Stablecoins have proved to be a potentially transformative force since the first stablecoin was minted over a decade ago. They have also undoubtedly become the clearest product market fit in crypto.
The total stablecoin in circulation has now exploded to over $160 billion, while more than 20 million unique wallets transact with stablecoins on public blockchains every month. They are a wake-up call to the big financial institutions. In fact, JPMorgan Chase, Mastercard, PayPal, and VISA have all adopted or become the issuers of their stablecoins. Stripe recently bought Bridge, a two-and-a-half-year-old company using stablecoins to make global money transfer easier.
Stablecoins The Steady Force Driving Innovation
Stablecoins have become a hot topic, and their use is becoming more popular worldwide. They could reshape the landscape of payments as we know it. Lebanon has demonstrated the usability of stablecoins in a nation where the traditional banking system is struggling. They have adopted US dollar-based stablecoins successfully. 
The arrival of Bitcoin in 2008 and the foundational distributed ledger technology have moved central banks worldwide to consider digital monetary systems to different extents. Some nations have started introducing central bank digital currencies (CBDCs). The Bank of England was the first to initiate such a move, investigating the possibility of its CBDC in 2014.
The Digital Euro
The European Central Bank (ECB) is exploring a concept of CBDC called the Digital Euro, also known as “digital cash.” It is proposed to provide a new means of digital transactions issued and maintained by the ECB. It would give users direct access to central bank money. The essence is to modernize the payment system and reduce the dominance of giants like PayPal, Visa, and Mastercard. However, the question on the lips of many is: Is it necessary? Especially when there are already efficient digital payment methods, including credit cards.
Stablecoins A Unique Payment System
Stablecoins will reverse the traditional flow of payment networks. Currently, supporting payments in any given country involves building local banking relationships with and/or integrating into local payment channels, one jurisdiction at a time in traditional finance. Even for the largest financial institutions, trying to connect with consumers and businesses in over 150 countries is a herculean task. And that’s not even including costs and effort for ongoing maintenance of infrastructure and relationships.
Stablecoins invert this model. Instead of having each institution need to integrate with systems on a jurisdiction by jurisdiction basis, every country can integrate with one global platform. The reason stablecoins can operate on open blockchain networks and have instant worldwide reach by default is that they operate on open blockchain networks. By integrating stablecoin technology any financial institution or business, at once, becomes capable of sending and receiving stablecoin from anyone with a compatible digital wallet.
Lowering the Entry Point
Since stablecoins also dramatically lower the bar to building companies able to interact with global payment networks, even small startups can now offer cross border transactions. An excellent example is Bridge. The company allows for any company to leverage its APIs using stablecoins, which allow you to move money around the world in minutes, not days, and for a fraction of the cost we were charging for legacy offerings.
Of course, converting fiat currencies to and from stablecoins still requires some level of local financial infrastructure and other benefits that local institutions provide. But the complex coordination connecting hundreds of different systems, has been abstracted away to a global, interoperable layer.
Enhanced Efficiency
They also allow a step change improvement in settlement efficiency and risk management. By default, transactions on traditional payment networks are batched and settled at the end of each business day. What this means is that there is a huge counterparty risk as there could be a delay of hours, or even days between a transaction is originated and finally settled.
In contrast, stablecoins can be settled near real time at virtually no cost. Reduced counterparty risk and working capital requirements – similar to moving from mid-20th Century retail credit arrangements with monthly or quarterly clearing to 21st-century credit cards with almost instantaneous clearing.
These implications for capital efficiency are profound. Prior to this, businesses that needed to keep large cash reserves to manage settlement risk could now function on much better balance sheets. By doing this, it frees up capital that can then be reinvested, or paid back to shareholders. It also obliterates many of the arcane and lucrative business models that rely on taking advantage of settlement delays, including some float-based revenues which exist only as a tax on market participants.
The Path Forward
In addition to looking forward to the benefits of stablecoins, we need to be realistic about the potential tradeoffs. They are hugely beneficial for combating financial crime due to the level of financial transparency they facilitate, but they do come with huge privacy concerns if architected without those concerns in mind. Promising projects are already building solutions to this delicate balance of privacy and compliance. We are very excited about this development area as active players and investors in crypto.
Although stablecoins can improve efficiency and reduce cost in many situations, they also break up existing business models. The real and permanent transition for companies who make money from friction in cross border payments or float income is now upon them. They need to adapt or vanish. A form of creative destruction caused short-term dislocations in the financial sector. Ultimately, the English economy benefited from this in the long run. This was also the case during other great epochal shifts in how money was invested, moved, and stored.
Final Thoughts
Stablecoins are used in products like cross border trade finance or digital content payments of micropayments—product categories that it would be hard to imagine in legacy systems. The stablecoin revolution, however, is still in its pants. This technology will have to mature and be more widely adopted to remake global finance in a less closed, more efficient, and more inclusive manner.
However, they pose quite big challenges and just as big opportunities. The shape of how we navigate through this transition will define the geoeconomic relations of the world and the future of money. As these developments in digital currency occur, societies, policymakers, and reference associations must verify and align these developments with their values, protect their rights, and contribute positively to the financial ecosystem.
