Maximizing Cross-Border Transactions with Stablecoins: 5 Essential Considerations
As a business owner, every dollar made is a dollar that counts and a dollar that should be saved or invested. Despite so, corporates have incurred an annual transaction cost of more than $120 billion from additional hidden costs, delayed settlement, and trapped liquidity.
To top it all off, the report by JP Morgan notes that corporates move nearly $23.5 trillion yearly across countries but still have to wait an average of two to three business days to clear a cross-border transaction.
This is to say that every year, businesses are losing both time and money. At the center of this is the main culprit, intermediaries.
How are intermediaries the problem?
Let’s say you want to send $50,000 from New York to Accra, Ghana. Using bank transfer, you’ll most likely incur a 4% to 8% transaction cost.
Every time your money passes through an intermediary you should expect a fee charged. These intermediaries include a payer, the payment service provider, the payment infrastructure, and the corresponding bank.
This whole process will take an average of 1 to 4 business days before the money is received in the recipient’s account. For most businesses, this time frame can cause a cash flow crisis.
Due to the number of intermediaries involved in your transaction, transparency becomes a challenge. You’ll find your $50,000 transaction has incurred hidden charges that are rarely disclosed to you by the bank.
Additionally, there is the issue of security. Every country has a different regulation of security. It only takes a single weak spot in the movement of funds for your money to be stolen before getting to the recipient’s account. You have no guarantee of the safety of your funds.
In some cases, you should also anticipate regulatory costs and compliance costs, and you should expect currency exchange costs that eventually push the general transaction fee higher.
Stablecoins to the rescue
What if you can send the same amount of money from New York to Ghana directly without any intermediary involved? That‘s the blockchain dream come to a reality.
Smart contracts have eliminated the need for a third party in cross-border transactions. Simply put, a smart contract is a program built on the blockchain that runs when predetermined conditions are met. Using the agreement, businesses and individuals can transact with each other directly with the smart contract prompting actions on both parties.
Cryptocurrency enables these smart contracts to work by being the defining decentralized digital currency of exchange. However, due to the nature of the market, these digital assets are volatile and tend to fluctuate a lot.
Stablecoins, on the other hand, peg their value on the US dollar, and it is backed by crypto, fiat, and algorithm. Its stability means that it stores value. That means that if you sent the $50,000 from New York to Accra using a stablecoin such as USDC, the same amount sent is the same amount that will be received by the recipient.
What makes stablecoins different?
What makes it different is that transactions are peer-to-peer. The only cost incurred is the gas fee required to send these stablecoins and the on/off-ramping fees. This also means that you can move your high-volume money across the world in hours rather than days and all transactions are from one wallet address to another. You also get to enjoy 24/7 access to cross-border service on any given day or time without limitation.
By their very nature of being blockchain-based, users enjoy a secure transaction. Every transaction is added to the ledger which makes the transaction transparent enough that both the sender and the receiver can access the transaction history.
Interested? Here are some tips to consider when leveraging stablecoins for your business’ cross-border needs
1. Choose a reputable stablecoin
Despite how stablecoins come with its benefit, as seen with the Luna scandal, there are weaknesses to look out for. Transparency is important especially with the audit on reserves to back the stablecoin.
When choosing a stablecoin for your cross-border transaction, do proper research. Does the stablecoin operate in a transparent and accountable governance model? Is the stablecoin backed by assets such as a basket of currencies? Are these backings audited transparently? Is the stablecoin compliant with relevant regulatory requirements in the jurisdiction it operates? Does the stablecoin have a track record of being reliable and stable? Does the stablecoin have robust security measures such as strong encryption?
Do your research and evaluate your options.
2. Use a secure wallet
By removing intermediaries, stablecoin transactions are peer-to-peer this is to say from one blockchain wallet address to another. You are responsible for your digital assets from how you store them to how you access them.
For one, always store your stablecoins in a non-custodial/ self-custodial wallet. Make sure you store your digital assets in a wallet with a strong encryption and two-factor authentication. Don’t forget to back up your seed phrase in case of any crash and you need to transfer your digital assets to a new wallet. You can back this up in a hardware wallet or on paper. And again, do your due diligence on the platform. Understand their governance and the reputation of the team.
3. Use smart contracts
If you are moving high-volume money across the world, you need to ensure the security of your funds. To avoid fraud and risk of errors, make use of smart contracts and the legally binding agreement that comes with them.
Smart contracts automate the whole cross-border transaction reducing the time and cost of a manual process. The cryptography behind the smart contract is tamper-proof. No one can change records for fraud purposes. The whole transaction process will also be transparent for both parties to publicly view. Smart contracts also ensure that both parties fulfill their obligations to access the funds.
4. Stay informed
Stablecoins may not be exposed to market volatility but they are exposed to geopolitics, volatility in the collateral backing, peg vulnerability during the bear market, and other external exposure.
You should strive to stay informed to help you reduce the risks, understand potential risks and security concerns, and take the necessary steps to minimize them. Staying up to date will also help you evaluate potential investments and make informed decisions about which stablecoins to use. You will also be able to know the latest market trends, regulations, and any opportunities that may arise. Also, staying informed puts you one step ahead of your competition.
5. Choose a fast and reliable service provider.
When moving high-volume money, trust in the service provider is important. Do you trust their speed of transaction? Are the gas fees low? In case of your support, what is their response rate? Is their platform reliable at all times?
When choosing a service provider for your cross-border needs you need to consider if the service provider offers a stablecoin with low volatility. Also, consider their transaction fee and exchange fee. Also, check if their platform is user-friendly. Do they have clear documentation? What is their reputation? Also, do they have robust security measures in place to protect your funds?
At Kotani Pay, we understand that time, convenience and money are important to you. That is why we offer your business alternative on-ramp/off-ramp options. You can integrate with our API and access stablecoins at any given time or you can choose our one-time stablecoin settlement solution for your cross-border needs. With our solutions, you can move your high-volume funds in form of stablecoins, convert them to your local currency and withdraw directly to your local payment service provider for only 2%. Our Kotani Pay wallets are also non-custodial. You can easily access and back up your digital assets with other blockchain platforms.
A bonus tip for consideration: You can never go wrong with planning. Prepare and plan for the best or worse case scenario. Consider having a risk management strategy to protect your business from currency fluctuation and other risk associated with cross-border transaction
Talk to us and learn how you can leverage Kotani Pay’s reliable on-ramp/off-ramp solution for your cross-border needs.