How stablecoins restore the best properties of cash

Societies around the world, independently and over thousands of years, have arrived at cash as the dominant means of economic exchange. Whether it was a shell, a stone, a metal coin or eventually a paper bill, it worked the same. As long as two people trusted the underlying instrument, they could transact directly.

Cash’s defining property is that payment and settlement happen at the same time. Once money changes hands, the transaction is finished. The other party has it, and you no longer do. There’s nothing to reconcile.

Over the last half-century, we’ve added electronic rails on top of money, enabling a global economy that works across distances in a way that cash never could. But those rails also separated payment from settlement, eroding many of the properties that made cash so efficient in the first place. The financial system now does all kinds of gymnastics to get back to what we already had with cash.

Sending a remittance from the US to Colombia feels instant. The recipient might see the money right away, even though the institutions behind the payment have not actually settled with each other yet.

That illusion of cash is made possible by having Colombian pesos already available on the other side of the transaction before the sender ever walks in the door. And to provide the same experience globally, a payment provider needs liquidity positioned across the countries and currencies where it expects customers will want to send money.

Across the system, all that prefunding adds up. Capgemini estimates that as much as $4 trillion sits trapped in settlement and liquidity accounts just to fund cross-border payments. Keeping that much money parked around the world is expensive. Institutions have to fund those balances, while giving up whatever return that capital could earn elsewhere. And because a provider can’t know exactly where demand will show up, it holds more than it needs.

The economics get worse as the market gets smaller. In a major corridor, the cost of maintaining that liquidity can be spread across a large volume of payments. In a smaller market, there are simply fewer transactions over which to spread the cost, which makes smaller and emerging markets more expensive to serve. You can see that in remittances. In the World Bank’s latest data, sending $200 to sub-Saharan Africa costs an average of 8.46%, compared with a global average of 6.36%.

And now that payment and settlement happen at different times, someone needs to keep track of it all. Money often moves through multiple institutions before it reaches its destination, and each keeps its own records of what was sent, what was received and what is still owed. Financial institutions employ teams of people to manually monitor payments, investigate discrepancies and reconcile the books when money finally arrives.

The more markets and intermediaries a provider supports, the more operational infrastructure it needs to run. Many of these costs are fixed regardless of the size of the market, again making smaller markets less economic to serve.

Sometimes this results in higher prices. In other cases, institutions withdraw from certain markets completely. The Bank for International Settlements counts a 25% decline in active correspondent banking relationships between 2011 and 2020, with the steepest declines in emerging markets and small island states, where the number of active correspondent banks has fallen by as much as 41%.

This is where stablecoins and tokenized money come in.

The case for them is stronger now, simply because existing systems are not improving fast enough. In 2021, the G20 set targets for cross-border payments to be met by the end of 2027, including an average cost of no more than 1% for retail payments. Last October, the Financial Stability Board reported that costs remain sticky, and the targets are unlikely to be met by the 2027 deadline.

At the same time, stablecoins and tokenized money are now globally scalable and can operate inside clear regulatory frameworks across major markets. They offer a way to restore cash’s defining property, in which payment and settlement happen at the same time, while retaining global reach.

When I send you a stablecoin, you have it and I no longer do. The transfer and the record of it are the same event, so there's nothing to reconcile after the fact. We can start to remove the gymnastics of prefunding and reconciliation required to create the illusion of cash.

This has the potential to rewire the financial system, freeing up enormous amounts of idle capital while automating much of the operational work required to keep track of money as it moves. The net result is that more markets become economic to serve.

We’ve already seen what better payment infrastructure can unlock. In Kenya, access to M-PESA lifted an estimated 194,000 households, about 2% of Kenyan households, out of poverty, with the largest gains among households headed by women. In Brazil, Pix made instant payments free for individuals. The IMF found that within two and a half years it had reached more than 140 million people, or about 80% of adults.

Both show what better payment infrastructure can do within a country. The opportunity now is to make those benefits flow across borders.

Inefficiencies can be a source of profit for many in the financial system. Institutions holding funds while payments settle can earn on the float, even as other institutions and customers bear the cost of prefunded capital around the world.

That means the costs and benefits of the current financial system are not evenly distributed. Making settlement faster may reduce costs overall, but it also removes revenue from parts of the system that benefit from delay. That makes change harder than simply deploying better technology.

But while the road to implementation will be difficult, the direction is clear.

Money is entering its next form, one in which payment and settlement can happen at the same time, reconciliation can be automated, and the capital now parked around the world to lubricate the system can finally get back to work.