20 Oct, 2023

NewPay’s Upcoming Integration of Stablecoins: Transforming Cross-Border Payments with Blockchain

As cross-border trade continues to grow, the importance of cross-border payments has become more evident. According to data from the Bank for International Settlements (BIS), global cross-border payment transactions exceeded $29 trillion in 2022. Traditional cross-border payments typically involve financial and payment institutions as intermediaries, resulting in higher payment costs and increased risks.In recent years, there has been an increasing interest in reforming cross-border payment methods. The cryptocurrency market, with Bitcoin (BTC) as a prominent example, has experienced rapid growth, and its underlying technology — blockchain — is gradually influencing traditional cross-border payment methods. Currently, regulatory agencies, financial institutions, payment companies, and cryptocurrency platforms globally are actively exploring the use of blockchain technology in cross-border payments, which expands the possibilities for cross-border transactions.Blockchain is considered an innovative internet technology known for its features such as decentralization, information transparency, high security, and robust privacy. It has the potential to mitigate some of the limitations associated with traditional cross-border payment methods, leading to advantages like time efficiency, reduced foreign exchange losses, and improved security in cross-border payment transactions. However, the use of blockchain technology in cross-border payments is subject to certain limitations due to variations in regulatory conditions across different countries.Traditional Cross-Border Payment Models and Their ShortcomingsPrimary Methods of Traditional Cross-Border Payments① Bank Wire TransfersBank wire transfer is the most common method for cross-border payments. It relies on the Society for Worldwide Interbank Financial Telecommunication (SWIFT). SWIFT serves as a global network linking numerous major banks, enabling them to standardize their communication in foreign exchange transactions. Nevertheless, SWIFT has limitations, as payments may encounter delays or even failure when routed through multiple intermediary banks or subjected to anti-money laundering scrutiny, resulting in extended processing times and increased foreign exchange losses.② Professional Money Transfers & Bank Card Clearing AgenciesProfessional money transfer institutions are essentially financial organizations that often collaborate with banks, postal services, and similar entities to establish service agent points. They leverage the advantages of their networks to expand the coverage of their cross-border payment services. In the context of small-value money transfers, entities engaged in bank card transactions, such as Visa and Mastercard, as well as specialized payment companies like Western Union and MoneyGram, have traditionally served as significant service providers.Established financial payment companies like Western Union and MoneyGram benefit from a widespread global offline presence and possess local payment licenses. These attributes contribute to faster transaction processing. However, they are commonly associated with comparatively higher fees. Western Union, for example, charges fees based on transaction volumes, which may result in increased costs for recent, frequent, and low-value e-commerce transactions. In contrast, international credit card cross-border payments facilitated by entities such as Visa, JCB, and Mastercard frequently involve certain restrictions. These constraints may encompass limitations on maximum transaction amounts and the inability to reuse the same IP address, which can present inconveniences for substantial cross-border payments.③ Cross-Border Payments by Third-Party Payment InstitutionsCross-border payments carried out by third-party payment institutions primarily consist of offering internet-based payment and settlement services to parties participating in cross-border e-commerce transactions. When a third-party payment institution from one country or region aims to conduct cross-border e-commerce payment operations in another area, it usually must acquire a "Payment Business License" issued by the local government and secure financial licenses from the national foreign exchange regulatory authorities to facilitate cross-border payments.Third-party payment platforms facilitate user transactions through various devices, offering increased convenience. However, the regulatory oversight in this sector is relatively lax. While third-party payment companies provide financial services like payments and settlements, they do not operate as traditional banks and are not subject to the same regulatory framework. This limited oversight of third-party payment operations has resulted in notable security risks within financial transactions.Key Limitations of Conventional Cross-Border Payments① High CostOn the demand side, the expenses associated with these transactions are notably high. This not only hinders international financial exchanges but also fosters illegal “under the table” payments, which can disrupt the legitimate and compliant functioning of the payment system and financial stability. Larger entities, particularly multinational corporations, possess substantial negotiating power and expansive global networks, enabling them to reduce payment service charges. Nonetheless, they still face challenges related to fund liquidity and the costs associated with currency conversion. For individuals and small to medium-sized businesses, cross-border payment transaction costs are relatively elevated, and the payment processes can be intricate.On the supply side, financial institutions that offer cross-border payment services must contend with various cost factors such as compliance, network, agency, currency exchange, and liquidity costs. These elements can lead to higher payment fees or a more limited range of services.② Low ExpediencyCross-border payments involve a lengthy chain of processes and may encounter a series of "disputes," which include money transfers, clearing, fundraising, and withdrawal, all of which require a certain amount of time. Additionally, cross-border payments make use of different financial systems, which often lack unified coordination. Furthermore, these systems do not operate around the clock, resulting in inherent delays in payment processing. For instance, payments from European countries to African countries tend to be slower in comparison to the opposite direction, with 39% of transactions taking more than 12 hours to complete.