Key takeaways
- Unlike traditional systems, USDC enables quick cross-border payments with lower fees, benefiting regions like Latin America and APAC.
- USDC overcomes issues like hefty transfer fees, unfavorable exchange rates and long settlement times with transparent, blockchain-based solutions.
- The popularity of USDC is rising in nations such as Mexico and the Philippines, where conventional remittances are expensive and slow.
- Regulatory concerns, possible depegging and technical difficulties like blockchain scalability could affect the mass adoption of USDC in global remittances.
Remittances and cross-border money transfers have often been slow and costly, especially in regions such as Latin America and the Asia-Pacific, where millions rely on these services to support their families abroad. USD Coin (USDC), a stablecoin tied to the United States dollar, is changing the scenario by providing a quicker, more cost-effective substitute.
USDC has particularly gained popularity in nations such as the Philippines and Mexico, where remittance volumes are substantial and conventional remittances entail expensive fees and delays. The stablecoin is laying the groundwork for more effective international payments with its alliances with financial organizations and its expanding acceptance in these areas.
This article explores what USDC is, the challenges of traditional cross-border payments and remittances, how USDC addresses these challenges, the use cases of USDC cross-border payments, the potential challenges and considerations for USDC in remittances, and the future of USDC in cross-border payments and remittances.
Understanding USD Coin (USDC)
As opposed to cryptocurrencies like Bitcoin (BTC), which are volatile, stablecoins are pegged to a relatively stable asset, such as a fiat currency like the US dollar or a commodity like gold. Also, some stablecoins use an algorithm to control supply.
In the case of USDC, it is pegged to the US dollar, implying that $1 is the intended value of 1 USDC at all times.
Stablecoins like USDC offer much-needed stability in the often unpredictable world of cryptocurrencies. This stability makes USDC an attractive option for individuals and businesses looking for a lower-risk way to enter the cryptocurrency market.
USDC is supported by a reserve consisting of US Treasury bills and cash. USDC is supported by a reserve consisting of US Treasury bills and cash. As of Aug. 30, 2024, there was approximately $34.64 billion worth of USDC in circulation, while the total value of assets held in the USDC Reserve amounted to about $34.72 billion.
This indicates that an equal amount of US dollars is kept in reserve for each USDC in use. Circle, a financial technology company, is behind USDC stablecoin.
Several cryptocurrency exchanges, payment processors and retail outlets now accept USDC, making it simpler for people to use cryptocurrencies for regular transactions.
Did you know? USDC was launched in September 2018 by Circle with support from the cryptocurrency exchange Coinbase. Circle also received an initial investment of $110 million from Bitmain.
Challenges of traditional cross-border payments and remittances
Cross-border payments and remittances come with several challenges that make the process far from ideal:
Currency exchange rates
Unfavorable currency exchange rates may eat into the amount you’re sending abroad. For instance, 1 British pound was typically worth about $1.30 in October 2024. But 1 pound was worth over $2 before the global financial crisis in 2008. Post the Brexit vote in June 2016, sterling lost plenty of strength against the dollar. The currency exchange rates need to be factored in to determine the amount the recipient will be getting.
Hefty transfer fees
Banks may charge hefty transfer fees for sending money abroad. International money transfers typically involve fees of around 3%–4% of the total amount, but this can vary depending on the bank.
Banks often add a margin of up to 7% to the daily exchange rate when you send money internationally. This means a $10,000 transfer could cost an additional $500. In some countries, receiving international wire transfers may also require the recipient to pay a fee.
Long settlement times
In international transfers, long settlement times often frustrate the sender and the recipient. Cross-border transfers can take several days to process. If multiple banks are involved, the time could be even longer. This delay can be stressful when funds are urgently needed.
Difficulty in cash-based remittance
People in underbanked or rural areas often struggle to access financial services. Many lack bank accounts and rely on cash-based remittance services, which can be expensive and less secure.
Lack of transparency
Lack of transparency and, therefore, the possibility of fraud further complicate the process. Scammers often target people sending or receiving money. The lack of transparency regarding fees and exchange rates can make it difficult to determine the final amount that will be received.
How does the USDC address remittance challenges?
USDC has turned out to be a game-changer for cross-border payments, effectively addressing many of the challenges that traditional systems face. The inherent borderless nature of USDC makes international transactions easier. Here’s a breakdown of how it improves the process:
- Speed: USDC transactions settle on the blockchain nearly instantly, contrary to traditional transfers, which might take days. Rather than days, the transfer happens in a matter of minutes.
- Reduced cost: In conventional transfers, banks and intermediaries collect a significant percentage of the transfer amount for handling money, currency conversion and other services. When using USDC, transactions happen on the blockchain, significantly bringing down the fees.
- Transparency: As every USDC transaction is entered into a public ledger, anybody may check it at any time. Because the transaction history is publicly available, there is less chance of fraud, which is something the traditional systems lack.
- Support for unbanked communities: USDC is particularly useful for underbanked or unbanked communities. Someone with just a smartphone and internet access can transact in USDC. Thanks to digital wallets, you can send money abroad without banks getting involved.
