Payment Stablecoins and Cross Border Payments: Benefits and Implications for Monetary Policy Implementation

March 30, 2026

Payment Stablecoins and Cross Border Payments: Benefits and Implications for Monetary Policy Implementation¹

Kyungmin Kim, Romina Ruprecht and Mary-Frances Styczynski

Section 1. Introduction

In July 2025, the U.S. Congress passed the Genius Act, which established the regulatory framework for payment stablecoins.² The law defines what an authorized payment stablecoin issuer is and how it will be regulated. At a high level, a payment stablecoin is a digital asset that is designed to be used as a means of payment, and the issuer is subject to rules that are designed to keep the stablecoin at a stable value-one to one-relative to the U.S. dollar. Payment stablecoins must be backed by relatively safe assets with low exposure to credit or valuation risk, such as a deposit at a depository institution, short-term U.S. Treasury securities, and balances in an account at a Federal Reserve Bank (central bank money). The law prohibits a payment stablecoin issuer from directly paying interest, while the possibility of indirect reward is not ruled out.³

In the near future, there will be greater clarity on the path for a payment stablecoin as federal and state regulators take steps to implement the law. The rules and regulations issued by federal and state regulators will affect the overall adoption of payment stablecoins by wholesale and retail customers. In the meantime, we can speculate how the introduction of payment stablecoins as a new form of money and safe asset affects the economy. We are particularly interested in the potential effects of large-scale stablecoin adoption on the central bank's balance sheet and monetary policy implementation.

These effects will depend critically on the economic purposes that the stablecoin serves. In this note, we envision a payment stablecoin ecosystem driven by individuals and small banks making cross-border payments. The efficiency in cross-border payments is an important topic for many governments and international bodies such as G20, and we present a stylized example of a payment stablecoin reducing the need for individuals/businesses or small banks to rely on intermediaries in processing cross-border payments.⁴ In our example, individuals, businesses, and small banks use payment stablecoins to directly make cross-border payments while large international banks act as readily available counterparties that buy and sell these stablecoins, preserving some of their roles in facilitating cross-border payments. While U.S. dollar stablecoins facilitate foreign exchanges, exposure to U.S. dollar by foreign entities is viewed as a source of risk in our example. Thus, we abstract from the potential use of U.S. dollar stablecoins as a store of value outside the U.S., which is reasonable in the context of economies with stable local currencies.

Payment stablecoin issuers' asset management strategy is another key factor that determines stablecoins' effect on the financial system. We consider three scenarios: In the first scenario, a stablecoin issuer backs the stablecoins by depositing a matching amount of funds as bank deposits. In the second, the issuer holds Treasury bills. In the third scenario, a bank acts as an issuer and sets aside a matching amount of funds as central bank reserves to guarantee the value and liquidity of the stablecoin it issues. In all of these scenarios, the central bank may need to recalibrate its reserve management policy given the potentially volatile and sizable payment flows between banks and payment stablecoin issuers.

Section 2. Frictions in Cross-Border Payments and Payment Stablecoins as a Potential Remedy

Cross-border payments are generally viewed as slower, more expensive, and not very transparent to end-users relative to domestic payments.⁵ This consensus has spurred international initiatives aimed at reducing frictions in cross-border payments. For example, the G20 has made enhancing cross-border payments a key priority, and the Financial Stability Board has set out targets to assess progress in this work. The G20 has identified a number of frictions in cross-border payments, including the length of payment chains, which are ultimately passed along as costs to end users.⁶

Processing cross-border payments involves high fixed costs, giving rise to an intermediation model through correspondent banks. Such fixed costs include the cost of setting up a foreign branch to support exchange of foreign currency or the cost of creating a capacity to conduct cross-border compliance checks, such as anti-money-laundering and know-your-customer considerations. Large international banks can spread such costs across many transactions, but small banks cannot. Therefore, these small banks need to route cross-border payments over an intermediary chain through large international banks.

