From payments to profits: what the massive popularity of stablecoins will lead to

While the whole world is watching the bitcoin exchange rate, the world's largest companies are becoming more and more active in another sector of the cryptocurrency market - stablecoins. Why this is happening, argues the international expert on digital finance, author of telegram channel  "Notes on Sleeves"  Victor Dostov. 

Today, many are discussing how stablecoins are becoming a fundamental element of the new payment infrastructure. 

Stablecoin is an umbrella term. It usually refers to a blockchain-based token whose value is tied to some "stable" asset, most often the U.S. dollar or gold;

Big companies like Walmart, Amazon, Expedia and even airlines are considering issuing their own tokens to bypass the traditional Visa and Mastercard payment systems.

Coinbase has announced a partnership with e-commerce platform Shopify - the platform can also settle stackablecoin payments. Fiserv, a payments technology provider (with about 10,000 financial institutions as clients), announced plans to launch a digital asset platform, including a new FIUSD steiblcoin. The company will add it to its banking and payment infrastructure by the end of the year. This way, any customer will be able to easily use this token for payments and liquidity transfers. Obviously, this will quickly become a must-have option for vendors.

JPMorgan took a slightly different approach: the bank launched the JPMD stablecoin backed by commercial bank deposits. With it, institutional investors can make faster and cheaper settlements around the clock;

Visa and Mastercard respond: they allow the issuance of cards that can be used to pay with cryptocurrencies, including stablecoins. 

As a result, while the total value of all bitcoins in circulation - over $2.3 trillion - is significantly higher than the combined value of stablecoins (over $250 billion), the daily turnover of the latter (roughly $160 billion) already exceeds that of bitcoin (about $70 billion) or ether (about $33 billion). 

The question arises: why do all these market players need this?

To understand this, let's start with the basics. The classic scheme of a stablecoin is simple: you give the operator a dollar, he puts it in the reserve, and in return issues a token. This token can be transferred to another person or returned to the operator, getting the dollar back (minus the commission). Stablecoins are also freely traded on exchanges or in p2p (peer-to-peer, a model in which participants interact directly on the network). But when settling with bitcoin, you are inevitably faced with the volatility of the exchange rate: the price of sending and receiving can differ significantly. This is inconvenient even for short-term transactions, and for long-term transactions, the risk is even higher. Stablecoin solves this problem;

In the ideal model, the steblecoin operator has a license from the regulator, and supervisory authorities control the compliance of issued tokens with the amount of reserve (according to liquidity and adequacy norms). These are centralized steiblcoins. But there are other forms: decentralized stablecoins are backed by cryptocurrencies like ether, where mechanisms to cover exchange rate fluctuations are important. To issue steblecoins worth the equivalent of $100, for example, the buyer must lock the cryptocurrency into a smart contract operator for more than $100. Algorithmic stablecoins have no collateral at all: their stability is maintained by a special algorithm resembling a currency corridor in classical economics;

Broadly speaking, stablecoins can also include central bank digital currencies and tokenized bank deposits, where the operator is the government or a bank.

However, the essence remains the same: by their economic nature, classic stablecoins are very similar to good old electronic money. How, then, are they fundamentally different from non-cash funds?

To understand this, we need to look at the structure of cashless payments. If you have $100 in an account in bank A, it means that the record of your money is stored in its internal system, it is recognized as money because the central bank has issued a license to bank A. Bank A guarantees this amount of money with liquidity. Bank A guarantees this amount with liquidity. When you transfer to bank B, your money is an abstraction to the latter because the record from bank A is not available to it. For the transfer to take place, contractual relations between the banks, participation of payment systems, guarantees of the Central Bank through the system of correspondent accounts are necessary. Taking into account that banks do not keep clients' funds on their accounts, but issue loans out of clients' money, the set of guarantees is even more complicated. And cross-border transfers turn into a bureaucratic puzzle;

The reason for this complexity is simple: cashless money lives on centralized platforms. Within one bank, they circulate freely. Moving outside its system inevitably involves additional intermediaries and arrangements.

