Xapo Bank, a Gibraltar-based licensed private bank and Bitcoin custodian has partnered with stablecoin issuer Circle to become the first financial institution in the world to integrate a SWIFT alternative payment rail in USD Coin (USDC) cryptocurrency.
The feature allows the bank’s customers to circumvent costly and time-consuming SWIFT payments and instead deposit, withdraw, send, and receive money in real time with Circle’s USDC stablecoin.
Xapo Bank Partners With Circle to Launch Stablecoin Payment Rail
Payment rails are systems or networks that allow the digital transfer of funds between two parties, regardless of their country or currency. There are different types of payment rails, like bank wire networks, payment card networks, and blockchain-based protocols. Some popular payment rails are Automated Clearing House (ACH), Visa, Mastercard, SWIFT, PayPal, and blockchain technology.
According to the announcement made on March 22, Xapo Bank will be offering a 1:1 conversion rate for all USDC to U.S. dollar (USD) exchanges. Furthermore, the bank will automatically convert all deposits to USD so that customers can rake in the benefits from a 4.1% annual interest rate return on their USDC deposits. Apart from a $150 member fee, the bank will not charge any fees for the services.
Considering the recent bank failures in the United States, Xapo Bank assured customers that as a fully licensed and regulated financial institution under the Gibraltar Deposit Guarantee Scheme (GDGS), it will guarantee USD deposits of up to $100,000.
The bank also said it does not indulge in any crypto staking activity using the USDC deposits, declaring that it has no exposure to the crypto market as all customer deposits are held in dollars.
Xapo Bank takes a different route from the traditional banking system. Most banks rely on the fractional reserve system, where they are only required to keep small amounts of customer deposits to be made available for withdrawal while the remaining funds are used to create loans or invest in long-term securities to earn interest.
Meanwhile, Xapo Bank maintains all its deposits in reserve and invests them in “very short-dated, highly credit rated, money market instruments” and short-term bonds. Unlike traditional banks, Xapo Bank shares 80% of the interest earned through these investments with its customers.
Seamus Rocca, CEO of Xapo Bank, said the USDC payment rail marks a watershed moment in financial history. He added that the faster and cost-effective service will run 24/7, including weekends, eliminating customers’ anxiety about holding their USDC in crypto exchanges and the complications with transferring the tokens through expensive fiat off-ramps into traditional banks.
The news comes a week after Xapo Bank announced it was expanding its payment rail to integrate Britain’s Faster Payment System (FPS) to enable account deposit and withdrawal settlements in British pound (GBP).
Earlier this month, the bank also announced a collaboration with Bitcoin-based payment service provider Lightspark to integrate Bitcoin’s Layer-2 scaling solution, Lightning Network, onto its system.
The service allows Xapo Bank users to pay for purchases of up to $100 at any vendor accepting Lightning payments on the go without having to incur any high transaction fees or long blockchain confirmation waiting times.
USDC Turmoil and its Redemption Arc
Circle and USDC have been going through a tough few weeks since the collapses of two of its main banking partners, Silicon Valley Bank (SVB) and Signature Bank. The stablecoin issuer held $3.3 billion in cash reserves backing USDC on SVB while making use of Signature Bank’s SigNet protocol for USDC to USD exchanges.
Both banks were shut down by U.S. regulators after falling victim to the Federal Reserve’s rising interest rates on the dollar, forcing the institutions to sell their investments in long-term securities at huge losses to make fund withdrawals available to customers. The banks suffered from runs by panicked customers who rushed to withdraw their deposits, resulting in insolvency.
Circle was heavily impacted by the closure, as USDC holders were worried about the token’s future and began redeeming their investments. The stablecoin lost its dollar peg and was at one point trading as low as $0.87.
It was only after the U.S. government announced they will be bailing out both banks and Circle said it will be moving all deposits in SVB to BNY Mellon that USDC regained its dollar parity. USDC is the second-largest stablecoin with a $40 billion market cap and is one of the most traded cryptocurrencies.
Earlier this week, Circle partnered with Australian stablecoin wallet provider Stables and global payments giant Mastercard to allow retail customers in the Asia-Pacific region to make real-time payments at merchants in USDC.
The service currently available to Stables users in Australia will soon be expanded to countries in North America, Latin America, Europe, and Africa and also support transactions in their respective local currencies.