Intermediation model and its cost: Because small banks often do not have a capability to directly send or receive cross-border payments, they operate through a correspondent or a correspondent network. This results in a chain of intermediation that generates multiple types of costs. First, the payment may take longer time to reach its destination because it needs to be processed by each intermediary in the chain.⁷ Second, the status of the payment can be hard to determine because it may be sitting at any of the intermediaries in the chain.⁸ Furthermore, any message attached to the payment may be at a greater risk to be altered because each intermediary may be using a different system or convention to process the message.⁹ Lastly, redundant compliance checks for anti-money laundering and counter terrorism financing (AML/CTF) may be run at multiple points in the chain, adding to the overall cost.¹⁰

The length of a chain depends on the activity of correspondent banks in various jurisdictions and the currency pair. According to SWIFT data, more than 50 percent of international payments are in U.S. dollars.¹¹ Currency pairs, such as the USD/JPY, that are commonly traded in the foreign exchange market would likely involve a shorter intermediation chain. However, most transactions require an intermediary, and over 60 percent of wholesale payments are routed through one or more intermediaries.¹² Other less common currency pairs may require a broad network of correspondent banks located in multiple jurisdictions.

Concentration of intermediaries, market power and economies of scale: The network of correspondent banks is highly concentrated, and the number of correspondent banks supporting cross-border payments has been on the decline in recent years. The latest statistics through 2022 indicate that the number of active correspondents has declined by about 30 percent over the last decade.¹³ While there is not much direct evidence on the exercise of market power in this market, the high degree of concentration in correspondent activity may give the small group of players excessive market power, allowing them to extract economic rent in the form of high fees or outdated infrastructure.¹⁴

In addition to the barriers to entry associated with the high cost in establishing a foreign branch, economies of scale may contribute to the use of correspondent banks. Large international banks would be able to manage liquidity needs and risks more effectively by aggregating many transactions. For example, they might be more efficient at maintaining inventories of foreign currencies or managing more complex risks such as foreign exchange rate volatility than small banks.

Section 3: Potential Benefits of Payment Stablecoins

Figure 1 represents our attempt to summarize various costs faced by end-users (bottom row), many of which result from the intermediation model prevalent in the processing of cross-border payments (middle row). The intermediation model arises from the high cost of creating and maintaining a foreign branch (red box in the top row). Such a cost, combined with economies of scale, has led to the traditional institutional setup for cross-border payments that rely on intermediation by large international banks.

Payment stablecoins could potentially disrupt the correspondent banking model, reducing end-user costs by eliminating or drastically reducing the institutional cost (red box in the top row of Figure 1). However, whether this will happen partly depends on the relative importance of the economy of scale in the intermediation model. Even with payment stablecoins, the banking system may continue to rely on intermediation by large international banks due to their advantages, for example, in maintaining payment stablecoin inventories denominated in foreign currency or conducting compliance checks in multiple jurisdictions.¹⁵ While the correspondent banking model may continue to exist even after large-scale payment stablecoin adoption, there can still be benefits associated with increased competitive pressure and incentives for innovation by cross-border intermediaries.

Section 4. Cross-Border Payments Using Payment Stablecoins

In this section, we describe the mechanics of how a payment stablecoin arrangement could facilitate cross-border payments. We imagine a hypothetical payment stablecoin with easy access for foreign individuals and banks: both domestic and foreign entities can hold payment stablecoins and make payments without restriction. The cost of accessing a payment stablecoin infrastructure is minimal. Also, we assume for simplicity that holding the payment stablecoin is treated favorably by regulators.¹⁶

We describe two scenarios under which a person in the U.S. transfers 1 USD to another person located in Mexico. The first scenario represents the status quo, and the money is transferred via a chain of transactions involving a correspondent bank. In the second scenario, a cross-border payment is made using a stablecoin without involving a correspondent bank. Efficiency gain is achieved by shortening the length of a payment chain, decreasing reliance on large correspondent banks and saving costs that may occur at every point in the payment chain, including compliance. As discussed, the cost of accessing the stablecoin platform is assumed to be minimal; otherwise, there will be limited economic justification or business case for a payment stablecoin.