Did you know? USDC is an ERC-20 token backed by US dollars. To obtain USDC, users must complete Know Your Customer (KYC) verification and wire funds to a designated bank account. The issuing party then creates the equivalent amount of USDC on the blockchain, which is transferred to the user’s wallet. The wired funds are held in reserve.
Use cases of USDC cross-border payments
USDC cross-border payments have several use cases:
Remittances
Remittances allow you to send money to your homeland and support family and friends. In a way, remittances work like a lifeline. According to a world report, the remittances to low- and middle-income countries alone reached an estimated $656 billion in 2023.
The US, Western European countries and some countries in the Middle East, such as Qatar and the United Arab Emirates (UAE), are the largest sources of remittances globally.
USDC remittances are fast and almost immediate. Moreover, in countries where a large section of the population still has no access to banks, USDC remittances can prove to be a reliable source of income. For example, there are people from countries such as Afghanistan and Congo who earn in the West and remit regularly to their home countries.
Countries in Asia-Pacific and Latin America, such as Mexico and the Philippines, also receive remittances in large amounts. The Philippines received a significant $37 billion in remittances from overseas Filipino workers (OFWs) in 2023, contributing 8.5% to the country’s gross domestic product (GDP). The majority of these funds originated from the US, Saudi Arabia and Singapore.
Remittances to Mexico reached a new high of $63.3 billion in 2023, continuing a decade-long upward trend. Almost all of these remittances were sent electronically, primarily from the US. USDC has the potential to enhance the efficiency of remittances in these regions, making the process quicker and smoother.
It has been integrated into the banking systems of Brazil and Mexico, enabling businesses to use the USD-pegged stablecoin directly through their local banks. The integration of USDC into Brazil’s PIX and Mexico’s SPEI payment systems allows businesses to use USDC in local fiat currencies, such as the Brazilian real (BRL) and the Mexican peso (MXN).
In 2020, Brazil launched PIX, which allows for real-time transactions between individuals, businesses and government entities using phone numbers. As of August 2024, PIX had over 168 million users. Similarly, Mexico’s SPEI, launched in 2004, enables real-time bank transfers via mobile apps or online banking.
International business payments
Another strong use case of USDC is businesses using it for moving money faster and at lower rates across the globe than traditional payment systems. As USDC is a stablecoin linked to the US dollar, it is ideal for cross-border transactions compared to volatile cryptocurrencies like BTC.
A US-based business may use USDC to pay a European or an Asian supplier. The payment is immediate, saving both parties money by avoiding costly fees and the need to wait days for bank transfers. Businesses like Visa are already using USDC to make cross-border payments easier and give customers a smoother financial experience.
Charity and nonprofit donations
As USDC isn’t limited to national boundaries, it is generously used for charitable and nonprofit contributions. Donors can send money instantaneously from anywhere without worrying about expensive transfer fees or currency conversion.
Thanks to the transparency of blockchain technology, donors can easily verify where their funds have gone. In areas where banks are absent or where banking operations have been disrupted due to disasters, USDC can serve as a useful alternative.
Did you know? Worldwide, remittance flows were projected to grow by 1.6%, rising from $843 billion in 2022 to $857 billion in 2023. The leading five recipients of remittances among low- and middle-income countries (LMICs) in 2023 were India ($120 billion), Mexico ($66 billion), China ($50 billion), the Philippines ($39 billion) and Pakistan ($27 billion).
Potential challenges and considerations for USDC in remittances
While there are many advantages to using USDC for remittances, you also need to keep in mind certain challenges:
- Regulatory considerations: Crypto regulations differ greatly between nations. While some countries have a supportive environment toward crypto, including stablecoins like USDC, others have ambiguous regulations or are outright negative. This inconsistency may hamper the smooth operation of remittance services across borders.
- Depegging: The purpose of USDC, a stablecoin, is to maintain parity with the US dollar. However, if it depegs from $1, it will defeat the very purpose of a stablecoin. Anyone using USDC for remittance, payment or charity will suffer financial losses and lose faith in the stablecoin in case it depegs, though the chances are negligible.
- Adoption: In many areas, people might not be completely aware of how USDC or cryptocurrency operates. The adoption may be particularly a problem in areas where remittances are most needed.
- Technical difficulties: Blockchain-based transfers may get delayed by problems like transaction congestion and scalability, particularly when the network is busy. The technology is fast evolving, though, and the efficiency of blockchain-based solutions will be improved.
Though USDC has a lot of potential for use cases like cross-border remittances, payments and charity, these challenges need to be resolved before it can be widely used.
The future of USDC in cross-border payments and remittances
As more individuals and companies recognize the advantages of fast, low-cost and transparent payments, USDC is poised to play a central role in international finance. Emerging trends like the growing acceptance of stablecoins by financial institutions and their integration with payment networks bode well for the stablecoin.
Partnerships are extending USDC’s reach. For example, Visa and Circle have already teamed up to enable USDC payments, providing companies with the critical infrastructure to adopt it faster. As regulations regarding cryptocurrencies evolve, USDC is likely to become more appealing to both retail and institutional users.