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Market
While on the surface they might appear similar, the functions of orchestration and clearing remain fundamentally different. There's been significant confusion in the market about these concepts, and this post aims to clarify the distinction.
In payment systems, orchestration and clearing serve different but complementary roles. Payment orchestration refers to the coordination and routing of payment transactions across various corridors, networks, and participants. An orchestration layer acts as a hub or "coordination protocol" that ensures each payment flows through the appropriate paths with necessary checks (compliance, messaging, etc.) - e.g., SWIFT.
In contrast, clearing (aka bank clearing problem) refers to the process of reconciling and matching payment obligations among financial institutions, determining who owes what to whom before final settlement. Clearing often entails netting multiple transactions (offsetting debits and credits) to reduce the liquidity required for settlement - e.g., SEPA/FedNow/CLS. In other words, clearing aggregates or optimizes obligations, whereas orchestration guides individual payment instructions.
The Orchestration Focus
Today's payment landscape is primarily focused on aggregation and orchestration – finding the best route for a single payment, optimizing for speed or cost, and ensuring the user experience is smooth.
These companies do an excellent job handling:
Price discovery across liquidity providers
Connectivity across corridors
Routing optimization for individual payments
Abstracting pre-funding requirements by handling it themselves
User interface and value-added services (virtual accounts, hosted wallets, etc.)
Compliance and KYC/AML
This delivers significant value to users and has been crucial in advancing adoption. However, alongside these advancements, there remains an opportunity to address a foundational infrastructure challenge.
The Prefunding Reality in Stablecoin Payments
There's a common misconception that "stablecoins remove the need for prefunding because they're fast." This overlooks a critical reality: while blockchain transactions themselves are fast, the stablecoin payment ecosystem still requires significant capital lockup, particularly at the boundaries where stablecoins meet traditional finance.
The fast settlement of stablecoins doesn't eliminate prefunding requirements – it simply changes where and how they occur. In the "stablecoin sandwich" model (fiat → stablecoin → fiat), PSPs need prefunded liquidity on both ends: stablecoins at the origin to quickly convert sender's fiat, and local currency at the destination for immediate recipient payouts.
Without this prefunding, the speed advantage of stablecoins would be negated by delays at either end of the transaction. Prefunded float doesn’t disappear—it just shifts the problem elsewhere around the stack surrounding the blockchain leg.
What is “prefunded float”? Funds deposited in advance—whether in local‐currency accounts or stablecoin wallets—so that payouts can be made instantly without waiting for incoming settlement.
The Liquidity Provider Perspective
From the LP perspective, the challenges are equally significant:
Risk Management: LPs must carefully assess counterparty risk with each PSP relationship
Capital Allocations as needed across PSPs and corridors
Operational Complexity: Manual monitoring of positions and frequent rebalancing is required
Settlement Risk: Without proper clearing mechanisms, LPs face risk that stablecoins won't arrive after fiat is delivered (See Herstatt Risk)
These challenges mean LPs must build sophisticated treasury operations and risk management systems, often leading them to impose higher fees or stricter prefunding requirements on PSPs to offset their risk.
The Growing Fragmentation Challenge
This is getting worse, not better. The stablecoin landscape is becoming increasingly fragmented, with new issuers regularly entering the market. This fragmentation exacerbates existing prefunding challenges in several ways:
Multiple Stablecoin Types: PSPs must maintain separate liquidity pools for each stablecoin type
Differing Redemption Processes: Each stablecoin has unique redemption procedures and requirements
Varying Compliance Standards: Different issuers implement different regulatory approaches
Inconsistent Liquidity: Smaller stablecoins may have less reliable liquidity, requiring larger buffers
Slippage & Trading Fees: Converting between stablecoins introduces additional costs and price impact, especially for larger amounts
As more stablecoins enter the market alongside existing options like USDC, USDT, and others, this fragmentation will only increase. Without proper clearing infrastructure, the operational complexity and capital requirements will multiply.
The Capital Efficiency Challenge
Industry estimates suggest that over $4 trillion in capital sits idle in prefunded nostro/vostro accounts globally across traditional correspondent banking relationships. While stablecoin infrastructure offers opportunities to reduce this inefficiency, the operational model has effectively carried over into the stablecoin ecosystem due to the interaction with fiat rails.
Current Solutions (Treating Symptoms)
Credit-Based Solutions & Liquidity-as-a-Service
Third-party services provide on-demand liquidity without prefunding (eg Mansa, Arf), essentially offering short-term loans or credit lines to Financial Institutions. While this helps Originating FIs avoid locked capital, it simply shifts the burden to another party rather than solving the fundamental inefficiency – like using a credit card to avoid having cash on hand.
2. Just-in-Time Liquidity & Dynamic Rebalancing
Leading PSPs use algorithms to reallocate capital to higher-demand corridors. This approach still requires significant total capital – it just optimizes where it sits at any given moment, and becomes a competitive moat on how well this is done as it directly affects their capital efficiency problem.
3. Payout Networks and Partnerships
Networks of local partners share liquidity responsibilities, but this creates complex coordination challenges without systemic efficiency gains.
