Stablecoins

Introduction to Stablecoins

As Chris Dixon says, blockchains can (1) make old things better (e.g., remittances) and (2) enable new business models that were previously impossible (e.g., AI agent payments). First, imagine sending money across the world as effortlessly as sending a text message—no hefty fees or waiting days for clearance. Second, envision AI agents or machines transacting with each other autonomously, fully enabled by digitally native dollars on the internet. This offers a glimpse into the promise of stablecoins.

Stablecoins are cryptocurrencies designed to maintain a stable value relative to a reference asset—usually the U.S. dollar. They merge the reliability of traditional currencies with the innovation of blockchain technology. While their current market capitalization of $173 billion represents only a small fraction of global financial assets, their rapid growth and integration into mainstream financial services signal a significant shift in adoption.

Consider this:

• Integration with Major Financial Institutions: Companies like PayPal, Visa, Robinhood, and JPMorgan are incorporating stablecoins into their services, bridging the gap between traditional finance and the digital economy. The involvement of established financial institutions and companies could accelerate adoption, bring legitimacy, and influence regulatory frameworks for stablecoins.

• Real-World Impact: Stablecoins are being used to provide aid in conflict zones, facilitate remittances, and offer financial services in regions with limited banking infrastructure. This month alone, stablecoins logged $1.5 trillion in volume (higher than the approximately $1.3 trillion of 30-day settlement volume for Visa). On an adjusted basis (excluding high-frequency trading and bots), stablecoins settled $427 billion in volume.

• Reinforcing the U.S. Dollar: By embedding the dollar within blockchain ecosystems, stablecoins are extending its dominance into the digital realm. Stablecoin issuers hold more than $120 billion in U.S. Treasury notes (reserve assets), surpassing holdings of countries like Germany and South Korea. 

If stablecoins continue on this trajectory, they could approach a market cap of $1 trillion in the coming years, becoming systemically important to global finance and the U.S.

This article will explore:

1. Why Stablecoins Matter: Their role in reshaping finance.

2. Market Potential: Current landscape and future prospects.

3. Addressing the Challenges: Risks and considerations.

Note: The views and opinions expressed are solely those of the author and do not necessarily reflect those of the author's past or current employers. See disclaimer.

Why Stablecoins Matter

Bridging Gaps in the Financial System

The global financial system is rapidly digitizing, driven by increasing internet penetration and the demand for efficient, digitally native currency. Approximately 5.5 billion people use the internet, with 76% participating in some form of online commerce. The shift to digital remittances ($11.5 trillion in volume) is creating opportunities for seamless, secure, and digitally native dollars to be used in commerce and trade. Stablecoins are well-suited to meet this demand. 

The stablecoin ecosystem is built on the following fundamental principles:

• Enhance Accessibility: Open financial services to anyone with internet access, including the unbanked and underbanked.

• Increase Efficiency: Enable near-instant transactions, reducing settlement times from days to seconds.

• Improve Transparency: Stablecoin reserves are transparent —for example, Circle Financial provides daily attestations for USDC, its USD-backed stablecoin— and use highly liquid, low-risk assets like U.S. Treasuries as reserves to maintain stability and build trust.

• Foster Innovation: Introduce programmability in money, allowing for automated payments and complex financial contracts. 

While dollars in bank accounts are already digital, stablecoins offer a more flexible, programmable, and globally accessible form of digital dollars built on blockchain infrastructure. Some benefits include:

• Backed by USD: Custodial stablecoin reserves are fully backed 1:1 by cash and highly liquid assets like U.S. Treasury bills.

• Open Access: Stablecoins can be held and transferred by anyone with internet access.

• 24/7 Availability: They enable near-instant, 24/7 transactions and settlements.

• Global Accessibility: Provide easier access to dollars for people in countries with unstable currencies or limited banking infrastructure.

• Fast Settlement: They operate as bearer instruments that can be freely transferred on public blockchains, achieving quick settlement finality.

• Peer-to-Peer Transactions: Directly connect buyers and sellers, reducing the need for intermediaries.

• Programmability: They can interact with smart contracts to enable automated financial interactions.

