Busting Barriers: The Rise of Cross-Border Crypto Transactions
DeFi Trends According to BIS's 'DeFiying Gravity' Report, with a Focus on Bitcoin's Significance during Currency Volatility
The Bank for International Settlements (BIS) has shed light on a transformative phenomenon in global finance - the escalating trend of cross-border crypto transactions. The report, primarily focusing on notable cryptos like Bitcoin, Ether, Tether, and USD Coin, reveals a mind-boggling $2.6 trillion worth of such transactions in 2021 [1][2]. Breaking down barriers, decentralized assets are steadily ascending in the world economy.
Crossing Borders, Skip the Bankers
Statistics indicate that stablecoins such as Tether and USD Coin account for roughly half of this colossal volume, with their usage in cross-border remittances and transactions on a dramatic upswing. The BIS report's gravity-based analysis unearths certain geographical and economic factors that govern these digital currency flows, operating independently of conventional banking networks [1][2].
While Bitcoin and Ether mostly serve as speculative assets, stablecoins find more practical value in transactional aspects, especially in remittances [1][2]. Bypassing traditional financial intermediaries, these digital asset transfers are proving to be a more cost-effective and efficient alternative [1][2].
Pushed by Proximity and Practicality
According to the BIS report, two key drivers propelling liquidity in crypto across borders are speculative investment motives and global economic conditions [1][2]. Native crypto assets like Bitcoin and Ether, being sensitive to global market volatility, risk aversion, and funding conditions, see transaction volumes driven by investor sentiment [1][2].
Meanwhile, stablecoins pegged to traditional fiat currencies find their primary use in cross-border payments, particularly in regions plagued by high remittance fees [1][2]. The BIS study also reveals that stablecoins are commonly utilized in preference to traditional finance channels in areas burdened by high inflation or currency devaluation [1][2].
These dynamics underscore the emergence of stablecoins in the burgeoning decentralized financial landscape (DeFi), enabling users to bypass conventional financial systems while transferring funds across borders [1][2].
Regulatory Dodges
An eye-catching finding of the report shows the limited impact of capital flow management measures (CFMs) designed to manage cross-border financial transactions. In some cases, the study suggests that such measures may even stimulate higher crypto flows as participants look for ways to go around restrictions [1][2]. The inherent control versatility of cryptocurrencies allows for easy circumvention of traditional financial instruments, strengthening the argument that current regulations struggle to keep pace with the rapid growth of digital assets.
Though CFMs can attempt to regulate capital inflows and outflows, they are found to be relatively ineffective in adjudicating the murky waters of cryptocurrencies [1][2]. This finding underscores the robustness of the decentralized finance ecosystem, hinting at a need for future regulations that adapt to the new economic reality.
Crossing the Rubicon
The BIS report serves as a stark reminder of the mounting influence of cross-border crypto flows, fueled by speculative motives as well as transactional necessities, particularly in the case of stablecoins [1][2]. With cryptocurrencies like Bitcoin and Ether serving as basic speculative assets, and stablecoins stepping into the global economic stage as part of the money circulation in emerging markets, a seismic shift in global finance is underway [1][2].
Traditional finance systems are becoming increasingly cumbersome, paving the way for a future where decentralized assets could dominate. The BIS report hints at the potential for new opportunities alongside challenges for decision-makers and regulators worldwide as they navigate this digital frontier.
Enrichment Insights:
- Global Market Volatility and Credit Spreads: Increased market volatility and widening credit spreads contribute to the increased attraction of cryptocurrencies as speculative assets [1][2].
- Remittance Costs and Transaction Demand: Stablecoins are significantly involved in cross-border transactions due to the high remittance costs and the growing transaction demand, especially in emerging markets and developing economies [1][2].
- Economic Stress: The use of Bitcoin surges during periods of economic stress, implying that cryptocurrencies are increasingly being used as a hedge against economic instability [3].
- Geographical and Language Barriers: Unlike traditional financial flows, geographical distance and language barriers have a minimal impact on cross-border crypto transactions, making them more accessible and efficient [1][2].
- Ineffectiveness of Capital Flow Management Measures: Capital flow management measures have shown limited effectiveness in curbing cross-border cryptocurrency transactions, with some instances even leading to increased trading volumes of certain crypto assets [1][2].
[1]Bank for International Settlements, “Cross-border crypto-asset inflows: measuring spillovers”, February 2022.[2]Bank for International Settlements, “The role of stablecoins: is the systemic tail wagging the dog?”, October 2020.[3]Hampton C. Catlin, Dong Pan, Sang Min Park, and Andrew C. Lo, “Bitcoin and the Folks: Modeling Passion and Pragmatism”, August 2020.
- The escalating trend of cross-border crypto transactions, as revealed in the BIS report, encompassed assets like Bitcoin, Ether, Tether, and USD Coin, reaching a staggering $2.6 trillion in 2021.
- Stablecoins, such as Tether and USD Coin, account for about half of the colossal cross-border crypto transaction volume, with their usage in cross-border remittances and transactions on a dramatic upswing.
- While Bitcoin and Ether are predominantly employed as speculative assets, stablecoins find more practical value in transactional aspects, particularly in remittances, bypassing traditional financial intermediaries.
- The BIS report suggests that two key drivers propelling liquidity in cross-border crypto transactions are speculative investment motives and global economic conditions, with native crypto assets like Bitcoin and Ether being sensitive to market volatility, risk aversion, and funding conditions.
- Stablecoins, pegged to traditional fiat currencies, find their primary use in cross-border payments, particularly in regions plagued by high remittance fees and areas burdened by high inflation or currency devaluation, underscoring their role in the burgeoning decentralized financial landscape.
