Why Stablecoins Matter
- Neil Mathieson
- 2 days ago
- 4 min read
Updated: 2 days ago
Technology, regulation and integration to mainstream finance expand stablecoin adoption.
Take-Aways
Stablecoins have been established as critical infrastructure in the world of decentralised finance (DEFI) for years.
Stablecoins have under-utilised potential in traditional finance, ‘faster and cheaper’ payments possible soon as large PSPs embrace.
Advances in technology, regulation and innovation are significant pull factors for increased adoption in coming years.
The devaluation of fiat currencies and volatility in traditional asset classes would act as push factors.
Treasury management skills in crypto firms need to improve, regardless of the low risk inherent in stablecoins.
What is a Stablecoin?
Stablecoins are a type of crypto asset. They are specifically designed to provide stable value and are typically pegged to an underlying asset like the US Dollar or a commodity like gold. Unlike other cryptocurrencies, Stablecoins have low volatility.
How big is the Stablecoin market?
Today stablecoin market capitalisation accounts for approximately USD 233bn to the total USD 2.7tn crypto asset markets according to Forbes. Global exchange-listed equities total USD 155tn, and global payment volumes are many multiples of that. Stablecoins are thus niche, but rapidly growing in importance.
What are Stablecoins used for?
At approximately 10yrs old, and combining the advantages of the blockchain with reliability, stablecoins have evolved a range of uses:
Stablecoins as an Investment Asset
Stablecoins grow as an asset class as they become a reliable store of value relative to other assets and fiat currencies (of countries with high inflation or economic instability).
Stablecoins as a Payment Method
Stablecoins are increasingly used to facilitate cross-border payments as they avoid costly currency conversions and slow intermediaries like correspondent banks.
Stablecoins as a Trading Medium
Stablecoins like Tether are a popular liquidity bridge when trading between cryptocurrencies, and between fiat currencies and cryptocurrencies, as they reduce market risk.
Stablecoins as a Loan Collateral
Crypto lending uses Stablecoins both as a lending instrument and collateral.
Stablecoins in eCommerce Payment Processing
Stablecoins are increasingly offered as a settlement option for eCommerce transactions (despite acquirers and gateways being slow to adapt) by firms like Stripe.
What types of Stablecoins are there?
Fiat-collateralized stablecoin
Stablecoin is backed by a reserve of a fiat currency (off-chain), like USD Coin (USDC) and Tether (USDT) which are pegged 1:1 to the US Dollar.
Crypto-collateralized stablecoin
Stablecoin is backed by a reserve of other cryptocurrencies (on-chain), like DAI.
Asset-collateralized stablecoin
Stablecoin is backed by a single asset or basket of assets such as bonds or commodities.
Algorithmic stablecoin
Stablecoin value is maintained through an algorithmic mechanism on a Blockchain.
What are the risks in Stablecoins?
Like any financial asset or medium, there are risks in Stablecoins:
Market Risk in stablecoins
Market risk is low as stablecoins tend to be backed and therefore less prone to price volatility or systemic risks that can affect fiat and cryptocurrencies.
Credit Risk in stablecoins
Credit risk can arise if an issuer or exchange defaults. Question marks exist about some Balance Sheet valuations, and what treasury management skills crypto firms possess.
Collateral Risk in stablecoins
The monetisation of collateral is a complex matter in any default. Stablecoins typically do have proper segregation of funds and well-regulated custodians.
Algorithmic Risk in stablecoins
Digital assets create a wealth of signals; however intense market pressure and simple human error may affect supply and/or stabilisation safeguards.
"strong collateral, transparency, and effective governance are critical for a stablecoin to maintain its peg and protect users against market panic"
Trends in Stablecoin regulation
Regulatory standards, when properly designed and implemented, are important for building trust and giving market players clear guidance required for product development, fundraising and compliance.
The European Union’s MICA was an early high-level framework launched in 2023, and while implementation is ongoing, it has fuelled innovation such as Banking Circles EURI.
Recent announcements in the UK and US on the regulation of crypto assets can be seen as a critical endorsement that will give impetus to mainstream adoption. The US is particularly keen on US dollar-backed stablecoins (globally), with Trump’s crypto czar, Tyler Williams, focused on passing stablecoin legislation early.
Donald Trump's crypto venture, World Liberty Financial, has raised USD 550m from $WLFI token sales backed by US treasuries and dollars, the direction for stablecoins is clear even if the current form creates conflicts of interest.
Trends in Stablecoin innovation
Stablecoins in Payments
Stablecoins are increasingly integrated into eCommerce shopping carts by acquirers like Stripe, who recently acquired Bridge, and into local payment rails where they offer superior speed and liquidity benefits versus traditional methods in markets such as LatAm.
Stablecoins in Digital Wallets
PayPal USD is a stablecoin backed by US dollar deposits, US treasuries, and cash equivalents, issued on Ethereum and converts at 1 PYUSD to 1 USD. PayPal USD can be used for trading, investment or payments withi#in the PayPal ecosystem. Revolut announced plans for a stablecoin in Q4 2024 but details remain unclear.
Stablecoin Technology
In Q4 2024 Visa unveiled their Visa Tokenised Asset Platform (VTAP) for banks to ‘mint, burn, and transfer’ fiat-backed tokens and tokenise deposits. This is significant as it allows financial institutions to access blockchain at scale without vendor risk, while Visa can now offer stablecoins to merchants.
Outlook for Stablecoins
Stablecoins have long been critical to the functioning of lending, borrowing, and trading in Decentralised Finance (DeFi). Advances in blockchain and tokenisation can further increase efficiency and security.
As the crypto economy goes mainstream the use cases for well-designed and managed stablecoins expand, especially in traditional banking and card infrastructures where hidden costs and delays persist (despite 2 decades of fintech!).
Regulation should act as a catalyst for further adoption and innovation. The collective effect of these positive developments, alongside the potential for continued poor performance of many fiat currencies, will push stablecoins to become a standard part of the global financial system.
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