Today, USD comprises more than 50% of global foreign exchange reserves and accounts for nearly 90% of FX turnover. This skew toward USD is exacerbated onchain, where USD-pegged stablecoins comprise 99% of stablecoin supply. This stems from overwhelming demand for USD in economies with high inflation and payment friction, but ultimately reflects a lack of incentives to hold non-USD stablecoins, which results in low liquidity.

In terms of FX volatility, cost of capital, and access to yield opportunities, non-USD stablecoins and USD stablecoins are non-equivalents. While USD stablecoins are liquid and Treasury-backed, many non-USD stablecoins are illiquid and volatile, introducing FX risk and opportunity cost of siloed liquidity.

As we will explore, the creation of stablebonds introduces a new way to price in the risk of holding different currencies, with follow-on impacts for traditional FX, neobanking, and institutional payments.

Traditional FX

The current FX market infrastructure is a patchwork of corporate and bank balance sheets and OTC trading desks. While FX is more commonly discussed in the context of spot trading, the most traded FX instrument by volume is the FX swap (approximately 40% of the FX market). These contracts consist of two parties exchanging currencies today and agreeing to reverse that exchange at a future date, at a fixed rate. This enables institutions to synthetically borrow a currency or lock in a future exchange rate, letting banks and corporations hedge foreign‑currency cash flows.

Despite its sheer size, the FX market remains highly fragmented, subject to regional trading hours, T+1/T+2 settlement windows, and database infrastructure that lacks interoperability. Further, while around 70% of daily transactions are settled PvP (payment-versus-payment, requiring the simultaneous exchange of currency legs), this only applies for the leading currencies and the largest wholesale dealers. The remaining 30% of transactions are handled at the periphery and are susceptible to settlement risk. Furthermore, estimates of $27 trillion remain siloed in foreign currency accounts to pre‑fund FX transactions, creating vast cost inefficiencies.

The size and concentration of USD obligations in FX swaps and the opaque nature in which this debt is monitored pose systemic risk to the global FX market. Historically, episodes of market stress have led to sharp moves in the dollar basis (as banks and corporates bid aggressively to borrow USD and create a dollar shortage premium) and to heavy use of central bank swap lines as a backstop.

Current Onchain FX Solutions

Significant developments in expanding onchain FX have focused on increasing liquidity for non-USD stablecoins to support institutional FX flows in major currencies. Circle’s StableFX is one such case: a recently launched settlement engine built on top of its payment-focused Layer-1, Arc. StableFX provides institutional-grade FX across ten currency-pegged stablecoins, utilizing a request-for-quote (RFQ) execution model and automated PvP settlement using smart contracts. While quotes are communicated offchain, transaction execution is recorded immutably on Arc.

Through aggregated stablecoin FX liquidity, permissioned customers don’t have to manage bilateral credit agreements with multiple counterparties or have siloed liquidity in prefunded balances. This aggregation of demand and supply also results in lower slippage.

Still, others have focused on increasing onchain access to currencies on the long tail of FX volume in a permissionless manner. Codex is positioning itself as the go-to platform for stablecoins pegged to currencies in economies with notable crypto adoption but limited onchain liquidity in the local currency. Codex aims to utilize these local-currency stablecoins (e.g., South Korean won-pegged KRWQ and Turkish lira-backed BiLira) to empower various enterprise use cases, such as POS, onchain loyalty programs, and consumer credit.

Nonetheless, onchain exotic FX pairs remain susceptible to the same opportunity costs of traditional FX (i.e., the lack of a sufficiently portable source of yield to compensate LPs for providing non-USD stablecoin liquidity). While USD LPs receive T-bill-like returns from a variety of pools, there is no widely‑adopted, non‑USD, on‑chain risk‑free rate product.

Stablebonds

This brings us to stablebonds, pioneered by Etherfuse; Etherfuse provides the infrastructure for governments to issue bonds onchain.

By working with regulated local institutions that custody sovereign debt, Etherfuse tokenizes bonds into a synthetic yield product, with the yield accruing to token holders. This currency-pegged, onchain asset solves many of the risks and frictions of FX at once by offering a portable source of yield and an incentive-aligned way to conduct onchain FX.

Stablebonds are a competitive alternative to holding USD stablecoins, as sovereign yield rewards holders for not holding USD. By attaching yield to non-USD currencies, liquidity providers have an incentive to provide onchain liquidity in more currencies. And since stablebonds live onchain, they also present traders with new, programmatic trading opportunities, coupled with a wider range of tradable pairs due to increased liquidity for exotics. Capturing even 1% of global flows would represent approximately $90B/day in FX turnover, creating more spot and derivatives liquidity for delta hedging, basis trading, and cross-currency arbitrage.

These onchain assets create opportunities for yield optimization and routing between currencies and sovereign debt that were not previously feasible.

