Author: Shimon Newman
Edited by: Garrett Harper & Jonathan Gurirab
This report marks the second installment of Squads Labs' analysis of the global influence of stablecoins. Our first research report analyzed the impact of stablecoins in emerging markets and developing economies (EMDEs) and state-driven adoption of stablecoins. This research report examines how stablecoins disrupt traditional payment networks for cross-border transactions and payment interoperability.
Background
Closing the gap: Stablecoins are increasingly rivaling traditional payments
Stablecoins are rapidly closing the gap with traditional payment systems in terms of gross payment volume.
With features such as instant settlement, peer-to-peer transfers, and seamless integration with fiat currencies, stablecoins are emerging as viable alternatives to correspondent banking and international remittance providers. The first section of this report examines the structure of traditional payment networks, highlighting areas where stablecoins can offer greater efficiency. The second section examines payment interoperability, drawing parallels between crypto economies and existing interoperability frameworks.
Section I: Current challenges in cross-border transactions
Breaking barriers: Unlocking international money movement with stablecoins
The foundation of international cross-border transactions is the correspondent banking network, a system that has existed for decades. At the heart of this system lies the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a cooperative organization that provides a standardized messaging system for financial institutions worldwide.
When a cross-border payment is initiated, the sender's bank creates a SWIFT message containing transaction details. This message is then routed through the SWIFT network to the recipient's bank, potentially passing through one or more correspondent banks. The step-by-step process is the following [1]:
Initiation: A customer (the sender) instructs their bank to transfer money to a recipient in another country.
Message creation: The sender's bank creates a SWIFT message. This message contains crucial details such as the amount to be transferred, the recipient's bank account details, and any specific instructions.
Message transmission: The SWIFT message is sent through the SWIFT network. Each bank in the SWIFT network has a unique code called a Bank Identifier Code (BIC) or SWIFT code. The most common message type for customer transfers is the MT103.
Correspondent banking: If the sender's bank is not directly related to the recipient's bank, the message will be routed through one or more correspondent banks. These are intermediary banks that have relationships with both the sending and receiving banks.
Message receipt: The recipient's bank receives the SWIFT message.
Funds transfer: Based on the instructions in the SWIFT message, the banks involved will debit and credit the appropriate accounts. This is where the actual movement of funds occurs, but it happens outside the SWIFT system.
Confirmation: Once the transfer is complete, confirmation messages are sent back through the SWIFT network. While confirmation is near instantaneous, the underlying money movement is not.
SWIFT uses various message types (MTs) for different purposes. For example, MT 103 is commonly used for single-customer credit transfers. SWIFT also works with many other international standards, such as ISO 20022, IBA, BIC, TARGET2, Fedwire, SEPA, and various AML/KYC protocols, to ensure timely and accurate international transfers of funds [2].
Being part of the SWIFT network enables banks to communicate securely and directly with each other. However, it only eliminates the need for intermediaries if direct correspondent relationships exist between the source and destination banks. As discussed above, SWIFT doesn't transfer money; it provides a secure messaging infrastructure that allows banks to communicate the necessary information to execute cross-border transactions. The actual movement of funds occurs through correspondent banking, based on the instructions conveyed by these SWIFT messages.
To understand how funds move from Bank A to Bank C, it helps to start with a few key definitions:
Correspondent Bank(s)
A correspondent bank is a financial institution that provides services on behalf of another bank, typically in a different country. This arrangement enables banks to conduct business and offer services in regions where they do not have a physical presence or banking license. Correspondent banks act as intermediaries, facilitating international transactions such as wire transfers, currency exchanges, trade finance, and other cross-border activities.
Nostro/Vostro Accounts
Nostro/Vostro accounts are "pre-funded" accounts that correspondent banks maintain with one another to streamline international transfers. When a bank needs to conduct a transaction in a foreign country, it uses its Nostro account held with a correspondent bank in that region. From the correspondent bank's perspective, this same account is a Vostro account. These accounts allow banks to track debits and credits for cross-border transactions without needing a regulated presence or appropriate license in every country.
Intermediaries
Intermediaries are institutions or agents that facilitate financial transactions between different parties. They serve as conduits for information, funds, and financial instruments, ensuring the frictionless operation of financial markets and systems. In the context of SWIFT, if Bank A (source) and Bank B (destination) do not have a correspondent relationship, intermediaries are required to facilitate the transaction. In this setup, Bank A would transfer funds to intermediary Bank "I", which, leveraging its correspondent relationship with Bank B, facilitates the transfer and charges fees for the service.
Stablecoins: Reducing friction in the global financial system
Despite SWIFT and other payment standards simplifying cross-border transactions, the traditional correspondent banking model continues to face significant challenges.
Cross-border payment flows involve trillions of dollars each day, and a substantial portion of this activity is conducted through the correspondent banking network, which depends on pre-funded accounts. According to the Bank for International Settlements (BIS), there are tens of thousands of correspondent banking relationships globally, and maintaining Nostro/Vostro accounts is a key part of these relationships [4]. Recent estimates state that the total value lying idle in Nostro/Vostro accounts is over $27T [5]. A primary reason for the large capital requirements is the friction in managing and reconciling Nostro/Vostro accounts.