Expanding Use Cases Beyond Crypto Trading

Stablecoins are finding real-world applications that impact everyday lives:

Improving Existing Services (“Doing Old Things Better”)

• Cross-Border Payments: They reduce international transfer costs significantly, from an average of 6.2% down to between 0.5% and 3.0% (Duong, 2024). This makes a tangible difference for individuals sending remittances home.

• B2B Remittances: Cross-border business-to-business transactions on blockchains amounted to $843 million in 2023, with projections of reaching $1.2 billion in 2024 (Duong, 2024). Visa's USDC settlement expansion demonstrates the growing integration of stablecoins into traditional payment infrastructures.

• Traditional Payments: Major companies such as Stripe, Visa, Mastercard, and PayPal have introduced cryptocurrency payments using stablecoins. For example, PayPal's PYUSD stablecoin supply has more than doubled to over $1 billion.

• Micropayments: Stablecoins enable small, frequent payments to gig workers and the creator economy, allowing creators to monetize audiences worldwide without currency conversion issues. A study found that nearly 50% of gig workers were open to receiving a portion of their salary in cryptocurrency.

• Financial Inclusion: In regions where banking infrastructure is lacking, stablecoins offer a viable alternative for storing and transferring value.

• Payroll: Stablecoins are emerging as a payroll solution, enabling small, frequent payments that are cost-prohibitive with traditional financial rails. Platforms are considering using stablecoins to expand creator payouts to unsupported countries.

Enabling New Possibilities (“Doing New Things You Couldn’t Do Before” from Chris Dixon and Jeremy Allaire)

• Bridge Between Traditional Finance and Crypto: Stablecoins serve as a critical bridge between traditional finance and the cryptocurrency world, facilitating trading and providing a less volatile store of value. Companies and banks are using stablecoins to enhance the efficiency of internal financial operations. Société Générale's digital asset arm launched the institutional EURCV stablecoin, and Deutsche Bank plans to launch a new euro stablecoin in 2025.

• Digital Wallets: Improvements in wallet technology are lowering barriers to entry for consumers, potentially accelerating mainstream adoption of stablecoins. The trend toward "embedded" crypto wallets with seamless integration into hardware could drive stablecoins to become a ubiquitous component of the global financial system.

• Decentralized Finance (DeFi): Stablecoins are essential in providing stable liquidity pools and are used as collateral for decentralized exchanges and lending platforms. Many DeFi protocols use stablecoins as a base for yield-generating strategies, attracting users seeking to earn interest on their holdings.

• Autonomous Payments: Autonomous Payments: Stablecoins enable fractional payments between devices or services, such as AI agents, because smart contracts allow them to transact value autonomously when certain conditions are met.

• Community-Created Intellectual Property: Community-led platforms allow communities to collaboratively create content or intellectual property with transparent contribution tracking via blockchain. Royalties and payments can be automatically distributed to contributors when the content is reused, ensuring fair compensation.

• Data Monetization in AI Training: By providing a verifiable way to track data usage and ownership rights, stablecoins allow individuals to be compensated when their data is used to train AI models.

• Open Economies in Gaming: Video games can feature open, peer-to-peer economies in which in-game assets are owned and traded by players. Stablecoins can be used to enhance user engagement and create new revenue streams for developers.

Reinforcing the U.S. Dollar's Dominance

By embedding the dollar into digital ecosystems, stablecoins can:

• Extend Global Reach: Facilitate the use of the U.S. dollar in regions where it might not be readily accessible.

• Support Monetary Policy: Increased adoption of USD-backed stablecoins can enhance the effectiveness of U.S. monetary policy through greater dollar utilization. However, increased use of USD-backed stablecoins outside the U.S. might occur without corresponding regulatory oversight or alignment with U.S. monetary policy objectives, potentially undermining the intended support.

Market Potential

While the potential growth of stablecoins is significant, it is not guaranteed. Projections suggest that if stablecoins capture even a small portion of relevant markets, their market cap could approach $1 trillion.

Key Drivers of Growth

• Global Financial Trends: The demand for efficient, low-cost cross-border transactions is rising, and stablecoins are well-positioned to meet this need. In 2023, stablecoins settled $10.8 trillion worth of transactions, with $2.3 trillion in payments, peer-to-peer transfers, and remittances growing at 17% year-on-year (Duong). This month, stablecoins logged $1.5 trillion of volume (higher than the ~$1.3 trillion of 30-day settlement volume for Visa). However, on an adjusted basis (reflecting true “settlements & remittances”, stablecoins settled $427 billion in volume.