③ Limited CoverageIndividuals and small to medium-sized enterprises face relatively limited options for cross-border payment channels. In certain situations, they may feel inclined to resort to third-party entities that are costly, less efficient, and unregulated, potentially causing disruptions in financial operations and increasing the risks related to illicit financing and terrorist funding. Conversely, high entry requirements for cross-border payments mean that most banks and other financial intermediaries are unable to directly connect to cross-border payment systems. Consequently, they rely heavily on intermediary agents, which, in turn, affect the provision of cross-border payment services.The "risk reduction" strategy has resulted in the reduction of cross-border payment services. The global cross-border payment system exhibits a level of concentration, primarily centered on a few major global banks. Influenced by political factors, national sanctions, and concerns related to anti-money laundering and terrorist financing, these major global banks may discontinue their partnerships with specific countries, regions, clients, and financial institutions. This can result in the closure of their cross-border payment services.④ Vulnerable SecurityIn conventional cross-border payment processes, individuals are required to provide personal information such as their name and bank details to a bank or payment institution. These entities store a significant amount of the user's personal information, making it potentially vulnerable to security breaches. This concern is particularly pertinent when utilizing internet-based payment providers for cross-border transactions, which involve multiple entities, including merchants, consumers, and banks. Any disruptions in this process can pose a risk of unauthorized access to personal information.Blockchain Characteristics & Cross-Border Payment BenefitsBlockchain Technology Features① DecentralizationTraditional online data typically rely on centralized databases. The most significant innovation of blockchain technology is its decentralization of databases, removing the need for any third-party involvement. As long as the two parties in a transaction reach a peer-to-peer agreement, they can establish a safe transaction system at minimal cost. Due to this unique proof-of-work feature, the network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work. This forms a record that can't be altered without redoing the proof-of-work. As a result, all transactions are swiftly and safely completed once both parties reach an agreement. Their transaction records will be updated in real time, effectively serving the purpose of settling payments for both parties. Transactions on the blockchain do not involve any additional steps; payment and settlement occur simultaneously.② TransparencyA blockchain database is decentralized and accessible to all users, allowing anyone to query and access relevant information. This collective maintenance by various nodes ensures a high level of transparency in the blockchain system. To safeguard transaction data from leakage, information concerning the parties involved is encrypted. Blockchain networks can be categorized into public chains, consortium chains, and private chains, depending on encryption permissions. Public chains are unrestricted and open to all users, private chains are tailored for specific users or groups, and consortium chains are accessible to a limited number of equal participants.③ ConfidentialityIn the blockchain, the various nodes remain anonymous, this means the identities of each node throughout the chain remain anonymous. This not only saves time in cross-border payments but also ensures that the information of both parties in the transaction is not disclosed.④ Reliable SecurityWith blockchain technology, any single node can access the entire platform's transaction information, but altering the data on any one node is invalid unless the users's computational power controls 51% of nodes globally. This is virtually impossible. Additionally, in a blockchain network, nodes are connected peer-to-peer, without a central server or central interface. Therefore, attacking any single interface is useless. These measures provide an extremely high level of security.Advantages of Blockchain Technology in Cross-Border Payments① Improved Payment EfficiencyBlockchain technology enables peer-to-peer, end-to-end payments between transacting parties without the involvement of any intermediaries. This not only reduces the time required for payments and clearing but also shortens the transaction cycle, further enhancing transaction efficiency. In 2016, Ripple facilitated the first-ever blockchain-based interbank cross-border remittance between ATB Bank in Canada and Reisebank in Germany. Within 8 seconds, ATB Bank transferred $1,000 to Reisebank, a process that would typically take 2 to 6 working days using traditional methods.② Lower Transaction FeesBlockchain technology propels cross-border payments without the need for intermediary involvement, thereby saving settlement and payment costs. Moreover, since blockchain operates as a network-wide ledger, transaction timestamps are permanent with all transactions being traceable. This allows the establishment of a credit system without the need for transaction costs. Canada's ATB Bank claims that with the support of blockchain technology, they can reduce cross-border payment costs by 75%.③ Streamlining Transfer SpeedsBlockchain technology for cross-border payments operates without dedicated intermediaries, facilitating direct peer-to-peer transactions. Virtually all transactions can be completed instantly, significantly reducing the amount of funds in transit and improving the speed of capital circulation. Additionally, in cross-border payments under blockchain technology, financial institutions only need to use digital currencies recognized by the transacting parties, without necessarily storing additional fiat currencies. This reduces the risk of bank-to-bank account reconciliation.NewPay Teams Up with LADT for Full Stablecoin Payment SupportAs the only payment platform in Laos with a third-party payment license, NewPay has formally started a collaborative partnership with Lao Digital Technology Group (LADT) to support payments related to USDA (Southeast Asian Nations Stablecoin, abbreviated as "ASEAN Stablecoin").USDA is pegged 1:1 to the US dollar, offering users a reliable hedge against inflation when compared to the volatile currencies of ASEAN nations. This stablecoin facilitates the direct issuance of US dollars and ASEAN national currencies, delivering swift transaction confirmations through the secure EVM-compatible architecture of Arbitrum Layer2, all while ensuring an exceptionally low fee structure.Looking ahead, we expect that NewPay will introduce more streamlined cross-border payment products using blockchain technology for the ASEAN region, thereby making a valuable contribution to the prevailing digital economic evolution in this region.