Furthermore, corporates can leverage stablebonds to hedge FX risk during settlement windows and provide new prefunding options for cross‑border payments. If a company secures an accounts receivable in a currency other than its local currency (such as MXN), the risk is the FX move between invoice and cash collection. As such, the company can buy MXN-stablebonds (to hedge MXN exposure), and then unwind that position upon receipt of payment. The benefits, compared to swaps, are the yield on collateral (i.e., rather than synthetically borrowing USD to hedge MXN, the company can earn native MXN yield), atomic settlement (simultaneous and irrevocable) for less liquid currencies, faster rebalancing and collateral moves, and easier fractional access to local‑currency sovereign debt.

Further, since the peso has significantly outperformed the dollar over the past year (including both MXN appreciation vs USD and sovereign MXN yields), ongoing MXN stablebond exposure is an efficient form of treasury management.

The use of stablebonds can also create a more capital efficient experience for fintechs, leading to lower FX fees and greater yield opportunities for end users. The FX risk embedded in cross-border payments extends to payroll and remittances. As the current use of USD stablecoins for these functions eventually requires conversion into local stablecoins or fiat currencies, these processes still interface with legacy FX infrastructure.

However, a reward-bearing token that is interchangeable with the local fiat lowers this cost of capital and FX risk. Because of the yield on the underlying bonds, remittance platforms or fintechs offering multicurrency accounts can charge lower fees when converting from USD to the local fiat. Recipients can also forgo conversion altogether by getting paid in their local currency and earning their governments’ risk-free rate.

This frictionless swapping between stablebonds and local stablecoins also empowers DeFi-native use cases, as LPs can more easily provide liquidity to exotic pairings while earning yield.

Additionally, stablebonds alter the economics of foreign currency credit card payments. By pre-funding merchant transactions, stablebonds offer a highly efficient form of collateral that settles natively to the local fiat, while earning the currency’s risk-free rate; this eliminates per‑transaction FX spread and unlocks credit payments for volatile currencies.

An emerging market user can load stablecoins in their local currency, and Etherfuse is able to swap into local stablebonds so that merchants/issuers can interface directly with Etherfuse’s assets to manage settlement [Etherfuse is preparing a Q1 demo of such a card/payment integration].

Etherfuse also provides the bond collateral for stablecoin issuers to launch a host of new currency stablecoins. Through its APIs, Etherfuse offers access to sovereign debt upon which stablecoin issuers can issue pegged currencies. This enables fintechs to build onchain banking products (e.g., digital wallets, credit cards, B2B payments) with access to FX, and for consumers to buy and hold bonds using crypto.

For example, Etherfuse provides access to collateralized Mexican sovereign debt that US-based stablecoin issuer Brale uses to issue MXNe, a regulated stablecoin. Etherfuse sources and custodies these bonds via Mexican partners, while Brale focuses on issuance and regulatory plumbing. The resulting MXN stablecoin is currently the cheapest way to send money to Mexico, with superior FX pricing versus legacy channels. Etherfuse is live with 7 currencies today and has articulated intention to expand to more than 100 by the end of 2026.

In the FX swap market, stablebonds could introduce cost efficiencies, transparency, and accessibility. When stablebonds are used as high‑quality collateral, they can lower the cost of funding FX swaps. Further, greater liquidity in non-USD stablecoin pairs, incentivized by sovereign debt yield, creates a more resilient FX market by reducing USD concentration risk. An additional impact is the ability to leverage smart contracts for programmatic settlement and collateral movement, making risk management clearer and more reliable. Bringing high-yield sovereign debt markets onchain also means that more institutions and retail investors can access FX swap‑like funding and hedging structures directly in local currencies.

The key differentiator for Etherfuse, compared to other solutions for onchain FX, is multicurrency sovereign debt issuance combined with stablecoin portability. Rather than solely offering greater liquidity for emerging market stablecoin pairs or better plumbing and yield opportunities for the highest-volume currencies, Ethefuse offers both in an onchain synthetic yield product.

Forward Looking

In the face of dollar devaluation, digital asset natives face a diversification conundrum. While USD stablecoins themselves are backed by the safest and most liquid security in the world (the US T-bill), they themselves introduce risk to the Treasury market in the form of concentration risk (a run on USD stablecoins would impact Treasury prices) and collateral fragility (a debt downgrade, rate hike, or inflation that causes the value of Treasuries to fall could cause stablecoins to depeg). Further, sole allocation to onchain USD and US sovereign debt is suboptimal from a yield perspective, as several emerging markets have offered superior risk-adjusted returns.

FX hedging is only expected to become more integral to corporate treasury management and cross-border payments as USD volatility persists. Etherfuse’s conviction that global onchain finance cannot be built solely on USD rails is compelling, and non-USD reward-bearing tokens (“stablebonds”) are integral to bringing more currencies onchain.

To learn more about Etherfuse, watch the recent Stableminded episode featuring Co-Founder and CEO David Taylor