Deconstructing the Stablecoin Sandwich: How to Reshape Global Capital Flows?

Author: Awang

Stablecoins are the most representative practical tools in the field of digital currency, demonstrating how blockchain can provide a new and efficient infrastructure for the traditional financial payment system. In the past year, the total market value of stablecoins has increased by more than 50%; since Trump's re-election in November, it has accelerated. Currently, the total market value of stablecoins exceeds 250 billion US dollars and is at the forefront of the outbreak. This volume has already carried the efficient circulation of trillions of payment funds around the world.

Industry insiders are well aware of the value of stablecoins: they fully demonstrate the core capability of blockchain to “transfer funds and value instantly”, making it possible to build a closed business loop on the chain - payment. However, payment is far more than just “point-to-point transfer”, and the real enterprise-level scenario is far more complicated than “sending money from A to B”.

At present, most enterprise-oriented stablecoin applications adopt a "stablecoin sandwich" architecture. This term was first proposed by Ran Goldi, senior vice president of payments and networks at Fireblocks in 2021: that is, using blockchain to replace the horizontal value/fund transmission of traditional payment channels, while both ends still rely on the old financial payment system.

Although this design has brought significant improvements, it has also limited the full release of blockchain advantages. This is also the point that Airwallex CEO Jack criticized for not seeing stablecoin payments bring cost reduction and efficiency improvement.

Therefore, we will rely on Jesse's article Unpacking the Stablecoin Sandwich to look at how stablecoins can be used for global cross-border payments from the perspective of global funds transfer. This article will:

1. Dismantle the existing global cross-border payment system;
2. Analyze the specific improvements of the stablecoin sandwich architecture in fund management, B2B payments, and card network settlement;
3. Explore how to overcome the challenges at both ends of the stablecoin sandwich and ensure that the value of blockchain runs throughout the entire process.

1. Background of Stablecoin Payment

Among the many applications of stablecoins, B2B corporate payments are the most eye-catching. The latest Artemis report provides data from first-tier payment companies: monthly B2B corporate payments grew from $770 million to $3 billion last year. Fireblocks also reported that stablecoins account for nearly half of its platform transactions, and 49% of customers actively use stablecoins for payments.

The internal data of leading companies can better reflect the size of the market segments. According to a report by FXCIntelligence, BVNK (regarded as one of the largest players in the field) processes approximately $15 billion in annual volume, of which about half comes from B2B corporate payments, which is also the largest segment in cross-border payments. Conduit's annualized transaction volume is $10 billion, and the company estimates that this accounts for about 20% of the global B2B stablecoin cross-border payment market; Orbital's annualized scale is $12 billion.

Specifically, the use of global payments is becoming increasingly popular, as the advantages of stablecoins based on blockchain infrastructure are magnified when financial payment infrastructure becomes more outdated; SWIFT and the correspondent banking network successfully facilitate more than $100 trillion in global payments each year, however, businesses and banks still face huge complexity and latency issues.

2. Various models of global cross-border payments

2.1 Banking infrastructure based on SWIFT

First, let's look at how global payments based on SWIFT currently work.

For transactions between banks in different countries, the entire process is divided into two parts: "message clearing" and "fund settlement". SWIFT is responsible for transmitting transfer instructions between banks, while the actual flow of funds only occurs between banks that have pre-opened current accounts and can directly conduct debit/credit transfers.

 Jesse, Unpacking the Stablecoin Sandwich

Only when both banks have access to the SWIFT system and are partners with each other can the final transfer - fund settlement be completed. If the two parties do not have a direct cooperative relationship, they must connect with correspondent banks with corresponding interfaces and positions to complete fund settlement.

The following diagram shows a typical transaction on the SWIFT network: connecting two banks that have no direct relationship through a common correspondent bank.

 Jesse, Unpacking the Stablecoin Sandwich

As more intermediary banks are needed, settlement times of up to several days, rising fees, tracking challenges and other problems emerge. This also makes cross-border payments between neighboring countries with underdeveloped financial infrastructure also need to go through banks in the Global North, which brings great inconvenience.

 Stablecoins: Leapfrogging Africa's Financial System, Ayush Ghiya and Uchenna Edeoga

2.2 Cross-border fund pool model based on PSP

The process described above is exactly the path that companies must go through when conducting international wire transfers today: the bank must be connected to SWIFT and have clearing and settlement capabilities in the target payment corridor.