Stablecoins work differently. They exist on a shared distributed ledger, where address and transaction information is open to everyone. If Alice sends 100 stablecoins to Boris, it is a fact recorded in the blockchain that cannot be undone or hidden;

There are no borders in the world of stablecoins. The owner of USDT in any jurisdiction has real liquidity that can be instantly transferred to any other wallet. In essence, steblecoins create an analog of an international bank with instant settlements, without territorial restrictions and complex procedures. All additional services - deposits, loans, insurance - are provided by external players.

In an ideal world, where payments between countries are fast, cheap and seamless, the role of stablecoins would remain niche - for crypto-economy enthusiasts. But in the real world, the payment infrastructure is fragmented, the number of correspondent bank accounts is shrinking year by year, and transferring from point A to point B is becoming increasingly difficult. Against this background, the demand for a universal payment instrument is growing.

Of course, this infrastructure is not ideal. For one thing, the value of stablecoins can also fluctuate. For example, if you cannot buy or redeem them directly from the issuer, you have to pay intermediaries. During periods of market panic, liquidity drops and commissions rise. Secondly, today operators and regulators have learned how to essentially block "black" wallets. If you are paid with tokens related to illegal activities, it will be extremely difficult to spend them.

Previously, opponents of stablecoins often talked about the risk of issuers defaulting. Now this argument is practically silent. Licensed issuers are under the same regulatory scrutiny as banks. Since they do not issue loans, the collateralized reserve is almost always 100 percent and at least easily verifiable;

It is also important that the authorities of a number of countries, especially the United States, have realized: the availability of payment instruments denominated in the national currency strengthens its position in the world. The dominance of the dollar in international settlements is due to obvious things - wide circulation, stable purchasing power, and the development of financial instruments. Dollar-stablecoins do not replace this functionality, but supplement it, making the dollar even more attractive;

That's why the attitude towards steiblcoins in the US has been positive for a long time, and with the arrival of Trump, supportive. There is a GENIUS bill on consideration in the U.S. House of Representatives, which is aimed at developing and regulating stackcoins in the country (however, on Tuesday, lawmakers failed to vote on the issue). Also on their plan s agenda is consideration of the Digital Asset Market Clarity bill, which seeks to establish clear roles for the Securities and Exchange Commission and the Commodity Futures Trading Commission in regulating digital tokens. Another bill under consideration is the Anti-CBDC Surveillance State Act, which would prohibit the Fed from issuing a digital U.S. dollar, shifting the focus to private stackablecoins.

If the GENIUS Act passes, it will make stablecoins a more mainstream and recognized instrument and further encourage more competition in the market.

The next possible step to increase the already massive popularity could be the development of a revenue-generating stablecoin sector. 

For some tokens on the Decentralized Finance Market (DeFi), the operator can earn income by investing assets from the reserve (with the regulator's permission) in reliable instruments or lending at interest from the reserved in the smart contract. For example, USDY steiblcoins from Ondo Finance earn yield by investing in short-term U.S. government bonds (T-bills). Overall, according to an estimate by Forbes magazine, the market size of such revenue-generating tokens has already grown to $11 billion, which is 4.5% of the entire steablecoin market. 

It's a bit like the daily interest payment account that a lot of banks are now giving you.

Yield is not a determining factor for stackablecoin users, although it is undoubtedly a nice bonus. Recently, the idea of transferring this yield to the traditional market - through the mechanism of ETFs for yielding stackablecoins - has emerged. Phoenix Labs CEO Sam McPherson, for example, in an interview stated the need to expand the DeFi market with ETFs and so attract capital into digital assets. He is quoted by Forbes magazine. The publication does not rule out that ETFs on stablecoins will be the next big trend in the world of cryptocurrency exchange-traded funds. 

If it is popular with the mass investor, it will also lead to an increase in the proliferation of stablecoins.

To summarize, we see an opportunity to create new universal rails for settlements, especially for international settlements, using stablecoin technologies. And the market is looking for opportunities to capitalize on this.

The main barrier is the position of regulators. It is important not only for the general approval of stablecoins as a payment instrument, but also for a clear procedure of interaction with the traditional system, which allows operators and exchanges to easily open bank accounts, and banks - not to be afraid of compliance problems;

This is unlikely to result in the quick death of correspondent relationships, SWIFT and traditional payment systems. Rather, the scenarios will consist of the sprouting of the crypto segment into the traditional one to the mutual benefit.

This article was AI-translated and verified by a human editor