Stablecoins Reshape International Trade and Finance: The Future of Classical Banks Under Question

In 2024, we are observing a landscape of extraordinary geopolitical dynamics, where the United States encounters escalating rivalry from an expanded group of nations known as BRICS+, which now includes not only Brazil, Russia, India, China, and South Africa but also more and more other countries. This shift is not confined to the BRICS+ members alone; nations across Africa, the broader Global South, and South America are increasingly inclined to engage actively in the reshaping of international norms and regulations. This movement signifies a broader desire among these countries to influence the global financial order, reflecting a shift in international power dynamics.

Behind these geopolitical changes, significant events are occurring in the world economy and trade. Bitcoin has firmly established itself in the global financial arena, gaining recognition as a new asset class alongside traditional investments. The recent launch of Bitcoin ETFs in the United States on January 11, 2024, represents a crucial advancement in its evolution. Although an increasing number of brokers worldwide are dubbing Bitcoin “digital gold,” it remains far from achieving its goal of becoming the “new currency.”

Consider El Salvador, where Bitcoin has been recognized as legal tender for three years. Despite this initiative, only about 12% of the population has utilized it for transactions. This highlights that, while Bitcoin has made significant strides, it still has considerable distance to cover before it can be adopted as a mainstream medium of exchange, if that ever happens.

Limitations of Bitcoin Adoption and The Rise of Stablecoins

The limited adoption of Bitcoin is largely due to high blockchain transaction fees and the prolonged time required for transaction confirmations. Crypto enthusiasts are trying to address these issues by enabling second layers to Bitcoin and using wrapped Bitcoins, but these solutions often compromise the security of custody and transactions in Bitcoins.

Against the backdrop of Bitcoin's story, we see a skyrocketing popularity of stablecoins. Unlike Bitcoins and other non-stable cryptocurrencies, stablecoins achieve stability, often through a fixed value to fiat money, typically in the form of parity. Tether (USDT), the most popular stablecoin in the world, is USD-based and leads among dollar-pegged stablecoins.

More people in emerging countries are using USDT to arrange cross-border transactions for their relatives, especially labor migrants. These USDT transactions have forced officials in some countries to be nervous about compliance with established Know Your Customer (KYC) and Anti-Money Laundering (AML) practices in the classical financial world. Tether Holdings Ltd., the issuer of USDT, based in the British Virgin Islands, has already frozen several USDT accounts upon receiving requests from officials, partly due to concerns about Western sanctions compliance.

Regulatory Concerns and Banking Impact

The rising role of USDT in international payments has become a concern for Western regulators, including the Financial Action Task Force (FATF). They are wary of how payments in USDT could be used to arrange financial transactions among parties under sanctions. This concern extends to the banking sector globally.

Banks in the CIS countries, for example, are witnessing how the rapid digitalization of finance and the rise of fintech are leading to a situation where fintech companies and big online marketplaces are taking away their clients, not just in payment services but also in other areas. Several fintech startups have already become Big Tech companies, expanding their financial services beyond just payment innovations.

For instance, Buy Now Pay Later (BNPL) services are essentially a form of credit, a key function traditionally associated with classical banks, excluding investment or private banking. Now, payments and credit services are drifting out of the banking realm. The banks have already been hit, with approximately three bank branches in the U.S. closing every day as their client base disappears at an accelerating pace.

Future Developments in Stablecoin Usage

This is not the end of the story; it is just the beginning. In October 2024, it became known that the Tether operator was planning to launch credit services in USDT for commodity traders on the global arena. This means that in the near future, oil traders, for example, will be able to leverage the power of dollar stablecoins to make deals 24/7, in several minutes instead of waiting for open banking hours and dealing with extensive paperwork. The average cost to send money via international wire transfer is about $42, while the commission to move USDT may be just several dollars, depending on the blockchain used since USDT functions on various blockchains.

Paper-based transactions are still the key point in the business culture of most world countries, but the ascendance of digital signatures paves the way to a higher degree of acceptance of digital mechanisms to arrange contracts.

The volume of stablecoins transactions in the world will top $35 trillion this year, with an average sum transacted of $7,800. This underscores that stablecoins are often being used by ordinary people as an alternative to classical routes of money transfers, and by small and medium businesses, especially in emerging economies. However, big companies will also start using stablecoins in international trades.

Dollar Stablecoins and USD Dominance

Dollar stablecoins servicing world trade is another step to maintain USD dominance. As the USDT issuer states, these stablecoins are backed by huge investments in U.S. Treasuries, and the company boasts of being among the top 20 world holders of U.S. public debt. Together, the holdings of U.S. Treasuries by the issuers of the two key and rivaling dollar stablecoins, USDT and USDC, will definitely surpass the $100 billion mark next year.

As far as Tether's initiative is concerned, it is not just the initiative of one crypto player. In October 2024, Thai Siam Commercial Bank, a traditional bank and a visible player on the Thai banking landscape, outgrew the stablecoins experiments within the regulatory "sandbox" of the Bank of Thailand and became ready to offer services to conduct financial transactions in stablecoins, not only USD-based. It took only about two months to clear all things in the "sandbox" and get approval from the Bank of Thailand to go public with stablecoin services.

New Financial Reality

All these developments point to the fact that we are on the brink of a new financial reality in which fiat money in its classical forms may disappear not only in people's money transfers but also in world trade among companies.

Dollar stablecoins will face severe competition from central bank digital currencies (CBDCs) such as the digital yuan and digital ruble, as well as from private stablecoins issued on the basis of other than USD currencies. For example, for the first time in UAE history, the central bank of this country gave a "green light" to a private stablecoin issued on the basis of the UAE Dirham.

Moreover, the idea being discussed among BRICS+ countries to create a stablecoin backed by a basket of gold and fiat money may eventually come true.

Of course, the world economy is stepping into uncharted territory when stablecoins become used as a means of credit. When loans are made in fiat money through classical banks, there is supervision from the central bank in terms of capital sufficiency and reserve requirements. The issuers of private stablecoins can actually provide banking services without being officially regulated as a bank, and this is a significant issue.

The trend of financial services on blockchain taking more and more parts of "banking’s pie" has been tracked for several years, not without bumps and dumps along the way. There were a number of crypto startups that offered lending based on collateral in the form of Bitcoins, Ethereum, and other cryptocurrencies, and some of them went bust. These companies attracted crypto deposits and provided credit, precisely what banks are used to doing in the fiat money world. However, as mentioned above, supervision from central banks plays a crucial role in ensuring that banking systems in countries do not fall apart.

Financial Inclusion and Self-Regulation

There is no such supervising body in the crypto sphere. Everything is done via blockchain and smart contracts, and DeFi projects are often governed by Decentralized Autonomous Organizations (DAOs), which does not guarantee that the operating activities of such startups will always be financially robust.

Indeed, stablecoins enable the enhancement of financial inclusion to cater to the financial needs of unbanked people worldwide. However, this needs to be self-regulated more properly. Smart contracts are a very promising thing, but currently, they only fulfill automatically what the developers of such smart contracts put into them.

Role of Artificial Intelligence

Big expectations are emerging with the advent of Artificial Intelligence (AI). Currently, each third fintech startup in the world mixes crypto and AI innovations into their activities. The symbiosis of AI and blockchain may transcend the issues that each innovation faces separately. The "brain" of AI combined with the technical capabilities of blockchain creates a unique technology.