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The role of stablecoins in the next generation of global payment systems.
Locked and Loaded
It’s now possible to fly non-stop to Australia direct from the UK in just under 17 hours, and today, if you use a traditional bank, jumping on a plane with your cash in a grab bag is still the fastest way to send money internationally. Of course, there’s a legal limit to how much cash you can have on you, but, in 2018, the archaic system used to transfer money is like using a carrier pigeon with a message taped to its leg, when you could be using email.
SWIFT and SEPA
The banking industry, by its own admission, uses a model that is more 1998 than 2018.
When you want to send money internationally, you’ll more than likely be using the SWIFT payment system. (If you’re in Europe and want to send euros between different member state countries, then you’ll most likely be using SEPA.)
Most readers will have used the SWIFT system via their bank to transfer funds internationally, and your two most enduring memories of the SWIFT system are (probably) — 1: It’s not Swift. 2. It’s expensive.
So, what is SWIFT? SWIFT, or the Society for the Worldwide Interbank Financial Telecommunications, is a messaging system.
You might be thinking that the SWIFT name is ironic — considering how slow it is, but before SWIFT, the only available method to transfer funds internationally was Telex.
Telex was slow and had little or no security. Messages sent over Telex were in plain text, and to exacerbate the lack of security, Telex didn’t use any formal identifier system, meaning you literally had to type in the instructions in sentences. The receiving bank would have to interpret the message sent, and this caused a high level of errors, because of language interpretation.
In 1974, seven international banks formed a cooperative society and agreed to operate a global network to transfer banking instructions securely. By 1977 the SWIFT cooperative had increased from 7 banks to 230.
The success of SWIFT is based on its scalability. Today, the SWIFT messaging system provides transaction information between banks, brokerage companies, clearinghouses, exchanges, and foreign exchange money brokers. With 10,000 members sending 24 million messages per day.
A lot of people imagine their money being physically transferred overseas, and use this as the justification for the cost and time taken for handling your money transfer, but no money is ever sent through the SWIFT system. SWIFT does one thing — it sends secure messages. And that’s all it does. It does not send funds through the system. Ever.
It works like this…
SWIFT assigns each of its members with a unique identifier code of either 8 or 11 characters. This code is called by various names, but they are all the same thing.
BIC code, SWIFT code, SWIFT ID.
Bank transfers work like this — starting with the most simple scenario and becoming more complex.
If you walk into a branch of your bank (in your home country) and want to send money to a friend who also banks with the same bank (also inside your country) then all you need is the branch code and account number.
If your friend banks with the same bank as you (even if it’s a different branch), then the money doesn’t leave your bank. It’s transferred with an internal debit to your account and a credit to your friend’ account. This is called an intra-bank transfer.
What if your friend banks with a different bank in the same country as you?
Sending money between banks in the same country is called an inter-bank transfer. If your bank and your friend’s bank both have reciprocating commercial accounts with each other, the transfer works like this.
Your bank will debit your account and credit your friend’s bank commercial account. Your friend’s bank commercial account then credits your friend’s account. But if your bank doesn’t have a commercial banking relationship with your friend's bank, an intermediary bank must be used.
All countries have an intermediary bank that all banks within the country must have an account with. That bank is the Central bank — Sometimes known as the lender of last resort.
That’s how money is transferred domestically between banks in the same country, but what happens when the bank transfer has to move across borders? That’s where SWIFT comes in.
An international money transfer is the same as an inter-bank transfer except the sending and receiving banks are in different countries. If the sending bank and receiving bank both have a reciprocal commercial banking relationship with each other, then the sending bank will send a SWIFT message to the receiving bank to inform them of the transfer. The sending bank debits the sender's account and credits the receiving bank’s commercial account. The receiving bank then credits the destination account.
The SWIFT message takes just minutes to process; however, it can take between one to three days for the money to show up in the destination account.
The most inefficient, complex, and expensive way to send money internationally, using SWIFT, is when the sending and receiving bank doesn’t have a reciprocal commercial banking relationship. In this case, an intermediary bank must be used.
The sending bank debits the senders account and instructs the intermediary bank to debit its commercial account with the intermediary bank, while at the same time, credit the receiving bank’s commercial account. The receiving bank’s commercial account then credits the receiver's account.
