Global commerce depends on the ability to move money quickly and reliably across borders. Yet, currency volatility continues to challenge businesses and individuals engaging in international transactions. Exchange rates fluctuate constantly, and sudden shifts can increase costs, delay settlements, and complicate financial planning. As international trade expands, these risks become more pronounced.
A new class of digital assets, known as stablecoins, has emerged as a potential solution. Designed to maintain a consistent value, stablecoins aim to combine the advantages of cryptocurrencies, speed, transparency, and borderless functionality, with the reliability of traditional money. By mitigating volatility, they have the potential to reshape the way global payments are conducted.
What are stablecoins?
A stablecoin is a type of crypto asset created specifically to maintain price stability. Unlike most cryptocurrencies, which can experience dramatic price swings, stablecoins are pegged to stable assets such as fiat currencies or commodities. For example, a stablecoin linked to the US dollar strives to maintain a one-to-one ratio, meaning one token equals one dollar.
This peg makes stablecoins appealing for international transactions. Their value does not fluctuate drastically between the initiation and completion of a payment, reducing exposure to exchange rate risks.
Stablecoins also inherit the strengths of blockchain technology, including transparency and traceability. Each transaction is recorded on a public ledger, allowing for real-time verification and reducing the chances of fraud. Combined with efficient processing speeds, these qualities make stablecoins an increasingly practical option for global financial operations.
The main types of stablecoins
Stablecoins can be categorised based on how they maintain their peg. Understanding these mechanisms is key to evaluating their reliability and use cases.
- Fiat-collateralised stablecoins are backed by reserves of fiat currency held in traditional banks. Each coin is supported by an equivalent amount of cash or cash equivalents. Tether (USDT) and USD Coin (USDC) are among the most well-known examples.
- Crypto-collateralised stablecoins use other cryptocurrencies as backing. To account for the volatility of these underlying assets, they are often over-collateralised. DAI, for instance, is backed by Ethereum and other digital assets, using smart contracts to maintain its stability.
- Algorithmic stablecoins rely on software-controlled supply and demand mechanisms rather than collateral. These systems expand or contract token supply automatically to keep prices stable. While innovative, algorithmic models have faced challenges and are generally considered riskier than collateralised alternatives.
Each category has its strengths and trade-offs. Fiat-backed stablecoins provide the greatest stability but depend on trust in the custodial institution. Crypto-backed and algorithmic versions reduce reliance on central entities but introduce higher operational complexity and risk.
The problem of currency volatility
Currency volatility remains one of the biggest obstacles to efficient cross border payments. Businesses trading internationally must constantly manage exposure to fluctuating exchange rates. Even small variations can have a significant impact on pricing, margins, and competitiveness.
For example, a company invoicing in euros but paying suppliers in dollars may find its profits eroded if the euro weakens before payment is made. Traditional hedging tools exist, but they are often expensive and inaccessible for smaller firms or individuals.
Historical events highlight how exchange rate instability can disrupt trade. After the Brexit referendum in 2016, the pound sterling experienced sharp declines, creating uncertainty for British importers and exporters. The Turkish lira’s steep depreciation in 2018 caused widespread disruptions in regional trade, while Venezuela’s hyperinflation rendered its local currency almost unusable for cross-border commerce.
These examples underscore the importance of finding new, technology-driven mechanisms to preserve value and ensure predictability in global transactions.
How stablecoins bring stability
Stablecoins directly address volatility by providing a consistent store of value that can be used across borders. Because they are pegged to stable assets, they retain purchasing power during the transaction process, regardless of exchange rate movements between local currencies.
A business can convert local currency into stablecoins, send them instantly across a blockchain network, and then convert them back to fiat currency in the destination country. Throughout this process, the value remains constant in the pegged unit, typically a major currency such as the US dollar or euro.
A company can also easily accept crypto payments using a crypto payment gateway, which is simple to set up and plug into payment checkout systems. This opens the door to more customers who want to pay with crypto, and is auto converted into the currency of choice for the business.
Beyond stability, blockchain infrastructure offers additional advantages:
- Speed: Settlements occur within minutes or even seconds, unlike traditional global settlements that may take several days.
- Cost-efficiency: By removing intermediaries and banking layers, stablecoin transactions generally incur lower fees.
- Transparency: Every transfer is recorded on-chain, allowing businesses to track funds with complete visibility.
- Accessibility: Stablecoins can operate outside conventional banking systems, enabling participation from individuals and companies in regions with limited financial infrastructure.
For businesses engaged in high-volume international trade or remittance networks, these benefits translate into greater operational efficiency and reduced financial uncertainty.
The role of blockchain technology
The underlying blockchain infrastructure plays a vital role in enabling stablecoin functionality. Distributed ledger technology allows participants to exchange value directly, reducing reliance on correspondent banks or clearing systems.
This peer-to-peer model shortens settlement times and ensures traceable, tamper-resistant records. Smart contracts, automated programs that execute transactions under specific conditions, can further streamline payment workflows, adding automation to compliance checks, invoice settlements, and reconciliation processes.
As more enterprises integrate blockchain solutions, interoperability between payment networks is becoming a focus area. Standardisation efforts and cross-chain protocols are helping stablecoins operate seamlessly across different blockchains, enhancing liquidity and usability.
Challenges to adoption
Despite their promise, stablecoins face several challenges before achieving mainstream adoption in cross border payments.
- Regulatory uncertainty remains the most significant hurdle. Different jurisdictions are developing frameworks for digital assets, and the lack of global consistency can slow adoption by financial institutions.
- Infrastructure integration poses another obstacle. Many banks and payment processors still rely on legacy systems, which can be complex and costly to adapt for blockchain-based operations.
- Liquidity and network costs can also affect efficiency. Periods of high blockchain activity may increase transaction fees, potentially offsetting cost advantages.
- Economic and policy concerns exist as well. In countries with volatile national currencies, widespread use of foreign-backed stablecoins could influence local monetary stability and financial sovereignty.
Nevertheless, ongoing regulatory efforts, particularly in regions like the European Union with frameworks such as MiCA (Markets in Crypto-Assets), are laying the groundwork for more secure and transparent adoption.
The future outlook
The future of cross border payments is likely to involve a hybrid model, where stablecoins coexist with traditional systems. Financial institutions, fintech firms, and regulators are increasingly exploring partnerships that combine blockchain efficiency with established compliance standards.
If integrated effectively, stablecoins could significantly reduce friction in international trade. Payments would become faster, cheaper, and more predictable, enabling smaller enterprises to access global markets previously dominated by larger players with sophisticated currency management tools.
As blockchain infrastructure matures and regulations evolve, the use of stablecoins in cross border payments is expected to expand. Their ability to stabilise value, streamline transactions, and operate beyond traditional financial hours could make them a foundational component of the global digital economy.
Conclusion
Currency volatility has long been a barrier to efficient global trade. Stablecoins offer a practical and innovative means of overcoming that challenge by combining the reliability of fiat currencies with the speed and openness of blockchain technology.
While regulatory and operational questions remain, the direction of innovation is clear: digital currencies designed for stability are transforming the way value moves across borders. For businesses and individuals alike, stablecoins represent a glimpse into a future where international payments are faster, cheaper, and, most importantly, stable.