All of these approaches treat symptoms rather than addressing the root cause: the lack of a proper multilateral clearing layer that could coordinate obligations across the entire network.
Honorable mention is the rise of stablecoins that offer yield, allowing treasury operations to make use of this value turning idle capital into revenue.
The CLS Bank and Herstatt Risk Example
In 1974, Herstatt Bank in Germany received Deutsche Marks but shut down before sending the promised US Dollars to counterparties – a perfect example of settlement risk that orchestration alone cannot solve.
CLS Bank emerged as a solution, implementing multilateral clearing that eliminated this risk and dramatically reduced capital requirements. According to industry data, CLS achieves 96% reduction in funding requirements through its multilateral netting approach, settling $19.1 trillion with only $78 billion in funding (0.4%) by optimizing across the entire system.
Orchestration vs. Clearing: A Clear Distinction
Orchestration | Clearing |
|---|---|
Handles individual payments | Optimizes across the entire network |
Focuses on execution | Focuses risk management and capital efficiency |
Solves for user experience | Solves for counterparty risk and locked capital |
Operates at transaction level | Operates at system level |
Relies on pre-funding or credit | Creates efficiencies through multilateral netting |
"Who, how, and where" of moving a payment | "How much and when" of settling obligations |
Orchestrators help money move; clearing makes it efficient.
Circle Payment Network: SWIFT-like Messaging Orchestration with Native Settlement
The recently launched Circle Payment Network (CPN) takes a primarily orchestration-focused approach while also leveraging its position as a stablecoin issuer for settlement capabilities. CPN is described as an "orchestration layer for modern payment stablecoins and blockchains," providing a framework for financial institutions to coordinate global stablecoin and fiat payments.
CPN's design prioritizes immediate settlement, programmability, and user experience. From a design perspective, CPN functions more like a real-time gross settlement financial rail rather than the typical 'orchestrator' profile, using stablecoins as the settlement asset.
As the stablecoin ecosystem matures, there's room for complementary infrastructure focused specifically on clearing functions like dynamic multilateral clearing and liquidity saving mechanisms.
Regulation Through Clearing Layer
Regulations exist largely to prevent systemic risks from destabilizing the financial system. While they typically impose administrative burdens, their goal is to minimize risk and prevent economic disasters.
Clearing systems serve as the natural enforcement mechanism for these regulations. Rather than forcing each market participant to build complex compliance systems, the clearing infrastructure implements these requirements systematically.
The result is that market participants achieve compliance automatically through participation, drastically reducing administrative overhead while increasing safety. The same principle applies to stablecoin markets – embedding regulatory compliance into the clearing infrastructure itself reduces friction while enhancing safety.
Emerging regulatory frameworks for stablecoins could be efficiently implemented through properly designed clearing systems, transforming complex compliance burdens into seamless operational processes.
The Power of Neutrality in Clearing
An important distinction to note is that clearing functions most effectively as a neutral, global layer rather than as an individualized solution confined to individual networks. While networks like CPN may eventually develop clearing capabilities, their effectiveness will be inherently linked to their network scope.
The true power of clearing comes from its ability to operate across multiple networks, currencies, and participants. A neutral clearing layer that isn't tied to any single network or asset can optimize capital efficiency across the entire ecosystem, rather than just within a single walled garden.
This is why traditional clearing systems like CLS Bank operate as independent, neutral entities serving multiple financial institutions. They don't favor any particular bank or currency, allowing them to maximize netting opportunities and capital efficiency for all participants.
The Visa Example
This isn't theoretical – it's how Visa became dominant. When Bank of America spun off Visa, they introduced the first multilateral clearing system for card payments. This innovation created a network effect that transformed the market.
Visa's power extends beyond just orchestration - they've implemented universal acceptance and redemption clearing for cards across their global network. Any bank issuing Visa cards can be assured that their cards will be accepted at any merchant acquiring Visa payments, regardless of which specific bank issued the card or which bank the merchant uses.
The true innovation was multilateral netting for all participating banks globally to process card payments. The card is just a medium of exchange; the actual clearing network is the true moat.
End Game For Payments: Global Money Movement
If we want to achieve the vision of instant, nearly free global payments, we need to consider both orchestration and efficient clearing infrastructure. While user interfaces, token bridges, and payment routing have seen significant innovation, there remains an opportunity to address the fundamental clearing challenge.
The potential impact of open, global clearing for payments is substantial – advancing the original promise of Bitcoin and the practical regulated implementation of stablecoins for an instant, low-cost payment system anywhere in the world.
Let's Talk Capital Efficiency
If you're a PSP processing significant monthly volume, a proper clearing solution could free up your operating capital that could be reinvested in growth, passed to customers through better rates, or returned to shareholders.
If you are facing these challenges of capital efficiency as a PSP or LP, or you're building a payment network that could benefit from more efficient clearing for your counterparts, please reach out to discuss how a specialized clearing layer could transform your operations.
Any take on orchestration, clearing and the future of stablecoins? I'd love to hear your thoughts.
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