The intermediary bank charges a fee for doing this, but the real costs and delays using the SWIFT system occur when the person sends money from one country to a receiver’s account in another country, and the receiver’s account is denominated in another currency.
The sender will typically be charged a transfer cost fee (anywhere between $30 and $100) and a foreign exchange rate between the sending and receiving currencies. (The exchange rates offered are very expensive — as you’ll see)
If you live in Europe and want to send euros to a bank inside any of the EU member states; then, you can use a SEPA transfer. SEPA — Single Euro Payments Area — is an effective way to send euros only across the borders of EU member states (plus Iceland, Monaco, Switzerland, Liechtenstein, Norway, and San Marino.)
SEPA works like a domestic inter-bank transfer. Banks that allow SEPA transfers have either commercial relationships directly with each other, or share relationships via intermediary banks.
For the user, SEPA payments are low cost (either free or a very low fee), and normally complete the next business day.
Sending money across borders using SWIFT is slow, and expensive, especially if you factor in foreign exchange fees.
The banking system is using technology that’s 45 years old. A disruption was needed, and disruption is what the banking system got.
In the Close Quarter series, we talked about Ripple. Ripple Labs is a private company backed by elite venture capitalists, banks and corporations, including Seagate technology.
Ripple is made up of three components. The company, Ripple Labs, the protocol, Ripple, and the currency of the Ripple protocol, XRP.
What problem is Ripple Labs Inc attempting to solve with XRP? The answer is SWIFT. Ripple is a disruptive technology and a possible replacement for the SWIFT system. The Ripple protocol, using XRP, is designed for faster, almost instant interbank payments.
The SWIFT cooperative is not just going to let a new technology like Ripple takeover. SWIFT has responded to the threat by launching an upgrade, called Global Payments Innovation, to the SWIFT system, but it took a threat to motivate the change.
Ripple is attempting to disrupt the interbank payment system, but other companies, like FinTech banks and currency exchange brokers, have been launched over the last few years to disrupt the traditional banks themselves.
For example, most banks advertise they charge a low fee or even a zero rate fee to send money across borders, say British pounds from your account to euros in your friend’s account. But what they don’t tell you is the spread they add to the buy and sell price.
Exchange rates are quoted in pairs, like EUR/USD, or GBP/EUR.
In EUR/USD, the EUR, or Euro is called the Base currency, and the USD, the quote currency.
If the exchange rate between the Euro and US dollar (EUR/USD) is 1.14233, then, this means it will take 1.14233 US dollars to buy 1 Euro.
Exchange rates move in minimum units called PIPS. (Percentage in point.) Pip values in all currency pairs except the Japanese Yen are measured to the fourth decimal point, or 0.0001. (The Yen is measured to two decimal points)
Traditional banks widen, some might say outrageously so, the spread between the buy price and sell price, causing very high costs to be incurred by the sender.
Let’s say someone wanted to send £100,000 British pounds to Australia, as a down payment for a property.
At the time of writing, the current exchange rate mid price between the GBP/AUD is 1.7681.
The best British bank rate on offer, (by the big four banks) is 1.7292 — That’s the best current rate.
If you could sell British pounds and buy Australian dollars at the spot mid price that’s a difference of 389 pips. (PIP = points in percentage, and is the minimum unit of movement in the foreign exchange markets)
A pip value is 1/10,000 (for all pairs except Japanese Yen) and doesn’t sound like very much, but £100,000 at the spot rate of 1.7681 is $176,810, but at the best bank rate it’s $172,920, a difference of $3,890.
Pip values are calculated using this formula.
Pip value = (1 pip / exchange rate) x lot size.
(The standard lot size is 100,000)
0.0001 / 1.7681 100,000 = £5.656 per pip (or $10 AUD per pip)
The difference of $3,890 is calculated by multiplying the amount of the base currency by the pip value. In this example, that’s $100,000 x 0.0001. This equals $10 per pip, and $10 per pip x 389 pips is $3,890.
Anyone who’s lived in Australia over the last twenty years will tell you how far 100k goes when it comes to house prices, so imagine, instead, if you transferred half a million pounds. That would be a difference of $19,450 between being able to swap the currency at the spot rate and using a bank.
