Significant growth: A woman passes a bitcoin monument in Ilopango, El Salvador. Unlike bitcoin and other tokens prone to price volatility, the use of stablecoins as actual currencies in transactions is gaining popularity around the world. — Reuters
NEW YORK: While bitcoin’s surge above US$100,000 captivated the headlines in 2024, many financial firms are more focused this year on a different type of cryptocurrency whose price is never meant to rise, or fall for that matter.
Mainstream players such as Visa, PayPal Holdings Inc, Stripe Inc and others are making investments in projects involving stablecoins, which are crypto tokens typically designed to be pegged to the value of the US dollar or another traditional currency.
This sub-sector of the digital asset space has proven to be a lucrative business, now that issuers are able to invest reserves backing stablecoins in short-term US treasuries with attractive yields.
And unlike bitcoin and other tokens prone to price volatility, the use of stablecoins as actual currencies in transactions is gaining popularity around the world.
“We’ve seen significant growth in demand from some of the largest companies in the world that participate in under-served payment verticals like global contractor and employee payouts, trade finance and remittance,” said Rob Hadick, a general partner at digital asset venture firm Dragonfly.
“There is both significant demand from end users in receiving US dollars, which can be near impossible using non-stablecoin rails, but also from senders who want to bypass the correspondent banking system which can be slow, costly and have high failure rates.”
The coming year is poised to see competition ramp up in stablecoins, which collectively have grown to about US$205bil in market capitalisation, according to tracker DeFiLlama.
While Tether Holdings Ltd’s USDT extended its lead in the market this year, reaching a current market capitalisation of about US$140bil, headwinds to its dominance are emerging.
The European Union’s Markets in Cryptoassets rules require all stablecoins listed on centralised exchanges to be issued by an entity with a so-called e-money license. Circle Internet Financial Ltd, Tether’s main competitor, received such a permit in July.
Tether has yet to apply for one, meaning the token risks being delisted by exchanges. Several crypto exchanges operating in the European Union have already delisted USDT.
Meanwhile, several US companies are getting into the business.
Visa launched a new platform called Visa Tokenised Asset Platform for banks to issue stablecoins and other tokens.
The financial technology (fintech) company Revolut is considering issuing its own stablecoin, Bloomberg reported in September.
Stripe, the payments company founded by billionaire brothers Patrick and John Collison, has acquired financial technology (fintech) platform Bridge, which specialises in stablecoin transactions.
PayPal already has its own dollar-tracking cryptocurrency called PYUSD that was created in a collaboration with New York-based Paxos.
Stablecoin “issuance is an attractive business model today,” said Augustus Ilag, investment partner and head of Asia at CMT Digital.
“Many players have woken up to just how attractive this can be, off the back of the success of companies like Circle and Tether.
By launching stablecoins, companies gain a new revenue stream, a compelling addition for many businesses looking to diversify their offerings.”
Because stablecoins are running on blockchains, it reduces the transaction costs and improves overall efficiency to move money, added Ilag.
Johann Kerbrat, crypto general manager at Robinhood, said his company is working with stablecoin issuer Paxos to be part of an open network for stablecoin usage called Global Dollar Network.
“We have a lot of money moving around the platform, like between Robinhood and market makers or other entities,” he said “So you can see that the stablecoins have tonnes of value.”
Of course, stablecoins are not without risks.
TerraUSD, which was an algorithmic stablecoin that used a parallel floating rate currency, Luna, to keep its fixed US$1 value, failed in spectacular fashion in 2022.
Its collapse set up a broader selloff that wiped US$200bil from crypto’s total market value. Several digital-asset companies later also went bankrupt partly because of Terra’s blowup.
More than two years later, there’s currently no unified federal regulatory regime for stablecoins in the United States, despite efforts by lawmakers and regulators to push for a comprehensive framework.
In the European Union, however, the new MiCA rules to oversee the crypto industry have set clear guidance on stablecoin regulations and led to a rush of adoption by Europe-based companies and startups.
“European governments want fintechs to be more like banks and have Basel-like requirements, which basically kills them relative to other banks since fintechs are like narrow banks,” said Tarun Chitra, general partner of venture fund Robot Ventures.
“Stablecoins avoid many of those issues, which also make the process automated.”
With the crypto markets enjoying a state of euphoria after Donald Trump’s victory in the US election, many are optimistic that the industry will flourish further in 2025.
Stablecoins may offer the path of least resistance for non-crypto companies looking to get in on the action with digital assets.
“Stablecoins allow them to get into crypto without touching the risky aspects of securities and scammy parts,” said Anna Yuan, founder of stablecoin project Perena. — Bloomberg
