2021 was the year cryptocurrencies and digital assets passed an inflection point, where we can no longer deny the growing use cases and interest in the technology – a trend that seems to be only gaining momentum in 2022.
From major food & beverage chains like Starbucks to technology companies like Twitch and Microsoft, we have seen a rise in enterprises accepting crypto-enabled payments.
In its fiscal first quarter of 2022, Visa credentials in crypto wallets had more than $2.5 billion in payments volume, which is equivalent to 70% of the payments volume for all of its fiscal year in 2021.
Digital assets as a means of payment is an exciting prospect across the globe. But it is also one that some regulators have understandably taken a cautious approach towards.
Here in Asia Pacific, for instance, regulators in Thailand have banned the use of digital assets as a means of payment for goods and services, out of concern for the security and stability of the country’s payment systems.
Yet, recognition of the role digital assets play in the global financial system remains strong, leading to the Bank of Thailand calling for suggestions on how digital assets can enhance payment systems and bring about financial innovation within the country.
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However, the vision of digital assets has now gone beyond a means of payment for in-store or retail payments. It has also revolutionised cross-border payments through its role as a means of settlement.
Reframing digital assets as a means of settlement
Cross-border payments are known to be costly, full of friction, and slow. Globally, US$120 billion in transaction costs is spent each year to facilitate such international transactions.
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Looking at the Asia Pacific region alone, each country has its own payment infrastructure, local currency and economic priorities. As a result, the region’s payment landscape is still highly fragmented, resulting in inefficient cross-border transactions despite close economic and social ties.
A significant cause of this friction is correspondent relationships – a network of bilateral accounts-based relationships – used to process cross-border payments. Although widely proliferated, the market structure of correspondent accounts injects significant friction, delay and costs in processing payments, primarily due to the need to pre-fund these accounts.
Data from the World Bank shows that the global cost of sending remittances is an average of 6.3% of the amount sent. For some countries, such as Thailand, it could be even higher – as much as 13.3% for sending and 7.7% for receiving remittances.
What this means is that for every dollar sent home by migrant workers, a significant amount of it is spent on hefty transaction fees and pre-funding requirements. For businesses, the inefficiencies of cross-border payments can impact their bottom line, especially as businesses in Asia Pacific globalise and transact with partners from a multitude of countries.
Digital assets tackle this challenge by being used as a means of settlement, serving as a bridge between two currencies. Where a typical transaction could take up to 3 to 5 days to settle, crypto-enabled cross-border payments can be completed in a matter of minutes.
With real-time, instant global payments now made possible, financial institutions no longer have to tie up capital in correspondent banking accounts in order to pre-fund transfers. This overall efficiency and reduced friction, by way of faster transfers and lower costs, ultimately benefitting the consumer.
We’re already seeing these benefits in action. Tranglo, a cross-border payment specialist in Asia Pacific, has seen US$48 million worth of transactions completed via Ripple’s On-Demand Liquidity solution within the first 100 days of its deployment – validating customers’ preference for faster and cheaper solutions.
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Clearly, digital assets can offer a compelling alternative to the incumbent correspondent banking model for businesses.
Building a regulatory ecosystem to support innovation
To turn this vision into reality, it is important for policymakers and regulators to facilitate the use of digital assets as a means of settlement, alongside other use cases, to help support innovation in the sector.
For starters, we will need a clear regulatory framework that differentiates between different types of digital assets. Such a framework, which supports the use of digital assets as a means of settlement, can help assist in faster and more efficient cross-border payments.
To provide clarity, digital assets should be classified based on their functionality and economic purpose – similar to the approaches taken in countries like Singapore and the United Kingdom. In line with such practices, we recommend that there be a clear distinction between payment tokens (as a means of settlement), utility tokens, and security tokens.
The next challenge of regulating digital assets lies in their dynamic nature. Enterprises – from traditional financial institutions to fintech start-ups – are exploring entering the industry in record numbers. How should regulators determine the risk posed by each new entrant, while keeping in mind the importance of consumer safety?
The recommended regulatory framework should be forward-looking and flexible while providing regulatory certainty and consumer safeguards, and at the same time meet the policy goals of encouraging innovation with the principle of ‘same risk, same activity, same treatment’.
In other words, activities carrying the same risks should be regulated in the same way. Such an approach will set the stage for a level playing field that provides the regulatory certainty needed for crypto innovation to manifest maturely.
Building bridges in a fragmented system
Digital assets have the potential to transform the global financial system into a more inclusive, transparent, and fairer ecosystem – look no further than digital assets as a means of settlement for cross-border payments to witness the tangible benefits to end-users.
Naturally, as digital assets gain traction on a global scale, governments across Asia Pacific will need to explore new regulatory approaches to harness and unlock their potential, while managing the associated risks.
Regulators, policymakers, and the industry must come together to build a forward-looking and flexible regulatory system; only then, will a more dynamic, responsive, and inclusive payment system be within the reach of the masses.
Brooks Entwistle is the SVP of Global Customer Success and MD of APAC and MENA at Ripple