A cross-border payment example without a payment stablecoin: Person A in the U.S. has a bank account with a small U.S. bank and wants to transfer 1 USD to person B in Mexico, who has a bank account at a small Mexican bank. We assume that the small U.S. and Mexican banks do not have any foreign branch. In a typical case, the small U.S. bank would then transfer 1 USD to a large U.S. bank serving as a correspondent. The large U.S. bank would send 1 USD to a large Mexican bank that has a branch in the United States. Next, the large Mexican bank then sends x MXN-x denotes the prevailing exchange rate-to the small Mexican bank, which credits person B's account with x MXN. The large U.S. and Mexican banks could charge fees for their intermediation service. See Table 1 for the changes in the balance sheet of each bank under this scenario.

Table 1: T-accounts under existing correspondence banking system

A cross-border payment example with a payment stablecoin: Person A in the U.S. wants to pay 1 USD to person B in Mexico. Persons A and B have deposit accounts at a small U.S. bank and a small Mexican bank, respectively. To initiate the payment, the small U.S. bank subtracts 1 USD from the account and exchanges 1 USD of reserves into 1 USD of the payment stablecoin. The small U.S. bank then transfers the stablecoin to the small Mexican bank. The small Mexican bank then credits x Mexican pesos (MXN) to the account of person B. At the end, we assume that small banks do not want to bear foreign exchange risks, and the small Mexican bank sells the 1 USD stablecoin to a large Mexican bank in exchange for x MXN. Below, we provide an overview of the changes in the balance sheets of the three banks involved.

In this example, person A instructs the small U.S. bank to handle the cross-border payment and the bank purchases payment stablecoin to initiate the payment. Alternatively, person A can purchase payment stablecoin directly using balances at the small U.S. bank and transfer it to person B, who can then sell it to the large Mexican bank for Mexican currency and deposit it at the small Mexican bank. The resulting change in T-account is the same.

Table 2: T-accounts with Stablecoin

By assumption, all three banks in the example can directly access a payment stablecoin platform, and they can purchase, hold and transfer the payment stablecoin at little fixed or variable costs. It is the key characteristic of the hypothetical payment stablecoin that facilitates cross-border payments. Once the sender or their bank-person A or the small U.S. bank in this example-obtains the stablecoin, the stablecoin can be transferred directly to the receiver without intermediation, assuming that the receiver or their bank-person B or the small Mexican bank-has ready access to the stablecoin platform. This would eliminate any intermediation fee, reduce the time for the payment to reach the final recipient, and make it easier to track the payment.

While a payment stablecoin may eliminate some costs associated with cross-border payments, it does not eliminate all costs. In our example, the small Mexican bank still depends on the service of the large Mexican bank to unload foreign exchange risk. In addition, while the "on-chain" cost-cost for sending or receiving payment stablecoins between entities that already hold stablecoins-is likely to be small, there may be greater "on-ramp" and "off-ramp" costs associated with exchanging payment stablecoins for fiat currency. Overall, these caveats show that a successful adoption of payment stablecoins for cross-border payment is not guaranteed at all. It depends on the pricing of services by stablecoin issuers, which will be driven by regulation and technology, among other things.

Section 5. Payment Stablecoin Reserve Assets: Effect on Monetary Policy and Financial Landscape

The introduction of a payment stablecoin could have a far-reaching effect on the financial system. The payment stablecoin issuer would need to back the payment stablecoin by purchasing reserve assets, and this would affect the market for those assets and everyone else that held these assets.