13 Oct, 2023

NewPay's Stablecoin Payment Transformation on the Horizon

In cryptocurrency trading, the term “stablecoin” is frequently encountered, raising questions about its use in an environment where cryptocurrencies are known for their price fluctuations.The primary characteristic of stablecoins is their backing by real-world assets, except for algorithmic stablecoins. This backing results in reduced price volatility compared to other cryptocurrencies, justifying the name “stablecoin.” Consequently, a notable portion of cryptocurrency investors views them as a dependable asset in times of market instability.Consider a US dollar stablecoin as an example. When a company intends to issue 1 million USD stablecoins, it is required to deposit assets equivalent to 1 million US dollars within a custodian institution. This deposit is crucial to maintaining a 1:1 value ratio with the US dollar. Without this equivalence, the market may not acknowledge it, potentially leading to a decline in the coin’s value.Generally, stablecoins are often pegged to specific fiat currencies or commodities like gold. This pegging is an attempt to bring stability to the highly fluctuating cryptocurrency landscape. It’s worth noting that not all stablecoins follow the same principles to achieve this goal. Based on the mechanisms they employ, stablecoins can be broadly categorized into 3 main types.Fiat-backed stablecoinsThe first category of stablecoins is fiat-backed stablecoins, such as USDT and USDC, and is by far the most popular. The daily trading volumes reached an astonishing $18.3 billion and $2.7 billion, respectively. These stablecoins are backed by reserves of traditional fiat currencies, such as the US dollar or the Euro.To maintain their one-to-one peg to a currency, the stablecoin issuer ideally holds the currency in cash, or cash equivalents such as treasuries, which should match or exceed the circulating supply of the stablecoin.Crypto-backed stablecoinsNext, we have crypto-backed stablecoins. As their name suggests, crypto-backed stablecoins originate from DeFi applications, and are backed by cryptocurrencies held as collateral.However, due to the volatile nature of cryptocurrencies, crypto-backed stables typically require over-collateralization to a specific ratio to ensure stability.For instance, a collateralization ratio requirement of 150% means that a user needs to deposit $150 worth of crypto to mint $100 of a stablecoin.Examples of crypto-collateralized stablecoins include DAI, which is currently the largest crypto-backed stablecoin by market capitalization, or LUSD, which is 100% backed by ETH.It’s worth mentioning that even though DAI was designed to be a decentralized stablecoin, its collateral includes a large percentage of USDC, USDP, and GUSD, which are centralized fiat-backed stablecoins, and even US treasuries.Algorithmic stablecoinsThe third category is algorithmic stablecoins, which are also meant to be decentralized in nature.But unlike over-collateralized stablecoins, they may or may not actually be backed by anything.Instead, they rely on algorithmic and incentive mechanisms to maintain their price stability.However, historically, this mechanism has not been sustainable, since it’s dependent on consistent demand being there for the stablecoin, and once that disappears, they go into a so-called death spiral, where the mechanism collapses the stablecoin.Basis Cash, Empty Set Dollar, Titan, and most infamously, Terra’s UST are some of the examples of failed algorithmic stablecoins.These are the three main categories, but there are also other stablecoins that don’t fit neatly into them, like FRAX, which launched as the first partially algorithmic stablecoin, though a recent community vote has decided to shift the stablecoin to a fully crypto-collateralized model over time.Meanwhile, some stablecoins peg their value to physical assets, like precious metals or other commodities, such as Paxos Gold and Tether Gold, which claim to hold physical gold in reserves.Non-peg stablecoinsFinally, there are even non-peg stablecoins, like Rai, which are crypto-backed but do not have their value tied to any specific asset, and have their value fluctuate based on supply and demand.If you’re wondering why all the different designs, it’s worth noting that, like the blockchain trilemma of security, decentralization, and scalability, stablecoins also face their own trilemma of stability, decentralization, and capital efficiency, whereby any stablecoin design typically has to sacrifice one aspect to achieve the other two.To date, the pursuit of a stablecoin that successfully balances all three aspects is ongoing. There is considerable anticipation within the cryptocurrency community for the introduction of a stablecoin that can cater to a wider array of use cases.LADT and NewPay Team Up to Provide Stablecoin Payment SolutionsNewPay, the sole payment platform in Laos with a third-party payment license, has formally entered into a strategic partnership and product development collaboration with the Lao National Digital Technology Group (LADT) to facilitate the use of the ASEAN USD (USDA) stablecoin, endorsed by the Association of Southeast Asian Nations (ASEAN).In the foreseeable future, NewPay’s objective is to introduce more user-friendly blockchain-based cross-border payment solutions tailored for the ASEAN region. This initiative aligns with the ongoing trend of digital transformation within the ASEAN economy.