During the past year, there’s been a large number of various blockchain initiatives being announced by financial institutions spanning cross-border payments, CBDCs — both retail and wholesale, asset tokenisation, post-trade settlement and DeFi.
Of these, it is the fate of stablecoins that is arguably clearest.
Will they take crypto mainstream?
This is how things were for early adopters of Bitcoin until Tether’s USDT was launched in 2014. Circle’s USDC followed USDT in 2018, and Binance and Paxos’ BUSD in 2019 (we’ll ignore those stablecoins that emerged and imploded such as Terra’s UST).
The upside of this increase in confidence in the technology underpinning blockchain networks is even more companies are now willing to embrace it — especially banks. Fully collateralised stablecoins, with transparent reserves (emphasis intentional), like the blockchain networks underpinning them have remained resilient during recent periods of stress in the cryptocurrency sector.
However, once stablecoins are made available on blockchain networks, the issuers and customers benefit significantly. A customer can make a payment to anyone in the world in a matter of seconds with similar fees regardless of the amount being sent or where the recipient is. Unlike with a traditional bank payment, when this payment is made, the collateral held by the stablecoin issuer remains the same. It does not need to be debited from an account and subsequently netted off by the payee’s bank. For instance, when someone makes a payment from an account held by bank A to one that resides in bank B.
This is a boon for stablecoin issuers as their funds can remain in circulation for longer than customer deposits, which translates into them being able to earn more on these deposits. The customers of banks are likely to be beneficiaries once the stablecoin landscape starts to heat up properly. At the current time, there simply isn’t much competition. If you want the closest thing there is to a regulated stablecoin you go with USDC, if you’re using Binance you probably use BUSD, and if you don’t pay too much attention to the details perhaps you use USDT.
There’ll be some really interesting market infrastructure required too.
When used in payments, these bank-issued stablecoins will get swapped for other stablecoins. They may also be redeemed for their underlying currency. After all, not all stablecoins will be universally accepted. Some retailers may accept only J.P. Morgan coins, whilst others may only support Bank of America coins.
A stablecoin issuer will support redemptions for their users, but when one stablecoin needs to be exchanged for another,
- How will this be done?
- Will banks offer these services to their users?
- Will users make use of decentralised exchanges like Uniswap for this?
Or perhaps we’ll have native web3 payment protocols to which someone could send their JPM coins to convert and send them to another address as BAML coins. There is no doubt that as stablecoin adoption becomes more widespread, an ever greater amount of innovation will happen to provide a more seamless experience for users.
We’re still early in web3 as the mantra goes, however, it’s really interesting to think about the trickle-down effect widespread adoption of certain innovations will have such as stablecoins. Much like the growth of fintech created a surge in app and usability focussed activities for banks, we are on the cusp of seeing something very similar happening for stablecoins.
After all, when you’re a bank, why wouldn’t you be thinking about tokenising customer deposits? The landscape is wide open and it’s going to be fascinating to watch as the stablecoins landscape starts to gather momentum.