Bitcoin Winning Middle Market Appeal for Cross Border Payments

There are a lot of potential points of friction or failure in cross-border payments between businesses, ranging from slow finality and high costs to counterparty risk.

Those are all problems that using bitcoin, stablecoins and other digital assets can help you bypass, said Stephen Pair, CEO of crypto payments technology firm BitPay.

When the Bitcoin blockchain first launched in 2009, it was “the first time a technology that enabled value to be transferred from person to person without a third-party intermediary, and just as importantly, without a counterparty,” he told PYMNTS’ Karen Webster. “As soon as that transaction is confirmed on the network, it’s final and irreversible. So, for an international transaction, it makes perfect sense because you’re not dealing with the cost and inefficiencies and slowness of the international correspondent banking system.”

Besides which, he added, “there’s a lot of risk in that system.”

Taking a check for goods or services sold to a business on another continent — and sometimes in a country with a weak financial system — means trusting not just the customer, but also their bank. To say nothing of accepting the costs and delays associated with the international correspondent banking system, he added.

“In contrast, you could propose they pay you in bitcoin — in which case it goes from their [digital] wallet to yours,” Pair said. “It’s done, it’s final and that’s the end of it. You now have an asset that has a market value.”

Solving volatility

Of course, that asset’s market value can be very volatile — but bitcoin can be traded for dollars, euros and most other fiat currencies in a matter of minutes anywhere you’ve got internet access, he noted. That volatility can also be price-hedged if for some reason you can’t sell it instantly — for example, if the crypto payment is locked in a smart contract that only pays when certain conditions are met, like the goods arriving safely.

And if you use a service like BitPay, it will collect the crypto but pay in fiat, if desired — and it generally is, Pair said. “We take that volatility risk away from the merchant.”

Another solution is using a dollar- or euro-pegged stablecoin, he said, adding that they are becoming far more popular among his customers — not quite up to the level of Bitcoin, but getting close.

Using a stablecoin like USDC does “eliminate some of the complexity around managing the volatility of something like bitcoin, it has that benefit,” Pair said. There is still a learning curve about digital wallets — although it’s not too steep, and generally involves partnering with a company that can make those payments happen.

Stuck in the middle

A sweet spot for cross-border crypto payments is the middle-market business segment that finds moving money internationally more difficult and costly than large firms with more resources, Pair noted.

“The mid-size, mid-market companies don’t have the global footprint to be able to manage inter-subsidiary transfers” as well, he said, adding, “however, we do have Fortune 100 companies utilizing our platform to do cross-border transfers between their subsidiaries.”

And while they do benefit from in-house crypto payments — which don’t have the counterparty risk but can still cost time and money — Pair said that he believes it is the smaller and mid-sized companies that can benefit the most.

“We’ve had customers of ours that tell us that their only other option takes about three months for the transaction to be finalized,” he said. “It’s not hard to compete with that.”

Risks and rewards

But it is still that lack of counterparty risk “that makes bitcoin a transformational technology,” Pair said. “Other means of transferring value electronically all have lots of counterparty risks … even when you do a credit card transaction, there is an enormous amount of counterparty risk in that transaction.”

With crypto, he added, “it doesn’t matter where that company’s located, what kind of banking access they have, what kind of financial condition either the bank or that company is in. They’ve sent you the bitcoin, and you can go to market and turn it into whatever you want.”

The flip side of that is that neither party has the resources of that admittedly inefficient banking system when something goes wrong — for example, only receiving 23 widgets when you ordered and paid for 30.

That’s a different type of risk with different solutions such as underwriters, Pair said.

What crypto does need, he said, is for the U.S. to lay the regulatory ground rules for cryptocurrencies, which will include clarifying the know-your-customer (KYC) reporting requirements.

Then there is the push to make the growing network of real-time payments networks up and running in many scores of countries — as well as The Clearing House’s RTP Network and shortly forthcoming FedNow in the U.S. — interoperable. “How do you argue against that as a better alternative?” Webster asked.

“You’re dealing with lots of different networks, you still have not eliminated counterparty risk,” Pair replied. “These are lots of heterogeneous systems that are trying to be interconnected. There’s still a lot of cost and a lot of risk and a lot of counterparty involvement in those systems. But bitcoin actually works right now.”