Perspectives

Stablecoin vs. Fiat, which is the future for cross border payments

January 5, 2021


What is Fiat?

A government-issued currency, not backed by concrete materials such as gold or silver, is a Fiat currency. Modern paper currencies that include the U.S. Dollar, the Euro, and other significant global currencies are Fiat money. 

Fiat money is inconvertible and is unrecoverable since the word comes from Latin and implies "it shall be" or "let it be done." Its supply is regulated and controlled by the particular government that the currency belongs to. Because fiat money does not associate with physical reserves, like gold or silver, it is at risk of losing its value due to inflation. Its state mainly depends on supply and demand. 

What is a Stablecoin?

A stablecoin is a new type of cryptocurrency that ventures to offer price security and is backed by a stored asset. They give the on-the-spot processing and protection of cryptocurrency and the volatility-free firm costs of fiat currencies. 

They are secured to an underlying asset like gold or forex stocks, which act as an endorsement, and that is why their appraisals are clear of the wild fluctuations. They are designed to imitate the worth of fiat currencies, such as the dollar or the euro. Stablecoins are further classified into a few categories: Fiat-backed stablecoins, crypto-backed stablecoins, and algorithmic stablecoins.

Stablecoins are mainly of two types: trusted and trustless. In trust, an entity issues its token on a blockchain and declares that, for everyone in distribution.

Trustless stable coins eliminate the risk of being collateralized, just like cryptocurrencies that aren't held by a single focal entity. While a common blockchain approves them, stable coins are much more secure as they do not rely on human interactions.

Future for cross border payments

Stablecoins can have a significant impact on the future of cross-border payments and remittances.

A stablecoin's value is firm comparative to fiat currency. The exchange rate is 1:1, not 6,000:1 one day and 3,000:1 the next. It operates like a strict currency board, with each unit of eMoney fully supported by fiat currency. They are pre-funded and are stored in a trusted account.

But why use stable coins and not fiat currency since the first is a digital copy of the second?

  • First, it is better blended into our digital lives and issued by companies that understand the user-centered perspective. 
  • Second, its transfer is nearly costless and quick and is often more attractive than card payments and even bank-to-bank transfers.
  • Third, in countries where the stable coin is leading, users trust eMoney more than the fiat currency.
  • Stable coins allow several benefits for transporting value contrasted to fiat currencies as they permit more expeditious payments at cheaper costs with 24/7 global access.

More importantly, people reminisce about how a remittance provider makes them feel. Payments are usually the most enduring association between the migrant and the home community. If that connection is strengthened, they will identify that brand. Speed and cost are one thing, but that significant encounter will make people revisit. Stable coin projects have the potential to modify remittances, combining value, and ultimately improving the end-user experience.

Drawbacks of Stable coins

No matter how good stable coin proves to be in the cross border payment, it still has some disadvantages:

  • Almost all of the stable coins pertain to a particular organization. This means that although decentralized by itself, a stable coin is controlled by an individual entity that regulates its issuance and supply.
  • Cryptocurrencies manage the difficulties that conventional financial markets have. Stablecoins usually are clinched to fiat currencies, which make their value depend on the global market's ongoing condition and could be subjected to inflation.
  • Stablecoins are subjected to a lack of regulation, just like all the other cryptocurrencies. There's still a long journey for them to develop into and function as a means of transacting.

Conclusion

Stablecoin ensures benefits such as clarity, safety, immutability, firm transactions, cheap fees, and privacy, all of these without abandoning trust and security guarantees that befall with employing fiat currencies. 

The foremost importance of a stable coin is that it has the potential to assist the enormous unbanked and underbanked population. 

From migrant workers who wish to transfer money home to businesses who have to make payments to overseas workers, stable coins have the potential to succeed traditional money to promote faster, more reliable, more peaceful, and more affordable cross-border payments.

It is very much clear from the above musings that stable coins can take over fiat currency and cryptocurrencies for the cross border payments, as it has enormous growth potential.

Send more than money.