From SWIFT to Stablecoins: The Cross Border Payments Evolution

Excited for other companies like Parallax, pushing innovation in stablecoin payments, like Bridge (now Stripe!), Acctual, Artoh, Portal, Zulu, Conduit, Mural, Coinflow, Sphere, Transfi, Walapay, Nilos, Dakota & more.

‍Shoutout to Raj Parekh, Jeremy Batchelder & Catilin Leksana for looking at early versions of this and sharing feedback!

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‍When I describe the business of Parallax to folks new in the space, it helps to talk about how stablecoins fits into the larger cross border payments evolution.

I find myself repeating this concept of Crossborder Payments 1.0, 2.0 and 3.0. As with any thing that gets repeated way too often, I thought it best to memorialize in words, particularly through cheesy analogies…

‍Imagine 3 ways to send a package overseas

1. Cross Border Payments 1.0 with Banks and SWIFT is like sending a package overseas using a traditional postal service. 
2. Cross Border Payments 2.0 with Fintechs & Netting is a clever new delivery service via your travel-loving friends. 
3. Lastly, Cross Border Payments 3.0 with Cryptocurrencies and Stablecoins is a teleportation service.

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‍Cross-Border Payments 1.0: Banks & SWIFT 

‍It all started with SWIFT (not Taylor), with banks needing a secure, standardized way to move money. Before that, there was Telex, but for brevity, let’s start with something more familiar.

‍SWIFT is like a traditional postal service

‍Imagine sending packages overseas via international snail mail. You drop it off at your local post office, and it travels through a series of hubs and middlemen. Each stop adds fees, sometimes delays, and you have little insight into where it is at any given moment. It eventually arrives—but often after several days and at a higher cost than expected.SWIFT began in 1977, uniting 239 banks in 15 countries, and is now in over 10,000 institutions in 200 countries.

‍How SWIFT Works

1. Initiation: You say to your bank, “Please send this money to a bank in another country.” 
2. Message Creation: The bank packages your request into a SWIFT message. Imagine a letter saying, “Dear Bank B, please give this much money to Mr. X.”
3. Message Transmission: That message flies through the SWIFT network to the recipient bank, possibly passing through a few other bank friends on the way.
4. Intermediaries: Every intermediary (aka a random bank in between) takes a peek, maybe charges a fee, and passes it along. (Meanwhile, you’re still left wondering where your money is.)
5. Final Credit: Finally, the recipient’s bank credits the account. 

Pros of SWIFT

• Global Reach: It’s the original global payment network, connecting banks everywhere.
• Security & Compliance: Banks adhere to strict protocols to keep your money safe and legal

Cons of SWIFT

• Costly: Fees everywhere—your bank, their bank, every bank in between wants a slice.
• Slow: Several days for processing! Each bank has their own checks and balances, delaying the money movement. 
• Opaque: Tracking’s tough and you’re left wondering where your money is at any point in time.

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‍Cross-Border Payments 2.0: The Art of “Netting” with Fintechs 

‍Then came fintechs, here to “disrupt” the space and make it “seamless”—as every tech startup promises. To their credit, they did! 

‍Netting is like sending packages through friends

‍Imagine instead of shipping a package, you’re tapping into a network of travel-savvy friends who swap items on their local trips. You want to send a gift from New York to Tokyo. Rather than mailing it across the world, you find a friend, Alex, who’s about to fly from New York to Tokyo. You hand them the package, but instead of delivering it personally, Alex passes it to another local friend in Tokyo who’s happy to finish the delivery.Now, since the package only travels locally on both ends, it’s faster and much cheaper than international shipping. It’s a clever, efficient system!

But, if your friends aren’t constantly traveling to Tokyo, there might be delays, and occasionally, they’ll still need to use a slower delivery option.

It’s like settling a group dinner bill but at a global scale.

Similarly, the likes of Wise introduced the concept of netting: instead of sending actual money, they keep track of who owes what to whom across countries. 

If Alex sends the equivalent of 100 USD to Belinda in PHP, they then find another person Carlo sending PHP to USD to Dana. Because the amounts are roughly equivalent, Alex’s $100 gets sent to Dana locally & Carlo’s PHP equivalent gets sent to Dana locally. Money doesn’t actually move borders. 

Millions of transactions like this happen at scale. At the end of the day, they require these balances to “net” out. If it doesn’t 0 out, then they’ll still use SWIFT to balance everything. For majority of transactions, this cuts down on the time and cost of traditional cross-border routes, creating a quicker, more affordable system. 

‍How Netting Works

1. Initiate the Transfer: You tell Wise to send money. Wise nods and notes it down.
2. Local Funding: You transfer money to Wise’s local account.
3. Netting & Matching: They match your payment with someone else who needs money going in the opposite direction.
4. Local Payout: The recipient gets paid from Wise’s account in their country. Actual money may have never even crossed a border.

