Digital payments have been around for a while – whether it’s swiping a debit card, using Apple Pay, or sending money through apps like Venmo or Zelle. But behind the scenes, all of those transactions are layered on top of the traditional banking system. Stablecoins might change that.
Stablecoins operate outside of the traditional payment system offering a fundamentally different way to move money.
Think of a stablecoin like a digital dollar that can be sent anywhere in the world instantly, even on weekends or after hours, without waiting for a bank to approve the transfer. They’re designed to keep a stable value, commonly tied 1:1 to the U.S. dollar, and move across blockchain networks instead of having to go through a bank. For most American consumers using Venmo or Zelle, the immediate impact of stablecoins may appear minimal. But the implications for stablecoins in the world of investments are far broader.
Looking at stablecoins now is important because the U.S. Senate recently passed the GENIUS Act. The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act still needs to get approved by the House of Representatives, assuming they don’t try to pass their own version, but it’s a big win for President Trump and crypto advocates more broadly. Clear federal rules and regulations for issuing stablecoins will massively boost credibility and allow America’s largest enterprises to participate and pursue technological innovations that could improve customer retention, reduce costs, and streamline processes and payments.
The Simple Allure Of Stablecoins
Boiled down, stablecoins are simple digital assets pegged to traditional fiat currencies. Think of them as a blend between bitcoin and US dollars. They are designed to combine the speed and transparency of blockchain technology with the price stability of an asset like US dollars. The first major stablecoin from Tether launched in 2014 with a simple premise: hold one dollar in reserves for every token issued. It soon became indispensable to crypto traders who needed a stable medium of exchange for buying and selling different cryptocurrencies that didn’t support funding with US dollars.
But stablecoins faced a gut-wrenching test in 2022 with the collapse of TerraUSD (UST), a stablecoin designed to maintain its peg through complex incentives rather than being backed by US dollar reserves. When confidence wavered and investors sold off, its value plummeted to zero – erasing over $40 billion in wealth and drawing the attention of regulators. It quickly became clear that these so-called stablecoins weren’t as stable as they sounded.
The GENIUS Act now marks a clear signal that stablecoins are here to stay as it lays the foundation for how they can operate within the U.S. financial system. At the heart of the bill is a requirement that all stablecoins be fully backed by cash or short-term U.S. Treasuries on a 1:1 basis. This ensures that for every stablecoin token issued, there is a corresponding dollar in safe, liquid assets. The bill also mandates monthly reserve disclosures and annual independent audits to ensure transparency. Simply put, the GENIUS Act is here to make sure that stablecoins that look like digital dollars end up behaving like a digital dollars.
Stablecoins are also primed for a moment in the spotlight because of the technological advancements we’ve made over the past few decades. The computing power required to operate a stablecoin operation used to be significant, but today’s technology is built different. Everyone has a smartphone and a digital banking app, and the data centers loaded with Nvidia or AMD chips can easily handle the computing requirements.
Stablecoin Implications for Banks and the Treasury Market
Pegging stablecoins 1:1 to US dollars means the Treasury market just added a new purchaser – the stablecoin issuer. If these issuers grow like we expect them to grow, they could become a meaningful source of demand for treasuries, helping to offset a reduction in demand for treasuries from foreign central banks. A 1 – 1 ratio for a source of liquidity is exceptionally demanding. The impact on treasury flows are already proving significant – Tether, the largest stablecoin issuer in the world right now, owns more Treasuries than Germany.
However, these stablecoin issuers don’t exist completely outside the current financial system. Rather, stablecoin issuers will need to work closely with US banks as they’ll need a custodian of their reserve assets. The inference here is that this doesn’t change who is actually buying and holding the US Treasuries, the big banks in this case, but rather, this shifts the underlying deposit bases of the banks. Large deposit sizes can be good for banks, but the concentration of deposits with a few customers – the stablecoin issuers – can actually make the banks fragile. From a bank liquidity perspective, retail capital is a much more stable source of funding, typically FDIC insured, and less likely to be transferred out. Stablecoin assets are going to be concentrated, and unfortunately could be vulnerable to being withdrawn.
If stablecoins start to offer a yield, they could drive even more significant demand. Money markets and high yield savings accounts often come with liquidity provisions and restrictions. Highly liquid and transferable stablecoins may start to supplant some of the base building blocks and revenue drivers of the existing financial system. Banks recognize the risk to their business models – many technology oriented banks are exploring issuing their own stablecoins to stay ahead of the curve. For example, Fiserv Inc. (FI) has indicated it plans to launch its own stablecoin and platform for its 3,000+ smaller sized bank clients.
