May 4, 2023 2 min read

Executive summary: The Role of Crypto in Cross-Border Payments: The Ultimate Comparison

In this article, I explore various cross-border payment methods, analyzing the advantages and disadvantages of traditional banking, fintechs, CBDCs, Bitcoin, and stablecoins in the context of international transactions.

Summary: This document discusses the various methods of cross-border payments and their advantages and disadvantages, including traditional banking, fintechs, CBDCs, Bitcoin and stablecoins.

What Are Cross-Border Payments and How Do They Work?

Cross-border payments are transactions between parties in different countries using different currencies.
Retail transactions: Paying a business, sending money or buying something from another country; personal or consumer-based.
Wholesale transactions: Transactions between commercial banks, high-value payments, or batched retail transactions; larger scale and institutional.
Complex due to legal, regulatory, currency, time zone, and intermediary challenges.

Correspondent Banking:

Traditional method using banks and the SWIFT network.
Consists of three banks, one for each party, and two correspondent banks.

Pros and Cons of Correspondent Banks for International Payments:

Pros: widespread, reliable, and accessible in developed countries.
Cons: slow, high fees, complex, and inadequate in developing countries.

Fintechs:

Companies like Revolut and Wise offer improved international payment solutions.
Use fewer intermediaries and allow for one balance sheet covering multiple currencies.

Pros and Cons of Fintechs:

Pros: faster, simpler, and more affordable than correspondent banks.
Cons: liquidity limitations, currency support, and regulatory hurdles.

CBDCs and Interoperable Payment Systems:

Central Bank Digital Currencies and interoperable systems hold potential for the future of cross-border payments.

Pros and Cons of CBDCs for International Payments:

Pros: speed, cost, transparency, and regulatory compliance.
Cons: limited adoption, centralization concerns, and interoperability issues.

Bitcoin:

A decentralized currency with a growing presence in international payment solutions.

Pros and Cons of Bitcoin for International Payments:

Pros: fast, low-cost, and decentralized.
Cons: price volatility, regulatory obstacles, and environmental concerns.

Stablecoins:

Digital currencies tied to stable assets for added stability in cross-border payments.

Pros and Cons of Stablecoins for International Payments:

Pros: stability, speed, cost, and potential adoption.
Cons: regulatory scrutiny and centralization risks.

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