Pros of Netting

• Faster
• Cheaper
• More transparency with a sleek user experience

Cons of Netting

‍Behind the scenes, there’s A LOT that needs to happen to set this up for every corridor. These developments took close years to build: 

• Semi-Global Banking Network - For every currency and country, fintechs needed local bank accounts, each requiring compliance with unique regulations. It's like opening a bank account in every Monopoly neighborhood, but less fun and way more paperwork. 
• Ledger & Technology Infrastructure
  Sophisticated ledgers track every transaction across borders, ensuring no funds are lost in translation. Think of it as a turbocharged abacus keeping tabs on every dollar in every direction.
• Liquidity and Risk Management
  To dodge currency fluctuations, fintechs created complex hedging strategies, keeping enough reserves in each currency to cover transfers without taking on huge risk.
• Large Sums of Capital
  With prefunded accounts, money is always ready in local banks to cover mismatched transfers. But with slow SWIFT speeds, it’s often just sitting there waiting to be reconciled.
• Regulatory Compliance
  Navigating local rules and licenses was a must to operate legally. Compliance teams worked overtime to keep everyone playing by the rules.
• Daily Reconciliation
  At day’s end, fintechs balance accounts, calculating net positions and doing interbank transfers to keep things even. It’s the not-so-glamorous but crucial work that keeps your money flowing smoothly.

Wise has to set up local bank accounts, build super smart ledgers, and even hedge currency risks.

In short, cross-border fintechs are juggling a mix of banking, logistics, and risk management to make your transfers faster and cheaper—while keeping the wheels turning behind the scenes.

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‍Cross-Border Payments 2.5: Cryptocurrencies

‍Cryptocurrencies like Bitcoin and Ethereum brought a new way to handle international money transfers—without banks, fintechs, or the need for intermediary approvals. Cryptocurrencies are decentralized, global from day one, more instant, programmable and faster to build on. 

But cryptocurrencies still introduce volatility risk making it hard to use as a mode of money transfer for the masses. Crypto on chains like Bitcoin and Ethereum are also not necessarily as fast and not as cheap– sometimes the cost of a transaction on these chains, known as gas, is even more expensive than the cost of a SWIFT transfer. 

That said, this technology lay the necessary foundation for the introduction of stablecoins for payments. 

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‍Cross-Border Payments 3.0: Stablecoin Payments Revolution

‍Here comes the new kid on the block: stablecoins. Stablecoins are crypto assets pegged to a stable asset like the U.S. dollar, giving you all the perks of crypto without the headache of volatility. ‍

Stablecoin payments are like teleportation

‍Now, imaging sending packages in the future through ✨teleportation✨

You drop off your package, and—bam!—it appears in the recipient’s local drop-off point. There’s no middleman handling it along the way, and it arrives almost instantly. Stablecoins work similarly: they move directly across a globally accessible, shared network, bypassing traditional middlemen. Your money isn’t bounced around between banks, and thanks to its stable value, it doesn’t lose purchasing power in transit. When paired with self-custody wallets, this money movement also significantly reduces the regulatory and operational burdens of custody, allowing companies to pass savings back to users.

Stablecoins are taking on the giants by combining speed, low fees, and, you guessed it, stability.

‍How stablecoin payments work

1. USD gets sent: A payment in USD via a US bank account is initiated. This can be done in various ways including ACH or wire transfers, card deposits, and more. 
2. USDC arrives in a self-custodial wallet: We partner or build on/off ramps to facilitate this money movement. 
3. Send USDC over the Parallax network: Money between Parallax users actually moves between wallets, all through Solana.
4. Convert Back to Fiat: The recipient can then withdraw money to their own wallets or to their local accounts. 

Pros of Stablecoins

1. Speed and Low Cost - Running on new global blockchain networks, stablecoins offer fast, low-cost transfers. Parallax in particular runs on Solana.
2. Faster to build with more coverage - As above, what took a decade to build with 2.0 can now be built in 2-3 years, and with more global coverage
3. Self-custody wallets reduce regulatory burden - Unlike traditional systems, stablecoin funds are held in self-custody wallets. Users own and control their money, eliminating risks tied to bank custody and fund mixing but also reducing operational & regulatory burden in expansion 
4. No need for custodians and intermediaries - Self-custody means users store funds on their own devices, moving money without needing banks or custodians—keeping funds accessible and recoverable, and eliminating risks tied to bank custody and fund mixing. We basically prevent things like when Synapse and Evolve held users funds from happening.
5. Stability - Stablecoins are pegged to assets like the U.S. dollar, avoiding the volatility of typical cryptocurrencies.

Cons of Stablecoins

‍The biggest risk is that, as with new innovation, there is still some regulatory uncertainty.However, a lot of that is evolving fast, with examples like the Markets in Crypto Assets Regulation or MiCA in Europe, and a more crypto-forward U.S. administration. 

Additionally, the infrastructure for on and off-ramping (converting to and from cryptocurrencies and fiat) is still nascent. The recent Stripe acquisition of Bridge is excitingly paving the way for more infrastructure players to come and will lessen the overall costs in the long run. 

The hope and belief is that over time, because of big, shiny acquisitions, growing demand and, regulatory clarity, stablecoins and cryptocurrency will gain wider acceptance and growth. 

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‍It’s time to build

A quick summary:

• 1.0 - Allowed money to move globally but were slow and costly 
• 2.0 - Faster and cheaper for end users but rife with high opex, limited global coverage and took many years to build given the complexities of setting things up in every corridor.
• 3.0 - Even faster, cheaper & more global coverage. Still early days but liquidity and regulatory clarity is improving everyday.

There’s no better time to build in this space. 

At Parallax, we’re excited to be one of the first that have laid the foundations for stablecoin payments in consumer and business applications. 

Many others are making waves of change in this growing space, including wallet services, consumer applications, business products, infrastructure providers and more! 

These include Bridge (now Stripe!), Acctual, Artoh, Portal, Zulu, Conduit, Mural, Coinflow, Sphere, Transfi, Walapay, Nilos, Dakota and more. I’m lucky to be friends with the founders in these companies and I’m excited for everything they are building to collectively push the space forward. 

Onwards!