Trends and drivers of cross-border cryptocurrency and stablecoin flows

Cryptocurrencies' values fluctuate based on market forces and are not tied to any specific asset.

The Bank for International Settlements (BIS) has assessed trends and drivers of cross-border cryptocurrency and stablecoin flows in a paper published this week.

Cryptocurrencies’ values fluctuate based on market forces and are not tied to any specific asset.

Stablecoins are cryptocurrencies designed to maintain a stable value by having their market value pegged to an external reference, typically fiat currency.

As their popularity grows, such digital currencies have become of increasing interest and sometimes concern to governments and regulators across the world – both for their potential use cases but also for their implications for financial stability, among other reasons.

Cross-border flows of the two biggest cryptocurrencies – Bitcoin and Ether – and the two biggest stablecoins (by market capitalisation) – Tether and USD Coin – between 184 countries from 2017 to 2024 were investigated.

The 39-page analysis – titled ‘DeFiying gravity? An empirical analysis of cross-border Bitcoin, Ether and stablecoin flows’, published last week (8 May) as a BIS working paper – is co-authored by BIS Innovation Hub Eurosystem centre head Raphael Auer, BIS principal economist Ulf Lewrick and BIS Innovation Hub Europe Centre adviser Jan Paulick.

‘Our findings highlight speculative motives and global funding conditions as key drivers of native cryptoasset flows,’ the authors state. ‘Transactional motives play a significant role in cross-border flows for stablecoins and low-value Bitcoin transactions, where we further find a strong association with higher costs of traditional remittances.’

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‘Defying traditional frictions’

Bitcoin, Ether, Tether and USD Coin flows are described as ‘substantial’, peaking at a total of about $2.6 trillion (about £1.95 trillion) in 2021, with stablecoins accounting for almost half the volume. Transaction volumes fell to $1.8 trillion in 2023 but have since ‘resurged’.

‘Geographical distance curbs cross-border crypto flows far less than it does traditional financial flows. Indeed, cryptoassets used in decentralised networks appear to largely defy traditional frictions in capital flows,’ the authors write.

‘Conversely, a tightening of global funding conditions correlates with a decline in cross-border crypto flows, indicative of the use of cryptoassets as a risky investment,’ they continue. ‘At the same time, we also find evidence of stablecoins and low-value Bitcoin payments being used for transactions in the context of remittances. This is indicative of the multifaceted use cases of different cryptoassets.’

‘Our analysis indicates that policy measures designed to dampen traditional financial flows may have limited impact on constraining cross-border crypto activity. Yet, as cryptoassets become more integrated with mainstream finance, understanding the systemic risks and potential contagion effects between these markets will be essential for policymakers and market participants alike.’

‘At the same time, the socio-economic implications of increased crypto adoption, particularly in emerging market and developing countries, warrant a deeper examination. This includes assessing the impact on financial inclusion and economic stability, and the potential for cryptoassets to serve as a hedge against local currency volatility and weakness.’

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Macro implications ‘poorly understood’

‘Cryptoassets are increasingly being integrated into exchange-traded funds, futures and other conventional financial instruments,’ the authors set out in their introduction. ‘However, despite total market capitalisation exceeding that of large national stock markets, the macroeconomic implications of cryptoassets – including their underlying use cases and risks during market turmoil – remain poorly understood.’

‘A key challenge is that cryptoassets operate on decentralised infrastructure transcending national boundaries, unlike conventional financial networks governed by intermediary institutions and established regulations. In this context, new types of often elusive intermediaries have emerged in crypto markets,’ they continue, going on to explain their focus on cross-border transactions.

The US, UK and major emerging markets are described as ‘representing key nodes in the different crypto networks,’ while the authors also document ‘significant’ geographical shifts in cross-border activity, particularly from China to other major emerging markets such as India, Indonesia and Turkey ‘amid tighter crypto regulation in China.’

Stablecoins are often described as ideal payment mechanisms for remittances and cross-border disbursements – for example, migrant workers sending money to family members back ‘home’. The paper leans into this facet, stating that the ‘high costs of remittance payments through traditional financial intermediaries are associated with significantly larger cross-border flows in stablecoins and low-value BTC [Bitcoin] payments from