Various sources, such as Ripple, the company behind the cryptocurrency XRP, claim that up to $5T could be freed from Nostro/Vostro accounts by using cryptocurrencies to settle transactions rather than traditional banking messaging systems. Unfortunately, these “idle” funds can not be used for purposes other than Nostro/Vostro accounts, and volatile crypto assets like XRP add significant and unnecessary forex and liquidity risks to fiat transactions [5].
Stablecoins, however, circumvent liquidity risks by directly redeeming fiat, which could play a role in reducing the excess capital needed for Nostro/Vostro accounts. Contrary to popular belief, these accounts do not directly address settlement time delays. International wire transfers can still require several days to process before funds are settled in Nostro/Vostro accounts. As a result, additional funds are often necessary to cover large transfers while awaiting the completion of all wires. Because of this, many banks are exploring alternatives to Nostro/Vostro setups for wiring funds. According to SWIFT, the number of correspondent banking relationships has been reduced by around 20% since 2011 as banks look to reduce the cost burden of holding large pre-funded balances [7]. Stablecoins could reduce the amount of capital necessary in Nostro/Vostro accounts by eliminating the need for multi-day wires to hit Nostro/Vostro accounts. Moreover, stablecoins also improve FX exchange rates by reducing the number of conversions and benefit from 24/7 settlement at near instantaneous transaction speeds—further challenging the notion of conventional banking.
The efficiencies of stablecoins
Recipients can increasingly utilize stablecoins by exchanging them for fiat on centralized exchanges and ATMs, or by spending them via virtual/physical debit cards. This implies that stablecoins and their associated networks can functionally facilitate international money transfers and spending without relying on costly and slow bank services.
For example, sending Kenyan Shilling (KES) from a bank in Nairobi to a bank that only holds Australian dollars (AUD) in Melbourne might require multiple intermediaries, each taking a cut of the transaction.
With stablecoins, this transaction can be simplified.
Empirical research shows that stablecoins for payments could save an average of 3–6 days of transfer time across major payment routes [1]. Deloitte suggests that instantaneous transfers could positively impact developing economies, as they can accelerate local spending—potentially leading to billions in additional tax revenue [6]. Thus, stablecoin adoption and increased international transfer speed could benefit the global economy.
Notable developments in stablecoin cross-border transactions
While explorations around how stablecoins could unlock dormant value in Nostro/Vostro accounts are still more theoretical than practical, stablecoin technologies for cross-border settlement are already being implemented.
As more stablecoin issuers and service providers emerge, and central and international banks continue to develop rigorous standards for blockchain/stablecoin usage, we may see the world’s financial system increasingly move onchain.
Section II: Payment Interoperability
Stablecoins will unify global payments
Payment interoperability refers to the ability of different systems to communicate and exchange information, transactions, and value seamlessly [3]. More practically, in a world of interoperable payments, individuals can spend any type of money, and recipients get it in whatever currency they prefer (cash, bank transfers, stablecoins, Bitcoin, SOL, etc.).
Developed in the 1970s, ATMs are a great example of payment interoperability. They greatly simplify the withdrawal of local currencies abroad. While ATMs may seem innocuous to us in 2024, they exemplify modern payment technologies, streamlining payment delivery, foreign exchange, and instantaneous settlement.
Unfortunately, payment interoperability is still in its infancy. While great strides have been made in making payments more interoperable in the last century, international bank transfers and remittances are yet to have their “ATM moment.”
As of Q2 2023, the global average cost for anyone sending remittances is 6.35% of the total value transferred [7], with banks typically being the most expensive channel. This high cost is partly due to multiple intermediaries involved in the traditional correspondent banking model, each of which may charge fees for their services. Despite being expensive, banks are still the most popular way to transfer money.
New payment standards, such as ISO 20022, have been developed to build beyond SWIFT to create interoperability between payment systems such as ACH, CHAPS, and CHIPs. Regional payment networks and agreements also enhance the speed of local transactions while reducing fees.
For instance, most bank transfers within Europe are relatively cheap and fast due to the EPC SEPA Instant Credit Transfer (SCT Inst) scheme, facilitating instant domestic and cross-border Euro credit transfers throughout the SEPA zone [3]. Similarly, international remittances between India and Singapore are near-instantaneous and inexpensive, as India’s UPI-based BHIM app complies with Singapore’s Network for Electronic Transfers [3], highlighting how geographical banking standards and partnerships determine money velocity.
Stablecoins for payment interoperability
Financial institutions are increasingly exploring stablecoins as a solution for global payment interoperability.