Therefore, the service model of Cross Border Money Transmitters (XBMT), also known as cross-border payment companies, came into being. They aim to allow companies to complete global payments without going directly through the SWIFT channel. This capability is also called "Global Multi-Currency Account" or "Local Collection Account".

• Its essence is: cross-border fund pool model.
• The core of its service: providing companies with a multi-currency funding pool, enabling them to make flexible payments between different countries.

XBMT manages compliance and banking relationships, while businesses or individuals receive a single multi-currency banking product, creating a "closed loop", meaning there are no external operators or dependencies to add cost or complexity. If you compare it to a sandwich, the internal ledger is the meat in the sandwich, and the local collection account in each region is the bread. Liquidity is managed internally between accounts:

 Jesse, Unpacking the Stablecoin Sandwich

XBMT now occupies an important position in the global B2B corporate payment and corporate fund management market. They operate in a closed-loop mode, preparing and dispatching the required liquidity in advance, and then distributing it to corporate customers on demand. Because of the control of the end-to-end process, XBMT sets strict quotas and risk control rules for customers.

Despite its glamorous appearance, XBMT is still built on the track of SWIFT, relying on sophisticated liquidity management techniques to "manufacture" an instant account experience. However, the speed and scale of such designs are always subject to the available liquidity of XBMT in a specific country and the clearing time of its underlying settlement track itself.

Taking into account the bank account capacity and liquidity management, Airwallex has built a relatively complete "global multi-currency account" or "local collection account" in the current developed G10 countries, and can achieve relatively "zero cost" fund distribution. Compared with the "stablecoin sandwich" model, which requires deposit and withdrawal costs at both ends, it will have a greater cost advantage.

Therefore, the adoption of stablecoin payments still needs clear scenario advantages and cannot be generalized.

2.3 Stablecoin Model

If XBMT is a "structured product" carefully designed for B2B corporate payment scenarios, then stablecoin represents a more basic transition: it uses blockchain technology to reconstruct the way Internet business operates.

The settlement cycle of a stablecoin is equal to the block time of the blockchain on which it is issued - this is an order of magnitude faster than SWIFT and correspondent bank transfers. Any system that relies on traditional methods can be replaced by a shared, verifiable ledger that tracks stablecoin issuance and ownership.

More importantly, stablecoins are usually deployed on smart contract platforms, making innovative systems and workflows that are impossible to achieve on traditional banking tracks possible. For example, if XBMT wants to add a certain logic, it needs to integrate APIs in banks in various countries one by one; on open and verifiable protocols (such as Ethereum's ERC or Solana's SPL standard), anyone can add functions to stablecoins without permission.

From a macro perspective, faster and more interactive financial payments can directly amplify global GDP: companies can collect payments faster, and funds can enter downstream processes faster, thereby reducing management costs and capital occupation caused by settlement delays. When the settlement cycle is compressed from "days" to "seconds" or "minutes", its chain reaction will sweep the entire economy. At the same time, the existence of verifiable standards allows financial innovation to occur globally for the first time without permission - this is a qualitative change that the traditional financial system cannot achieve.

3. Application of Stablecoins in Global Payments

Given the advantages of stablecoins above, we can now see some specific global payment use cases that benefit from stablecoins. We will explore how global treasury management, B2B corporate payments, and card network settlements work today, and explore the applications and advantages of stablecoins in each area.

3.1 Enterprise Fund Management

Take corporate treasury management as an example: For example, a company has an obligation to make a payment in country B in currency b on a certain date. They must prepare a transfer of funds from country A in currency a before the payment is due:

 Jesse, Unpacking the Stablecoin Sandwich

This is a pre-funding process and the corporate finance team must consider the lead time required to execute payments in a timely manner.

The team must open an account with a local bank in order to execute payments on time. Sometimes, to support this, the company may seek short-term loans from partners in the region. The longer the global funds settlement is delayed, the greater the foreign exchange risk exposure and the higher the capital requirements of the corporate treasury department. For companies that just want to execute global payments, managing derivatives to hedge currency risks and calculate short-term liquidity can add a lot of operational overhead.

Stablecoins can simplify this system by eliminating the need to control international settlement delays:

 Jesse, Unpacking the Stablecoin Sandwich

We can see the role of the "stablecoin sandwich" structure: although the initial deposits and withdrawals at both ends still have to touch the fiat currency system, the existence of stablecoins allows the flow of funds between the two fiat currency "ramps" to be completed smoothly.