To facilitate a tractable discussion, we assume that the large Mexican bank would hold an inventory of USD stablecoins in place of USD reserves at the Fed following the introduction of the payment stablecoin. As a direct consequence, the overall demand for USD reserves might decrease. But such a decrease could be offset partially or fully by the actions of other participants in the financial system. In particular, the outcome would depend critically on the types of assets used to back payment stablecoins in circulation. Here, we consider three different types of assets: bank demand deposits, U.S. Treasury bills and USD reserves at the Fed.¹⁷ While a payment stablecoin issuer might diversify its asset holdings across all types, either for its own benefit or to comply with regulations, we consider each asset type in isolation for simplicity.¹⁸

First, if the payment stablecoin were backed by demand deposits at one or more banks, the decrease in the demand for USD reserves by the large Mexican bank might be partially offset by potential increases in the demand for USD reserves by those banks that end up hosting the deposits made by the stablecoin issuer. The balance sheet of these deposit-hosting banks would expand to accommodate the payment stablecoin issuer's deposits. These banks' liquidity management strategy would determine how much, if any, they would increase their reserve holdings given the influx of deposits from the payment stablecoin issuer, but the increase in reserve holdings would likely be less than one-to-one to the deposit inflow.

Next, the payment stablecoin issuer could hold U.S. Treasury bills to back the stablecoin, which would likely increase the demand for bills. This increased demand could decrease the yield on bills and have other important consequences for their liquidity.¹⁹ At the same time, those investors who would otherwise hold these Treasury bills now held by the payment stablecoin issuer would need to find alternative assets to hold. For example, they might decide to hold deposits or other bank liabilities, which would expand the balance sheet of the banking system and offset some of the declines in the demand for USD reserves. The equilibrium effect would depend on many factors, including investors' elasticity of demand for Treasury bills.

Finally, we envision a payment stablecoin issuer that backs the stablecoin with USD reserves. In this case, there might be little net effect on the demand for USD reserves. The large Mexican bank would likely convert a large portion of its USD stablecoin holdings back to reserves to earn interest because payment stablecoins are prohibited from paying interest-unless the bank was compensated in other ways by stablecoin issuers. Even if the large Mexican bank held a significant inventory of USD stablecoins, the payment stablecoin issuer would in turn back these stablecoins by holding a matching amount of USD reserves, the net effect could be close to zero.

Across these scenarios, the central bank's balance sheet management policy plays an important role. The change in demand for USD reserves might partially or fully pass through to the central bank's asset holdings depending on its balance sheet policy, and the potential payment flows between reserve accounts held by banks and those held by the payment stablecoin issuer could also influence the central bank's decision on the appropriate size of its asset holdings.²⁰

Holders of stablecoin inventory-the large Mexican bank in our example-will decide how much inventory to hold based on their ability to exchange the stablecoin for fiat currency and the effect of holding the stablecoin on regulatory ratios. Frictions such as time delays or fees associated with the exchange between a stablecoin and fiat currency will make the role of the inventory holder important as a readily available counterparty and may decrease conversion volume between the stablecoin and fiat while increasing the inventory holding of stablecoins. If there are no such frictions, individuals or small banks may choose to trade directly with the payment stablecoin issuer. However, even in such a case, individuals and institutions that do not want foreign exposure will need a counterparty to sell foreign-currency-denominated stablecoins that they receive. In our example, person B or the small Mexican bank will rely on the service provided by the large Mexican bank to convert the proceeds from selling USD payment stablecoins for Mexican pesos.

In addition to potential implications for monetary policy implementation, a widespread adoption of a wholesale stablecoin could have other consequences for the international financial landscape as it could affect how banks manage foreign exchange holdings and existing correspondent relationships and how central banks provide foreign exchange support.

Section 6. Conclusion

Payment stablecoins could help reduce certain frictions in cross-border payments by being less costly than opening a branch abroad or accessing correspondent banking services offered by large international banks. At the same time, those stablecoins would affect the market for domestic and foreign liquid assets, with implications for the central bank's balance sheet and monetary policy implementation. In our example, some banks would replace their USD reserve balances with payment stablecoin holdings. As a consequence, the demand for reserves might decrease while the demand for Treasury bills might increase, but there could be potentially shifts in asset holdings by other investors that would offset the initial impact. Generally, the net effect is hard to predict and would depend on how payment stablecoins were adopted by individuals and banks and how the stock of outstanding payment stablecoins were managed in the stablecoin ecosystem. The evolution of payment stablecoin ecosystem would depend on many factors, including the cost and efficiency of exchanging stablecoins with official currencies and the regulatory treatment of stablecoins.

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