It’s actually been possible for a number years for a retail investor to be able to place bids and offers at the interbank spot rate through brokers like Interactive Brokers, but to do this, you’d need to open an account with a minimum of £10,000, and be comfortable buying and selling directly on the bid and ask via limit orders.
The problem with this is you’re on your own if you make a mistake. For example, it’s bad luck if you enter the wrong order. If your order is executed you own the position, and no one is coming to help. You’d have to reverse the position yourself by trading the opposite way. For the average person, playing around with their life savings from the sale of a property on a bid and ask isn’t going to be comfortable.
As a retail investor, swapping currency at or near the spot rate was not possible — that is until now.
FinTech banks are disrupting the traditional banks by providing cross-border services to their retail customers. New FinTech banking platforms, in contrast to traditional banks, allow customers to exchange money from, say, British pounds to euros, or euros to US dollars at (or near) the actual interbank spot rate, saving customers thousands due to the wide spreads used by the traditional banks.
Because of the 2008 financial crisis, the banking industry is not widely trusted in society. A traditional bank, as they say, will always lend you an umbrella, but they’ll want it back when it’s raining. The general public is most likely blissfully unaware of the amount of spread added by a traditional bank when exchanging currencies. Most people don’t send large amounts across borders, needing instead to change money only for holidays, or small purchases. Anyone who has emigrated to another country and used a traditional bank to quote the currency exchange rate will understand just how much the banks have been making.
Traditional banks advertise no-fee exchanges, but when it comes to the actual rate they offer you, well that’s another story.
So, how do the FinTech’s do it? How can they offer the retail investor, prices at or near the actual rate?
Think of it like this: They operate as a middleman between you and the interbank system.
The FinTech bank will have segregated client accounts in all the countries they offer exchange rates.
If you want to send euros to a friend in Germany from the UK, you send your British pounds to your FinTech bank in the UK, either by bank transfer or debit card. The FinTech bank then sends euros to your friend from their German bank account. The money you send, never actually crosses a border.
Remember the commercial intermediary bank relationship we discussed earlier — the system that’s used when sending an international money order through a traditional bank?
The FinTech bank is the equivalent of a commercial intermediary bank to a traditional bank, except this time the customer is you.
For a retail investor, moving money globally, was, until very recently, slow, inefficient and expensive, but now, due to disruptors like Ripple and FinTech banks, things are changing fast.
In the Powerball article, we discussed volatility. It’s something the majority don’t think about. Most people in the US or Europe don’t have to concern themselves with exchange rate fluctuations because retiring to Arizona or Florida from Chicago, or to the Cote d’Azur from Helsinki incurs no foreign exchange risk.
But what if you’re moving to another country?
Traditional banks move money across borders using the SWIFT messaging system, a system designed in 1974 to replace plain text Telex machines. It’s slow and expensive.
Yes, it’s possible to lock in a fixed exchange rate for a period of days or months but eventually, if you move money across borders and it’s sitting in your account, the exchange rate fluctuations will have a real impact — especially if your end game is to round trip the funds back into your base currency.
Imagine you decided to emigrate to Australia in 2001, swapping your British pounds for Australian dollars at the rate of 2.98 dollars to the pound — The only way was down for the Australian dollar in 2001, and if you’ve been reading earlier articles, you might be guessing a foreshadowing of what happened next.
Yes, the mining boom in Western Australia had begun, but its impact hadn’t yet trickled down into everyday life.
Let’s say you're selling up in the UK, and by a “happy accident” you sold your house for £300,000 British pounds and bought Aussie dollars at a rate of 2.98 to the pound. This means for every pound you sell you reg receive $2.98 Australian dollars. After arriving in Australia, with AUD 894,000, you decide to invest it in a property.
Over the next nine years, you find yourself the beneficiary of the multiplier effect.
Between 2001 and 2010, the Australian dollar, a currency no one wanted in 2001 strengthened, and the mining boom, fuelled by Chinese desire for Australian iron ore, did find its way into the economy, and property prices boomed.
Median house prices in Perth rose 163% between 2001 and 2010, that’s a compound growth rate of 11.35% per year. Over nine years your AUD 894,000 is now $2.3 million.
But as property in Australia was going up, the currency was also going up against the British pound, meaning it can buy back more British pounds. Swapping Australian dollars back into British pounds at a rate of 1.51 in late 2010 gives £1.55 million.