By using stablecoins, the entire process is split into local transfers within countries A and B, and the blockchain completes the global liquidity settlement between the two parties in the middle. (Note: For this exchange to be successful, there must be enough liquidity on the chain to exchange stablecoin A for stablecoin B.)

3.2 B2B Enterprise Payment

The process of global B2B corporate payments is similar to corporate treasury management, but B2B scenarios can achieve greater benefits because B2B payments are often more complex and their success or failure may affect other aspects of corporate operations.

In this type of payment, banks in different countries are usually directly linked to the delivery of a service or goods. This means that all parties will be more sensitive to the progress of the payment. For example, in the "pre-financing" diagram mentioned above, the cost of pre-financing may depend on the real-time status of an inbound payment.

In addition, if the payment channel required by the enterprise is relatively unpopular, they often need to go through multiple international transit routes to complete the fund transfer - such a path may lack a clear progress notification mechanism, and is limited by the bank's non-7×24-hour business hours, and the payment time can easily be prolonged.

Let’s look at another example: A company in country A wants to pay a company in country B, and banks in the two countries don’t often do business with each other. If the bank in country A doesn’t have a direct connection to any suitable channel to country B, the payment will have to take an extra detour:

 Jesse, Unpacking the Stablecoin Sandwich

When these B2B cross-border payment processes are executed through stablecoins in the middle of the chain, a series of additional benefits will emerge at the enterprise level:

Both parties can manage and monitor payment status clearly and in real time.

Financing can be directly linked to time-sensitive raw materials or delivery nodes, allowing businesses that are highly dependent on goods arriving on time to avoid major risks or delays.

As risks are reduced, capital costs fall and capital turnover speeds up; as stablecoin integration solutions mature, this effect will bring about significant productivity improvements on a global scale.

Similar to the corporate treasury management scenario, the agency bank link, pre-financing requirements and most foreign exchange exposures have been basically removed. The entire process has been compressed from the previous 3 days to just a few seconds, and there is no need to consider market closures, so the working capital requirements are significantly reduced and simplified.

3.3 Card organization network settlement

In the card network, the card issuer sends payments on behalf of the cardholder to the merchant's acquiring bank, which receives the payment and credits it to the merchant's account. These banks do not settle debts directly; they are all connected to VisaNet, and Visa nets the payments between the banks during banking hours on weekdays. Each bank must maintain a prepaid balance to allow for timely wire transfers.

Visa has already begun trialing the use of stablecoins for settlements between acquiring and issuing banks as early as 2021. This use of stablecoins replaces the wire transfer process with USDC on Ethereum and Solana. After completing the card authorization on a specific date, Visa will use USDC to debit or credit the banks of both parties to the transaction:

 Jesse, Unpacking the Stablecoin Sandwich

Because the system runs within VisaNet, the net effect benefits partners in the network. This is most similar to XBMT's closed loop system, but the sheer scale of the card network benefits issuers/acquirers (as they previously had to manage global payments).

The benefits of stablecoins are similar to those of money management, but these benefits belong to the banks within the network: they can reduce the capital requirements needed to make timely international transfers, thereby avoiding foreign exchange risk. In addition, the openness, verifiability, and programmability of blockchain lay the foundation for credit and other financial infrastructure between banks within VisaNet.

4. Final Thoughts

Through the previous discussion, we have seen that the “stablecoin sandwich” is indeed useful in some scenarios; however, most stablecoin applications are still stuck in this sandwich structure and have not made further breakthroughs. Why is this the case?

In reality, very few companies actually use on-chain payments and stablecoins. As long as any link needs to touch the fiat currency track, we have to put bread on both ends of the "sandwich". We just added some protein to the original vegetarian sandwich, but it is still a sandwich.

The ultimate goal of stablecoin payment is to completely remove the bread at both ends. When businesses and consumers fully embrace stablecoins, the entire financial and business cycle can be completed on the blockchain, and we no longer need to be restricted by the backward traditional track. Once financial institutions and enterprises settle completely in stablecoins, unprecedented business scale will be released. As the global friction of enterprise construction, operation and service is greatly reduced, the growth curve of global GDP will be closer to the real consumption speed of goods, services and content on the Internet.

Therefore, the essence of PayFi is actually: Stablecoin Payments + On-Chain Finance. If we can completely get rid of the sandwich structure and build more on-chain financial services on both ends, the speed of global capital/value circulation will reach an unprecedented height.