistic, the practical issue persists. For long-term savings, bitcoin may be the ultimate safe-haven asset. As a checking account, though, the currency may presently be a source of trouble. That's why businesses that get paid in bitcoin often prefer to liquidate it, which is what Bitcoin Reserve is designed to facilitate. Unless you're savvy in bitcoin derivative trading, cashing out is the safest option if you're planning to do fiat-denominated large-volume transfers in the near future. And when you do cash out, unfortunately, you encounter the banking issues I described above. Is there a remedy? Can we combine bitcoin's uncensorable transaction capabilities with the relative intermediate stability of a fiat currency? Yes, we can.
The Stablecoin Solution
The concept of stablecoins appeared a few years ago when bitcoin's volatility became an apparent problem. Businesses were excited by the ability to send value across the globe in a permissionless way but no to so much about their value swinging up and down unpredictably. A market opportunity was born, and, with it, the concept of a stablecoin.
In short, a stablecoin is a token whose technical properties are similar to that of bitcoin but whose value is pegged to an existing fiat currency. This can be achieved in two ways:
- Simple: A $1 USD stablecoin token represents $1 USD in someone's bank account. It's an IOU that most people are used to dealing with when it comes to services like PayPal. The main difference is that the wallet and its transactional capacity is not controlled by the company issuing the IOUs. The tokens are fully controlled by the holder and can be transmitted in a peer-to-peer fashion.
- Advanced: A $1 USD stablecoin token represents $1 USD of value of someone's basket of assets. Such assets may be US dollars themselves combined with gold, real estate and other holdings. It's also possible to back these tokens fully with bitcoin if one is savvy enough in managing its volatility risk. For example, a 1x perpetual short position on Bitmex, in essence, represents USD value. In financial terms, such a derivative is referred to as synthetic USD.
If Bitcoin Reserve is a bitcoin-only brokerage firm and The Bitcoin Reserve Journal only presents bitcoin-related material, why cover these stablecoins? Aren't they just altcoins? Not quite.
As a business, our primary goal is to make it easy for individuals and companies to enter and exit the bitcoin economy. While most altcoins strive to displace the industry's king of the hill, ignoring the fact that bitcoin's first-mover advantage cannot be reproduced, the rising stablecoin ecosystem has as its objective something else: improving the movement of existing fiat currencies. In short, stablecoins don't compete with bitcoin—they challenge SWIFT, SEPA and PayPal.
How Stablecoins Will Replace Your Checking Account
Let's look at the advantages of using stablecoins for international transfers as opposed to your standard checking account.
- Peer-to-peer payments: Making international money transfers in stablecoins is a lot more frictionless than via a bank. Like in bitcoin, you hold the private key to the stablecoin wallet and are the only entity that has access to its balance and spending capabilities. When a payment is made, it goes directly to the recipient's wallet. How much you send and for what purpose is at your sole discretion. It's electronic cash.
- Faster settlement times: Final settlement of a stablecoin transfer takes the same time as a normal transaction on the blockchain that the token is issued on. The Liquid network, for example, settles all transactions in only two minutes. And the beautiful thing is that it's available to you 24/7. Business no longer needs to be postponed.
- Confidential transactions: Certain platforms, like the Liquid network, provide transaction confidentiality by default. While the sender's and the recipient's addresses are browsable (but not linked to identities) like on the bitcoin blockchain, transfer amounts are hidden. This keeps your financial data away from prying eyes and, in some cases, like professional trading, may furnish additional advantages.
In other words, if you have a time-sensitive $5,000,000 contract opportunity that you want to settle privately on a Saturday night, by using a stablecoin like Tether USD (USDT) you are at a tremendous advantage over someone who relies on their bank for the same transaction.
"The strength of stablecoins is their attractiveness as a means of payment. Low costs, global reach, and speed are all huge potential benefits. Moreover, stablecoins could allow seamless payments of blockchain-based assets, and can be embedded into digital applications thanks to their open architecture, as opposed to the proprietary legacy systems of banks."—The IMF
The Caveats of Using Stablecoins
Now that I've covered the advantages of using stablecoins instead of an operating bank account, let me address the risks involved. You must have a full picture of what you're dealing with, after all.
- Counterparty risk: As stablecoins are issued by private companies against their balances, there's a risk of default on liabilities. As can happen with any individual or company under investigation, the issuer's bank account may be frozen or seized. This means that the stablecoin in your wallet ceases to be backed by the actual asset. In my opinion, this risk is not much higher than in case of trusting your money with the bank directly: banks are just different counterparties that can go bust, too. The competition among stablecoin issuers will force reputable players to take good care of their infrastructure and diversify risk. As usual, do your due diligence.
- Transparency risk: For every $1 USD in the form of a stablecoin, you must be sure that the issuer has $1 USD in their bank account or, at least, an asset of equal value. Fractional reserve banking has already sent the global economy in a downwards spiral. Fractional reserve upon fractional reserve is dead on arrival. It's imperative, therefore, that stablecoin issuers make sure to engage independent auditors and provide transparency reports to consumers. Those who do will win people's trust. A prominent example today is Tether's transparency report page and independent audits.
- Technical risk: As users hold stablecoin balances in wallets fully under their control, a familiarity with how such wallets work is required. In this case, it's no different from transacting with bitcoin. The user interface is similar to what you're used to seeing in your online banking application or PayPal. However, the risk of losing money, if not careful, is still there. That said, given the game-changing advantages of stablecoins for your business, wouldn't you want to spend ten minutes on learning how to secure them?
Stablecoins: The Next Level for Your Business
The rise of stablecoins is not a coincidence. Bitcoin has shown a better way of transacting with your peers. It was only a matter of time before either banks provided competitive service, or entrepreneurs filled the gap. The legacy system is slow to move—a huge disadvantage in the new fast-paced world of bitcoin. The cat is now out of the box. You don't need much foresight to understand that the payments ecosystem will never be the same. Stablecoins are taking over, and businesses that choose to employ them to move fiat currencies find themselves in a very advantageous position compared to competitors. Think about it: you don't need a checking or operating account anymore. Use your bank (or better yet—bitcoin!) for savings and stablecoins for transfers. Liquidity is king!
We at Bitcoin Reserve have solid banking relationships with forward-thinking institutions, but it would be unwise to ignore the zeitgeist. Our goal is to establish an effective way for businesses to enter and exit the bitcoin market. Legacy bank wires still play a decisive role in international transfers, but we can already see a surge in demand for settlement in stablecoins. Our clients simply love the idea of buying or selling bitcoin and fully settling within minutes rather than days. As a proud member of the Liquid Federation, we're taking steps to help the newly-formed ecosystem flourish.
Do you want to know more about settling your bitcoin trades with stablecoins? We'll be happy to answer your questions. Reach out!