Recall from our previous research report that numerous central banks are looking into CBDCs, and payment providers like Visa and Stripe are already developing new standards for fiat-stablecoin transactions. In 2023, Chainlink collaborated with SWIFT and other banks to securely connect their networks to the Ethereum Sepolia network, creating the first bridge between a public blockchain and a private banking messaging system [8]. New payment providers like Bridge, Sling, and Sphere connect stablecoins and traditional banks through payment gateways and on/off ramps. Bridge was acquired by Stripe for $1.1B in October 2024, highlighting the increasing acceptance of synergies between stablecoin networks and payment providers [9].
Stripe has expanded its support for stablecoin payments across multiple blockchains, enabling merchants to accept stablecoins and receive payouts in fiat [10]. Shopify also now integrates USDC on Solana, allowing users to complete payments by connecting wallets like Phantom during checkout, all facilitated by Stripe [11]. Stablecoin on- and off-ramps have also never been more accessible. Companies like Bridge, Sphere, Decaf, Sling, MoonPay, and Onramper allow users to seamlessly convert fiat to stablecoins (and vice versa) across various blockchains using traditional methods like bank wires, credit cards, or Apple/Google Pay. For instance, Sling enables users to send stablecoins on Solana to over 140 countries, with the recipient receiving funds in their local currency (e.g. USDC to Kenyan Shilling via M-PESA) [12]. Coinbase has also partnered with Bridge to enable anyone with a Coinbase Wallet to set up a virtual U.S. bank account within the app, allowing their users to receive wires in USDC [13].
Challenges & opportunities for stablecoin payments
A significant gap in today's stablecoin-powered payment systems is the need for credit/uncollateralized liquidity. Traditional credit cards help bypass many cross-border transactions and foreign exchange (FX) issues by relying on fewer intermediaries than traditional debit models for funds. These credit cards work through the underlying card issuer “fronting” the money to the card user, allowing cardholders to spend money freely. Such systems are nonexistent in the stablecoin landscape today, with notable exceptions such as Goldfinch, which allows qualified users to loan uncollateralized USDC to businesses such as market makers [15]. PSPs also functionally rely on credit-based systems whenever they “front” money to facilitate a transaction; a lack of credit for onchain stablecoins is a potential bottleneck for PSPs to adopt blockchain technology for payment settlements.
Fortunately, onchain credit issuers can mitigate liquidity challenges for PSPs.
Huma Finance, built on Solana, offers a standout solution by enabling instant, borderless financing with high liquidity through tokenized receivables as collateral [14]. The platform is the first self-proclaimed example of “PayFi” (Payment Finance) solutions being built on top of blockchain technologies, and we may expect a proliferation of new PayFi services to emerge in the coming years.
Looking ahead, even more fintech platforms will be powered by stablecoins, making blockchain technology invisible to users—the ultimate goal for mainstream adoption.
Solana’s rise as a leading payment network
Conclusion
Stablecoins have and will continue to disrupt traditional payment systems. By addressing inefficiencies such as delayed settlement times, exorbitant fees, and Nostro/Vostro accounts, stablecoins have demonstrated their capacity to reshape how value moves across borders. The benefits of stablecoins–instantaneous settlement, seamless currency conversions, and cost savings—are already being realized in practical applications by enterprises, PSPs, and individuals alike. PSPs are increasingly choosing Solana to run their payment networks because it is inexpensive, cheap, and sufficiently decentralized.
New solutions on Solana, like Huma Finance, Sling, and Bridge, are disrupting conventional notions of money movement.
Despite challenges such as regulatory uncertainty and the need for greater adoption of interoperable standards, the strides made by stablecoin technology underscore its transformative potential. As financial institutions, PSPs, and regulators converge on rigorous standards for blockchain-based payment solutions, we stand on the precipice of a monetary revolution where global money movement is frictionless, affordable, and universally accessible.
Stablecoins are not merely alternatives to fiat; they are the inevitable future of payments.
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If you have relevant insights to share with our research team, please email shimon@sqds.io.
References
[1] CPMI (2023). Considerations for the use of stablecoin arrangements in cross-border payments.
[2] Mirela Ciobanu (2024). The road ahead: Towards seamless payment interoperability.
[3] Cebr (2024). The decade of digital dollars: Unlocking economic efficiency with stablecoins.
[4] Bank for International Settlements (2016). Correspondent banking.
[5] Frank Copolla (2019). There Is No Such Thing As Dormant Funds In Banking. Forbes.
[6] Deloitte (2019). Economic impact of real-time payments. Mastercard.
[7] The World Bank (2024). An analysis of trends in remittance services.
[8] Swift (2023). Swift unlocks the potential of tokenization with successful blockchain experiments.
[9] Bridgit Harris (2024). Stripe’s Acquisition of Bridge is a Stroke of Genius. Pirate Wire.
[10] Helene Braun (2023). Shopify Customers Can Now Pay In USDC Via Solana Pay. CoinDesk.
[11] Stripe (2024). Pay with Crypto.
[12] Sling Money (2024). Sling Money Official Website.
[13] Zach Abrams (2024). [Tweet]. X.
[14] Huma Finance (2023). Huma Finance Official Website.
[15] Goldfinch. (2024). The Decentralized Global Credit Protocol.