Blockchain for cross-border payments: an overview 

Traditional payment and banking rails no longer suit our globally connected, digitally-natured world.

To send a payment or settle funds across borders, money must pass through multiple dislocated banking systems and intermediaries, adding cost and time with every hop. Meanwhile, millions of people around the world are locked out from centralised financial systems. 

Blockchains and cryptocurrencies have emerged as a viable alternative to traditional cross-border payment and settlement methods. Blockchains operate 24/7, the cost of transacting is negligible, settlement is full and final, access is available to anyone with an internet connection, and the technology has been proven to work securely. 

But for businesses, blockchain adoption also comes with risk. Many cryptocurrencies suffer from price volatility, while regulation is still in its infancy. Knowledge can also be an issue. Legacy banking and payment systems are well-understood, while concepts of blockchains, keys and wallets are still unfamiliar. 

As with other cross-border payment methods, fintech businesses are helping businesses explore the opportunities. Fintechs can offer expertise and focus, making blockchain adoption easier and less risky.

The state of the industry 

Payments, especially cross-border transactions, are one of the most prominent blockchain use cases. Payment applications accounted for 44% of global blockchain revenue in 2022.

By 2031, the global crypto payment gateway market is projected to reach $5.4 billion, while Juniper Research estimates that B2B cross-border payments on blockchains will account for 11% of the total B2B international payments by 2024. 

Today, incumbent banks and financial institutions are as likely as fintech disruptors to be developing blockchain-enabled payment solutions and exploring digital assets. Visa B2B Connect, launched in 2019, is a blockchain-enabled payment solution to facilitate global transactions between banks, without the need for a card, while Mastercard Send also leverages a private blockchain to enable near real-time cross-border payment transfers between billions of card, bank and digital accounts globally.

Increasingly, banks and fintechs are working side-by-side. For example, Ripple, a blockchain payment company, has partnered with over financial institutions, including Santander and American Express, to facilitate faster and more secure cross-border transactions.

Stablecoins, a type of cryptocurrency whose value is pegged to an underlying asset (often a fiat currency) have a collective market cap of approximately $129 trillion (at time of publication). Over $40 billion in trades are made every day using stablecoins, with settlements reaching approximately $8 trillion in 2022, surpassing volumes of major card networks like Mastercard and American Express. By the end of 2023, it’s expected that on-chain stablecoin volumes will surpass Visa volumes, the world’s largest card network. In reaction, Visa is exploring using the stablecoin USD Coin (USDC) and the Ethereum network for global settlements. 

BVNK’s own cross-border payment solution — Global Settlement Network — uses stablecoins to help businesses settle funds anywhere in the world and seamlessly trade between currencies. Stripe, one of the world’s largest fintechs, now offers merchants the ability to make payouts in crypto through the stablecoin USDC, which is issued by crypto firm Circle.

Central Bank Digital Currencies (CBDCs) are another cryptocurrency alternative to enabling cross-border payments using blockchains. They are issued by central banks, and so provide greater regulatory protection. There are now over 100 CBDC projects around the world in various phases of development and testing.

4 flavours of blockchain payment infrastructure

Companies will want to use blockchains and tokens in various ways, depending on their appetite for control, flexibility and interoperability with other payment and financial systems. There are broadly four categories of blockchain payment provider to know about:

• Provider owns blockchain, and offers a native token - eg Ripple/XRP
• Provider owns blockchain but is token agnostic - eg Stellar
• Provider is blockchain agnostic but has native token - eg Circle/USDC
• Provider is blockchain agnostic and token agnostic - eg BVNK

How blockchain works in cross-border payments

Blockchains are not a payment technology, but payments are one application of blockchains. A decentralised blockchain is, by definition, territory agnostic. Unlike traditional banking infrastructure, in a blockchain payment the payer and payee are operating on the same rails, with the same data formats and protocols, which allows them to transact directly regardless of what country they are in. 

Example of a consumer cross-border payment journey:

1. At the checkout or other payment gateway the merchant offers a crypto payment option. 
2. The customer selects this option, selects the digital currency they want to pay with, agrees the exchange rate, and is presented with a public address for the merchant. 
3. The customer opens their crypto wallet and sends funds to the merchant's public address, also paying the blockchain’s processing fee. 
4. The transaction request is submitted to the blockchain and checked by nodes to ensure the customer has enough coins to make the payment. 
5. The transaction is submitted to a block, awaiting miners to validate it. 
6. A transaction is typically approved after a validated block has been certified by three nodes. 
7. The transaction is completed and recorded on the blockchain

This payment flow is enabled by a range of features that are inherent to blockchains:

Decentralised and accessible
on a blockchain, no single organisation is in charge. Compare that with traditional payments, which run across centrally controlled card and banking networks. The owners of these networks can decide who gets access, and how much to charge merchants and customers for using them. Those without permission get locked out, resulting in merchants unable to take payments, or customers unable to pay. Decentralised blockchains are permissible by default. The only entry requirements are an internet connection and a smartphone or computer.