• Technological Adoption: Stablecoins account for ~$173 billion of the cryptocurrency market capitalization, about 9% of the total, with a 26% growth rate in circulation since early 2024 (Duong and O'Halloran). As blockchain technology becomes more scalable, stablecoins will likely see increased adoption.

• Retail Adoption: Over 20 million addresses engage in stablecoin transactions monthly (Duong). Stablecoins strengthen the U.S.’s role in shaping global financial standards and technological advancements in digital payments. Over 95% of global digital asset trading volume is denominated in U.S. dollar stablecoins today, reinforcing the dollar's reserve currency status in digital ecosystems.

• Institutional Adoption: Tether, a stablecoin issuer, generated $6.2 billion in profits last year, out-earning BlackRock with fewer than 100 full-time employees (BlackRock has over 19,000 employees).

• Regulatory Developments: Jeremy Allaire, CEO of Circle, predicts that by the end of 2025, stablecoins like USDC will be legal electronic money supervised by central banks in major financial market centers, further legitimizing their role in the global financial system. Clear and supportive regulations could foster trust and encourage both institutional and retail participation.

Considerations for Realizing Potential

• Addressing Risks: Mitigating issues such as depegging events and technological vulnerabilities is crucial.

• Competition: Staying ahead of emerging competitors like Central Bank Digital Currencies (CBDCs) and tokenized deposits requires continuous innovation and collaboration with regulatory bodies.

• Infrastructure Development: Enhancing digital infrastructure, especially in underserved regions, will expand the accessible market.

Addressing the Challenges

While stablecoins offer promising benefits, their challenges must also be addressed.

• Regulation: Increased regulation could boost confidence in stablecoins, potentially leading to wider adoption and stability. Varying approaches to stablecoin regulation across jurisdictions, such as the European Union's Markets in Crypto-Assets (MiCA) framework and ongoing discussions in the United States, highlight the complexity of this issue (Gusdorf et al.). Implementing safeguards similar to those in traditional finance—such as disclosures, audits, and legal protections—can build trust. However, one risk is that inconsistent regulations across countries could fragment stablecoin markets, reducing their interoperability and limiting global adoption.

• Centralization & Liquidity Risk: Many popular stablecoins are issued by centralized entities. A loss of trust in these issuers or a failure to maintain proper reserves could have significant consequences for the entire cryptocurrency ecosystem. The concentration of the stablecoin market exacerbates this risk. However, a collapse involving the liquidation of sufficient reserves would likely not pose a systemic risk unless it occurs during a period of severely impacted liquidity for custodial stablecoins. A greater risk arises when stablecoins hold reserves in speculative investments that lose value, potentially leading to a 'run' scenario.

• Geopolitical Risk: Stablecoins could be used to evade international sanctions or facilitate gray- and black-market transactions. This might lead to increased scrutiny and potential restrictions from governments, affecting their broader adoption. Regulatory frameworks may need to evolve to oversee this monetary ecosystem.

• Stability Risk: In 2023 alone, large stablecoins experienced depegging events more than 600 times (Gusdorf et al.). These events can cause substantial losses to investors in the secondary market and erode confidence in the stablecoin system. The frequency and potential impact of depegging events highlight the need for improved risk management practices and transparency in the stablecoin industry (Kharif and Yang). 

• Security: Investing in robust security measures to protect against hacks and smart contract vulnerabilities is essential. The technology risk is linked to the robustness of the underlying blockchain which issuers do not control, and to the ability of smart contracts to withstand cyberattacks (Gusdorf et al.).

Competition and Collaboration

• Coexisting with CBDCs: CBDCs are digital currencies issued and controlled by central banks, representing a different tier in the monetary system. Wholesale CBDCs are for interbank transactions and have potential use cases in settlement between central banks and commercial banks. Retail CBDCs aim to solve cash-like use cases and provide consumer benefits such as instant direct-to-consumer payouts and traceability for large transactions. CBDCs face challenges in balancing centralized control and privacy with the need for interoperability with private actors. Exploring ways in which stablecoins and CBDCs can complement each other could be beneficial.

