The Year Of The Stablecoin
Forget about a Bitcoin stash, America should promote digital dollars.
Dateline: Woking, 31st December 2024.
Stablecoins are already big business. More than $150 billion worth of Tether (USDT), Circle (USDC) and other tokens backed by fiat currency (in theory, at least) are held by people around the world and volumes are growing. Revolut has joined the likes of PayPal with its own stablecoin and despite Europe’s new regulations, the growth of stablecoins of various kinds will undoubtedly accelerate through the coming year.
What Are Stablecoins?
While “stablecoin” originally meant a cryptocurrency with a price algorithmically maintained at a constant level against some external benchmark, the term has come to mean any asset intended to maintain a specific price and backed by reserves such as fiat currencies, commodities, or even other cryptocurrencies. Within that category, volumes are dominated by dollar-backed stablecoins such as Circle’s USDC and Tether’s USDT that have exploded in popularity, with the consequence that their issuers earn some pretty decent profits through the yields on the underlying assets (e.g., U.S. Treasuries).
Why the growth? Well, the first point to note is that the use of these stablecoins is not confined to developing markets that lack banking infrastructure. According to Chainalysis (October 2024), the UK is Europe’s largest crypto economy and a key driver of the region’s growth, particularly with respect merchant services and, of course, the stablecoins that dominate the European market, making up nearly half of total inflows (with notable growth in both retail and professional use). Stablecoins far exceed bitcoin for fiat currency trade, with the euro accounting for 24% of stablecoin purchases worldwide.
Another key point to note is the premium that stablecoins attract. Analysis by the Centre for Economics and Business Research (CEBR) and BVNK has shown that businesses and consumers in the 17 countries that they studied pay a premium to access stablecoins: on average almost 5% more than the standard US dollar price, rising to 30% in countries like Argentina. This year these countries will have paid nearly five billion dollars in premiums to access stablecoins and this is predicted to climb to something like $25 billion by 2027.
The demand is clear.
(It is not always for good though. Chainalysis also determined that stablecoins were used for nearly three-quarters of all crypto scam transactions last year and more than four-fifths of the payments to sanctioned individuals and companies).
Why is there such a clear demand? A recent YouGov survey (commissioned by Visa and others) of 500 cryptocurrency users in each of five emerging markets found that stablecoins, (almost all of which track the US Dollar) are increasingly seen as the core application in the crypto world, with the primary use being access to dollars for 47% of respondents, better currency conversion rates (presumably to US dollars) for 43% of respondents and cross-border payments (presumably in US dollars) for 32% of respondents.
Right now money gets transferred around the world through banking networks. These work reliably, but they are costly. The messages about money (think SWIFT) are separate from the actual movement of money (think Fedwire) which leads to the need for reconciliation and so on. The idea of sending money directly across the Internet is therefore appealing not because of any ideological position but because it is a way of reducing costs. This is why, for example, JPMorgan Chase developed their own proprietary blockchain and launched their programmable dollars on top of it. This is a good strategy because in financial services, regulation gives incumbents a chance to leverage their distribution (and lobbying) to slow change while building a counter-offensive.
Right now, the market is clearly telling us that it is that private solutions that have traction, especially in the “global south” where companies such as Airtm are creating simple wallets and enterprise payout solutions, a mix of a local and Wise-like services. They offer consumers a local wallet and enterprise payout solutions. Global citizens in high-inflation markets get dollars they can transact simply, 24/7, and for low fees. Enterprises get a payout solution that works in 190 markets.
Public and Private
What might this institutional counter-offensive look like? Well, there are broadly two options: privately-issued stablecoins as we have now, and bank-issued stablecoins of some kind (think, for example, of the Regulated Liability Network, RLN). Bank stablecoins and private stablecoins are, however, very different things, not so much apples and oranges as apples and airplanes. As analyst Noelle Acheson points out, while tokenised bank deposits and stablecoins may sound like the same thing, given that they are both a form of fiat currency on a form of shared ledger, they are actually entirely distinct concepts, and the difference matters for use cases, regulation and the broader appreciation of distributed ledger technologies..
with kind permission of Helen Holmes (CC-BY-ND 4.0)
So there are a number of different options for delivering stablecoins to meet the global demand. The question then is who will go on to satisfy it. In my book “The Currency Cold War” (LPP:2020) I was rather bullish on the prospects for stablecoins, saying that there is marketplace logic to the trading of asset-backed currencies in the form of tokens and that there would be an explosion of different kinds of tokens. I also wrote that assuming one important category of asset would be central bank money, then the key area of competition to be considered would be between private asset-based stablecoins and public fiat-backed stablecoins (i.e., central bank digital currencies).
I have to say that I am beginning to think, however, that central bank-issued stablecoins are actually not the same thing as central bank digital currencies (CBDCs). This is because they have different goals. CBDCs are to augment cash in a digital age and should be regarded as critical national infrastructure. Central bank stablecoins (CBSCs, if you like) are about making commerce more efficient, which is why I can see some central banks issuing fiat-backed stablecoins well before they issue CBDC because we are nowhere deciding (as a society, I mean) what exactly we want CBDCs to do.
(If the Bank of England issued a Sterling stablecoin, I do not think that it would mean that a Digital Pound is no longer needed. For one thing, a Sterling stablecoin would be implemented as a token whereas the Digital Pound, in any sane implementation, would be account-based and capable of offline operation.)
The Mighty Digital Dollar
The private stablecoins are rolling. With the news that fintech behemoth Revolut is far along in the process of launching its own stablecoin, to join the likes of PayPal which released its dollar-pegged PYUSD stablecoin a year ago (currently the fourth-largest such stablecoin with a $730m+ “market cap’), it is hardly hyperbolic to say that we might be looking at a trillion dollar market within a reasonable strategic horizon.
I think that this is a good thing. Stablecoins are of vital importance to next-generation financial services because they provide genuine competition to the payment systems of today, even in the US where the otherwise innovative financial system lags much of the world. American payment cards and banking apps work fine and give a safe and reliable service to customers, but the system is slow and expensive with costs rather unevenly distributed towards the less well off (who pay a lot to use what little money they have). More competition would be good for everyone.
It is not only about inclusion and equity though. There is a geopolitical aspect. Crypto critics often warn of digital currencies' potential to destabilise the U.S. dollar, but as Federal Reserve Gov. Christopher Waller argued some time ago, stablecoins' dependence on the dollar could actually strengthen the greenback as in the “web3” world because the new technology provides an opportunity to preserve the dollar as the dominant global currency since, as noted earlier, the demand for digital dollar is extensive and unsatisfied.
There is no doubt about the right strategy from an American perspective, but the way. Forget about a Bitcoin “strategic” “reserve” (i.e., stash): America should encourage an energetic but responsible dollar stablecoin ecosystem because the companies that control the stablecoin market will wield substantial influence over the future of money.
Are you looking for:
A speaker/moderator for your online or in person event?
Written content or contribution for your publication?
A trusted advisor for your company’s board?
Some comment on the latest digital financial services news/media?