Trust by consensus
The role of nodes, miners and the consensus mechanism eliminates the need to trust in a single authority. Instead, the blockchain relies on the collective incentive of users to maintain the integrity and security of the system. 

Built-in redundancy 
There are thousands of network participants in any given blockchain and each one maintains a complete copy of that blockchain ledger. This is unlike traditional databases where information is typically stored in a central location. Even if dozens of participants (or ‘nodes’ as they are known) go offline at the same time, blockchain operations continue.

Transparent
Public addresses provide a completely transparent record of all transactions from the start of the blockchain. This allows businesses to easily analyse transactions across any given period, and track the historic flow of funds from originator to beneficiary. 

Encrypted
The words ‘encryption’ and ‘crypto’ share a common root: ‘crypt’. It relates to cryptography, or the practice of anonymising and protecting sensitive data. Cryptocurrencies and blockchains use encryption to make transactions anonymous and secure. Using blockchain cryptography, two parties can complete a transaction without sharing their own information or having to use an intermediary such as a bank. 

Stablecoins in cross-border payments

Though customer payments are a valid use case for blockchains, many businesses are leveraging the technology for business payments and cross-border settlements, such as moving money between corporate entities, repatriating funds from emerging markets, or facilitating FX transactions. This is typically done using stablecoins as the digital currency, because their value is stable, removing the risk of price fluctuation.

Let’s now look at how a blockchain-enabled cross-border settlement works using stablecoins. International businesses can use stablecoins for cross-border payments in three ways:

1. Local market fiat currency > settled in stablecoins
2. Local market fiat currency > converted to stablecoins > settled in fiat currencies like USD, GBP or euro
3. Stablecoins or cryptocurrency > settled in fiat currencies like USD, GBP or euro

Here's an example of a type 2: an FX business converting fiat funds to a different fiat currency, using stablecoins:

1. The customer (ie FX/CFD broker, corporate treasury) opens an account with the fintech platform.
2. The customer submits a request to move money between two entities in different countries, using the platform's OTC desk.
3. The customer accepts the quote from the platform.
4. The platform instructs the customer to deposit funds with a partner bank in the country where funds are being sent from.
5. The partner bank converts funds to a stablecoin (ie USDT) and sends to the platform via blockchain. 
6. The platform converts the stablecoin to the fiat currency of the receiving country, and either deposits this directly to the customer's bank account or in a currency wallet within the customer’s platform account. 
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Now let's look at the flow of funds. The following example shows a global business moving Singaporean dollars from its Singaporean entity to its European entity, via the stablecoin USDT, using a fintech or DLT (distributed ledger technology) partner:

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Key use cases for blockchain in cross-border payments and settlements

Treasury flows and intra-company payments

To meet operational and regulatory liquidity requirements, a company's treasury department will need to move money around its organisation. When these flows involve moving money between national banking systems, blockchains can be faster than traditional payment rails. And when using fiat-pegged stablecoin (eg USDT, USDC) businesses can overcome the liquidity challenges associated with moving funds from emerging markets.

Investment and trading platforms

FX brokers and trading platforms can settle funding payments and payouts from and to markets all over the world at speed and low cost, using fiat-collateralised stablecoin rails.

Remittances

Blockchain-based payment solutions can streamline the process of remittances, enabling faster and cheaper transfers of funds. This is particularly relevant when money is being transferred to  countries with high-levels of financial exclusion. Of the top 20 countries where cryptocurrencies are most widely used for payment, ten are lower middle income (Vietnam, Philippines, Ukraine, India, Pakistan, Nigeria, Morocco, Nepal, Kenya, and Indonesia).

Supply chain payments

Blockchain technology can streamline supply chain payments, enabling you to pay global suppliers and partners quickly and efficiently.

Ecommerce

Blockchain payments provide a popular, secure and transparent method for online purchases, reducing the risk of fraud and providing customers with increased trust and confidence in the payment process. Today, most ecommerce is consumer facing, but it is also growing as a B2B sales channel. Ecommerce will become the largest B2B cross-border segment by 2030, worth $22 trillion.

Micropayments

A micropayment is a small, online transaction, usually under $10 and as little as one cent. Examples of micropayments include royalties, tips, pay-per-click advertising, one-off access to specific content, and verification of a credit card of bank account. Blockchain technology enables efficient and secure micropayments, allowing for low-value transactions that were previously not feasible due to high transaction fees associated with traditional payment systems. What’s more, units of cryptos can be shrunk (eg in bitcoin 1 ‘sat’ is worth 0.00000001 of a bitcoin), enabling micropayments and micro loans that foster new economic activity.