• Coexisting with Tokenized Deposits: Tokenized deposits represent a new form of digital money that bridges traditional banking with blockchain technology, offering potential advantages in programmability and efficiency while maintaining regulatory compliance. They differ from stablecoins, which are typically issued by private companies and may not be directly linked to bank deposits. If successful, tokenized deposits may provide a more regulated alternative to stablecoins that still leverage blockchain technology for efficiency. However, because tokenized deposits are linked to commercial banks, they may face stricter regulatory restrictions on global accessibility and use.

Conclusion

Stablecoins represent a significant innovation poised to reshape the way we think about money and transactions. They bridge gaps in the traditional financial system, enhance accessibility by opening financial services to anyone with internet access, increase efficiency through near-instant transactions, improve transparency with fully backed reserves, and foster innovation by introducing programmability into money. Stablecoins not only improve existing financial processes—such as reducing the cost and time of cross-border payments—but also enable new possibilities like AI agent payments and decentralized finance applications. 

Stablecoins are experiencing rapid growth and possess tremendous market potential. Their transaction volumes are already rivaling traditional payment networks like Visa. With major financial institutions like PayPal, Mastercard, and JPMorgan incorporating stablecoins into their services, projections suggest that stablecoins could approach a market cap of $1 trillion in the coming years.

Addressing these challenges is crucial for stablecoins to realize their full potential. Risks such as regulatory uncertainty, centralization and liquidity risks, geopolitical concerns, stability risks, and security vulnerabilities must be proactively managed. Implementing clear and supportive regulations could foster trust and encourage both institutional and retail participation. Ensuring transparency in reserve holdings and conducting regular audits can help mitigate financial risks. Furthermore, exploring ways to coexist and collaborate with emerging competitors like Central Bank Digital Currencies and Tokenized Deposits can strengthen the ecosystem.

Ultimately, stablecoins offer a glimpse into the rapidly approaching future of money—a future where financial services are more accessible, programmable, efficient, and inclusive.

References

• Acheson, N. (2024, September 10). 'Stablecoins vs. Tokenized Deposits: Why the Differences Matter.' CoinDesk.

• Allaire, Jeremy, and Chris Dixon. "The Money Movement with Jeremy Allaire | Ep 100 | The Web's Next Great Leap | A Conversation with Chris Dixon." The Money Movement Podcast

• Carter, N., et al. (2024, September). “Stablecoins: The Emerging Market Story”. Castle Island Ventures.

• Catalini, C., & Wu, J. (2024, August 6). “The Race to Dominate Stablecoins”. Harvard Business Review.

• Chervinsky, J. (2023, April 19). “Understanding Stablecoins’ Role in Payments and the Need for Legislation”. Written statement, U.S. House Committee on Financial Services.

• Disparte, D. A. (2023, April 19). 'Understanding Stablecoins’ Role in Payments and the Need for Legislation.' Written statement, U.S. House Committee on Financial Services.

• Duong, D. (2024, August 5). “Stablecoins and the New Payments Landscape”. Coinbase Market Intelligence.

• Gusdorf, V., et al. (2024, July 18). 'Growing Popularity of Stablecoins Exposes Investors to Multiple Risks.' Moody's Ratings.

• Kharif, O., & Yang, Y. (2024, February 10). 'Why Crypto Stablecoins Still Worry the Fed.' Bloomberg Markets.

• Taylor, S., & Sheffield, K. (2024, September 23). “Tokenized State of Play in 2024: Stablecoin Payments”. Tokenized Podcast.

Disclaimer

The views and opinions expressed are solely those of the author and do not necessarily reflect those of the author's past or current employers.

This material is for informational purposes only and is not intended to provide legal, tax, financial, or investment advice. Recipients should consult their own advisors before making these types of decisions. The content is based on information from sources believed to be reliable. The author is not responsible for errors, inaccuracies, or omissions of information; nor for the accuracy or authenticity of the information upon which it relies. The author has no responsibility or liability for any decision made or any other acts or omissions in connection with the use of this material.

This is not financial advice, and readers should conduct their own research. No information provided should be construed as an offer to sell, or a solicitation of an offer to buy any securities, assets, cryptocurrencies, or investment vehicles, nor should it be construed as tailored or specific to any reader. All investments involve risks, including possible loss of principal. Investments in cryptocurrencies are highly speculative and can be extremely volatile.