Over nine years your initial £300K investment into Australian dollars, and then into another asset class, has enjoyed a compound growth rate of 20.07%, or put another way you just made £11,574 per month, every month, over nine years. This is what can happen if you’re on the right side of currency fluctuations with a multiplier effect.
But what if you’re on the wrong side? What has the ability to give, also, and, unfortunately, has the ability to take away.
Why are we talking about the British pound to Australian dollar exchange rate? It’s because its a good example of volatility and trend moving in your favour.
This is the volatility of the Euro against the US dollar, as discussed in Powerball. It looks pretty wild, but it’s nothing compared to Bitcoin.
Here’s what the EUR/USD and BTC/USD volatility look like on the same scale.
FinTech Banks give you the ability to move your fiat currency around the system and give you the ability to quickly and efficiently exchange one currency for another, but with the rise of blockchain technology and cryptocurrencies, they still don’t allow you to get access to the new economy of digital currencies easily.
On the 10th of December 2018, the British parliament will vote on the next step in the Brexit process. The wrong answer could see the pound plunge, so using a FinTech bank, you can now efficiently, and cheaply, swap British pounds for euros or any other major currency, instantly, and at near or the actual exchange rate, for a low fee.
FinTech banks are disrupting traditional banks, but what if you want to move your money into a cryptocurrency asset? If you sweep your funds into a cryptocurrency account, what cryptocurrency are you going to use to hold your funds?
If you pick Bitcoin, Ethereum, or any other top-ranked alt-coin, you’ll be exposed to extreme levels of volatility, compared to other assets.
And what if you need to move fast? Even if you’ve already set up your account, how are you going to fund it? If you use a debit or credit card, then, generally, you’ll have to pay a high fee, and you won’t be able to move that much fiat currency without your bank raising an eyebrow. What about a bank transfer? Yes, the fees are much lower than using a debit or credit card, but usually, a bank transfer takes a few days to clear into a cryptocurrency account — you could be waiting three to five days before your funds are available.
Remember the British pound to Australian dollar example earlier, if you wanted to take advantage of that situation in real-time, back in 2001, you had to have your cash ready to move — your account needed to be fully funded, ready for you to pull the trigger.
Yes, it is possible today to fund a cryptocurrency account and move your funds into a stable coin like Tether, But Tether has some yellow flags as discussed in the Powerball article.
One of the big issues with Tether is the proof of its collateralisation. Tether is supposed to be backed one to one with US dollars, but with a circulating supply of 1.8 billion, as recorded by coinmarkcap.com, there should be a bank account with $1.8 billion in it. The problem is no audit has proved this is true. If you sweep your cryptocurrency funds into Tether, you’re exposed to complete failure — if you’re unlucky enough to be holding it if news breaks that Tether is not fully backed by the US dollars it claims.
What if there was a way where you could move your fiat currency into a cryptocurrency exchange, transferring from US dollars, euros or Japanese yen, to a stable coin equivalent? A stable coin that is 100% verified, audited, and backed one to one with the underlying currency it represents?
What if there was a way to set up your cryptocurrency account so it’s ready to trade, safe in the knowledge your funds are protected from cryptocurrency volatility, while at the same time, having the protection of an asset that verifiably holds the underlying fiat currency in a vault.
There is. Tied coin, Tiedcoin.com, is a price-stable cryptocurrency that’s backed 1 to 1 with fiat currency. Tied coin is available in euros, US dollars, and Japanese yen. Each denomination is 100% collateralised by the corresponding currency it represents.
Tied coin’s fiat currency holdings are regularly audited too, unlike Tether, and its bank account holdings are published on a daily basis, giving you the security of knowing your cryptocurrency investments will be protected from the extreme levels of volatility in the cryptocurrency marketplace.
Tied coin, available on BeaXchange, is a bridge between the cryptocurrency market and banks, both traditional and FinTech. Once your account is opened (subject to know your customer, and anti-money laundering screening) you’ll be able to sweep your fiat currency into a fully collateralised fiat currency equivalent of euros, US dollars or Japanese yen, protecting you from cryptocurrency volatility, while keeping your cryptocurrency account locked, loaded, and ready for action.