Crowdfunding and charity payments

Blockchain-based payment systems can facilitate decentralised crowdfunding, allowing individuals around the world to contribute funds directly to projects or initiatives without the need for intermediaries, while ensuring transparency and accountability.

Subscription services

Blockchain-based payments can simplify subscription services by automating recurring payments and enhancing security through cryptographic verification, ensuring seamless and secure subscription management.

Benefits of using blockchain for cross-border payments 

The unique technology of blockchains, and their separation from traditional banking and payment networks, provides businesses with a number of benefits when making cross-border transactions.

Meeting customer demand

By offering it as a payment method, businesses can reach new markets and demographics, especially where traditional banking is hard to access. Today, it is estimated that 420 million people around the world own cryptocurrency. And increasingly, they are seeing their crypto as more than just an investment to hold. Of those owners, 93% would consider making purchases with it. Iconic brands and retailers have added cryptocurrencies to their accepted payment methods over the decade – from Starbucks, Tesla, Nordstrom and Whole Foods to Gucci, Balenciaga and Tag Heuer. They find that up to 40% of customers that pay with a cryptocurrency are new to them; and that their purchases are twice as valuable as credit card transactions. 

Fast, always-on settlement

Settling money internationally using banking systems like Swift can take several days, particularly when moving funds in and out of emerging markets. Finance teams have to resort to pre-funding or suffer cash flow pressures. Settlement on blockchains can be near instantaneous and carried out 24/7 (though you’ll need to add time if you want to convert the cryptocurrency for fiat) eradicating the cash flow gap between the costs of selling and revenues from sales. 

Below is an example of how distributed ledger technology or blockchains can accelerate cross-border payments, when compared to Swift payments. This example uses BVNK as the payment provider facilitating cross-border payments for the sender.

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Predictable

Blockchain settlements are full and final. Once completed they become an immutable part of the blockchain ledger meaning there are no chargebacks in blockchain payments. This can protect businesses from significant lost revenue, and operational burden associated with processing chargebacks. It also removes the potential for chargeback fraud.

Secure

Blockchains are a proven technology for securely transacting and recording small and large amounts of cryptocurrencies every day. The volumes being transferred daily on the major blockchains is evidence of a reliable and trusted medium of exchange in operation. According to a report by venture capitalist fund a16z crypto, the total number of blockchain transactions has grown by over 50% in the past two years. Cryptocurrencies and blockchains use encryption to make transactions anonymous and secure. Using blockchain cryptography, two parties can complete a transaction without sharing their own information or having to use an intermediary such as a bank.

Adoption ease

An entire blockchain-enabled payments operation can be outsourced to a third-party, giving a merchant all the benefits of offering cryptocurrency payments to their customers with none of the risk or compliance obligations of holding them as assets on its balance sheet.

Transparency and traceability

While most blockchain transactions don't directly reveal personal information, they do allow for the traceability of transactions through public addresses and the publication of immutable records. This provides a high degree of visibility on the status of a payment, and aids payment reconciliation, financial record-keeping and analysis. A distributed public ledger also provides a powerful tool to track the provenance of funds, and detect and prevent illicit payments activity.  

Cost efficiency

Blockchains allow for straight-through processing between payer and payee (though in reality third-parties, such as wallet providers and fintechs, are commonly used.) In comparison, traditional cross-border payment systems can require multiple intermediary banks (also known as ‘corresponding’ banks) to support the path of a payment, which add settlement time and costs. One study found that blockchain-enabled cross-border payments could save businesses $10 billion by 2030. If you’re converting in and out of fiat currencies, also known as ‘on- and off-ramping’, there are additional costs involved, but businesses can still achieve significant savings, depending on the provider and currencies involved.

Challenges of using blockchain for cross-border payments  

Despite their advantages, blockchains are not a panacea for cross-border payments. Nor are some of the claims of blockchains altogether true. While in theory blockchain-enabled payments can be instant, users encounter administration time and costs of managing their cryptocurrency, including moving money between wallets and between on and offchain rails. These transfers typically come with an additional processing fee. 

Businesses should be aware of where blockchains do not represent an improvement on incumbent payment methods. Some of these issues will be solved naturally with time and the evolution of the technology, while some of the complexity can be mitigated by working with trusted partners that take on burden and risk.  

Volatility and price stability

For finance teams holding digital assets on their balance sheet, there is volatility risk associated with fluctuating prices. The advent of stablecoins pegged to assets like dollars has helped to mitigate this risk. While there are incidences of stablecoins temporarily losing their peg, major asset-backed stablecoins have proven their utility with a market capitalisation at around $130bn, and $30bn in trading volume every day, making them an attractive option for finance and payment teams. Many businesses also choose to work with partners who collect cryptocurrency on their behalf and settle them in fiat.