Still Lots to Unravel for Merchants
Clarity around regulation opens the door for consumer brands to issue stablecoins with confidence, knowing they are operating under a recognized legal framework. This is especially true in the world of payments. Every merchant you can think of will be looking at stablecoins as a way to decrease their transaction fees and optimize their working capital. Faster settlement and lower transaction costs, especially when sending cross-border payments to suppliers or employees, could save companies like Walmart and Amazon billions of dollars each year.
Two likely avenues for merchants are that they either become issuers of their own stablecoins or allow payments using stablecoins issued by a third party like the big banks, Circle (CRCL), or Tether.
Today’s process for completing a credit card transaction requires a payment gateway to route credit card information, a card network like Visa or Mastercard to authorize the transaction, and the issuing and acquiring banks working together to send the funds. Interchange and processing fees can eat up into the merchant’s bottom line, and the extra day or two for settlement is a thorn in the sides of CFOs trying to manage cash inflows and outflows.
From a capital efficiency perspective, wholesalers and retailers have to explore how a new medium of exchange that works instantly and offers absolute transparency, like stablecoins, can bring down costs when it comes to receiving payments, paying employees and suppliers, and purchasing inventory. Instant settlement on the blockchain for payments and cutting out clearinghouses and other intermediaries is a massive undertaking. It’s no surprise that Visa and Mastercard are also pursuing innovations in the stablecoin space.
Additionally, issuing branded stablecoins opens the door for enhanced loyalty programs and stronger customer retention. Because stablecoin issuers are not obligated to pay out interest they earn on reserves, this can enable merchants to essentially self-fund discounts and customer rewards. An Amazon or Walmart stablecoin could create an entirely new customer experience!
International Stablecoin Demand Will Be Significant
While the use case for U.S. consumers comes from driving efficiencies, enabling international access to stablecoins and in turn the stability of U.S. dollars, is an equally large opportunity. This is important both in terms of sending money abroad, and with regards to localized spending. Sending money internationally can take days and incur fees as high as 5–10%, but stablecoins can execute the same transaction in minutes at a fraction of the cost, using public blockchain rails to route payments. This payment route is especially meaningful in developing countries, where access to U.S. dollars can serve as a hedge against local currency volatility and isn’t necessarily easy to obtain.
Addressing local currency volatility is a huge opportunity for stablecoins. With just a smartphone and an internet connection, individuals in emerging economies can hold dollar-denominated savings without having to open a bank account in the United States. They can sidestep the fees from locally domiciled banks and easily access a stable vehicle that holds its value for the long term. This is especially important for international freelancers working for American domiciled consulting or technology companies, and for immigrants sending money back to their home country to support their families.
What Else Can Stablecoins Do?
One of the more revolutionary ideas enabled by stablecoins has been programmable money. Through smart contracts, users can build financial logic into payments – delayed transfers, conditional payments, or micropayments sent by the second. These features are basically impossible to replicate in the traditional banking system, but a company like Coinbase (COIN) enables smart contract interactions directly through its wallet and app.
Importantly, the traditional payment networks, like Visa (V) and Mastercard (MA) have their sights set on finding a way to adapt with stablecoins. The benefits of these payment rails for merchants when it comes to security and settling customer disputes is still extremely valuable. Visa and Mastercard can essentially allow a customer and their digital wallet provider to pay using a stablecoin or other digital currency, but still have the merchant receive fiat currency at the end of the day. Companies like Paxos and Anchorage sit right in the middle of the exchange to custody the stablecoins and then allow Visa to send a fiat currency payment. Don’t count these corporate behemoths out – their scale and influence on the payments industry is immense.
Stablecoins For The Future
While stablecoins have entered the limelight as of late, it’s worth pointing out that we’re still in the very early stages of their adoption. The current market value of all stablecoins out there is about $250 billion – a mere speck when compared to the almost $40 trillion supply of US dollars. Becoming the new digital plumbing of our financial system is no easy feat and every stablecoin is going up against payment network giants that have built our payment infrastructure from the ground up.
If broader adoption picks up, investors should keep tabs on how stablecoins impact banks and the Treasury market. As big brands and traditional payment networks attempt to coexist with stablecoins, remember that the first attempt likely won’t be the best, and it surely won’t be the last. Even if stablecoins don’t make it mainstream, the technology is here to stay.