Technical knowledge

Blockchain payments require users to have a certain level of technical expertise and familiarity with digital wallets and cryptographic keys. The complexity of the user experience, especially securing private keys and protecting digital wallets, can be a barrier to widespread adoption. Working with an expert payment partner can help here.

Regulatory compliance

As blockchain payments operate across borders and involve digital assets, they raise regulatory and compliance challenges. Governments and financial institutions are still developing frameworks to regulate and monitor blockchain payments, including anti-money laundering (AML) and know-your-customer (KYC) requirements. Not all of them see blockchains and cryptocurrencies positively so businesses must be aware of the rules for each market. While there are varying and inconsistent approaches from regulators right now, in the coming months and years we’re likely to see regulation around digital assets converging and digital assets becoming integrated into the mainstream global financial system.

Interoperability

Achieving seamless interoperability between different blockchain systems, or between blockchains and existing payment and financial software, can pose a challenge. Some fintechs offer a proprietary blockchain (eg Ripple) and/or token (eg XRP), while other providers integrate with multiple blockchains and are token and currency agnostic (eg BVNK). Providers like BVNK can help address this challenge: we’ve built an extensive API layer that allows businesses to move funds seamlessly between different networks.

Energy consumption

Blockchain networks that rely on proof-of-work consensus mechanisms, such as bitcoin, consume substantial amounts of energy. The environmental impact of energy-intensive blockchain operations can be a concern for businesses that are obligated to meet climate impact benchmarks. 

How to add blockchain to your cross-border payments strategy

​​Businesses that use blockchain to make and receive cross-border payments may not want to hold crypto assets on their balance sheets. They also understand that crypto payments are about much more than simply processing a transaction on a blockchain. Creating the perfect customer experiences and maintaining regulatory compliance are two crucial aspects that must be invested in, and can quickly suck up resources. So how can businesses balance the opportunities with the risks and required resources?

In the last decade, the rise of new payment processing companies and fintechs has shown what can be achieved by offloading complexity to experts and mitigating risks through a third party. The same lessons can be applied to enabling blockchain payments. Working with a regulated partner allows a business to mitigate operational overheads and avoid the fixed costs of inhouse development. A partner can also secure more competitive cryptocurrency exchange rates and hold these prices to avoid margin slippage. And they provide businesses with the option to hold volatile assets off their balance sheet, and pass on the burden of regulatory compliance.

Partners can help businesses go at their own pace. Some may simply want to offer cryptocurrency at the checkout or payment gateway, and then automatically settle in fiat, so the cryptocurrency never hits their balance sheet.

More typically, businesses will want to use cryptocurrency as an intermediary currency to process fiat-to-fiat settlements. Stablecoins can be an effective method for this, because their price is relatively stable and there is plenty of liquidity. This can be particularly beneficial when moving funds out of emerging markets.

Others will want to go all in, with crypto-bank accounts from which they can trade and pay others. So breadth of capability should be a key criteria for selecting the right blockchain payments partner.

Additionally, the fintech partner can advise and enable multi-rail operations. This allows a business to leverage the most effective infrastructure for specific situations and markets, using a mix of blockchain and fiat systems in isolation, in parallel, or in conjunction to optimise for speed and cost. 

Conclusion 

‍The blockchain payments industry has witnessed remarkable growth in the realm of cross-border transactions. By offering faster settlements, reduced costs and enhanced security, blockchain technology has the potential to revolutionise the way businesses process payments and transfer funds internationally.

With increasing adoption by financial institutions and customers, maturing regulations and standards, and innovations that layer on more speed and scalability, the future of blockchain in cross-border payments looks bright.

In the next 10 years, there’s unlikely to be a single winner in cross-border payments. The market is growing and there’s space for multiple rails which cater for different use cases, preferences and tolerances for risk, cost and speed.   

That is good news for businesses. Competition will accelerate innovations and new blockchain-related services. Simplification will be the goal. Treasury and finance teams will look to operate more efficiently by holding and trading digital and traditional currencies through one account; and to access day-to-day banking services (accounts, payments and invoicing, money transfer, reconciliation) all from the same platform. 

Exploring these opportunities will be a gradual process. Legacy payment infrastructure is too entrenched and trusted to be dismissed. Rather, we are entering a period of coexistence between traditional and blockchain-enabled cross-border payment methods.

BVNK is a next-generation payments platform that bridges the gap between traditional and digital finance to help merchants unlock the benefits of blockchain payments with minimal risk and technical setup. We are trusted by hundreds of businesses globally to process billions of dollars in payments every year. We enable businesses to move money around the world without needing to interact with the Swift network, accept payments in cryptocurrency from their customers without having to hold it on their balance sheet, and embed cryptocurrency and stablecoin solutions into their products and services without needing to become regulated.