This week, payments fintech Stripe made the biggest acquisition in its history, paying $1.1B for Bridge, which creates software that allows companies to move, issue, store, and accept stablecoins. Given the size of the acquisition, it’s clear that Stripe is making a big bet on the future of stablecoins. Stablecoins have already emerged as one of blockchain’s “killer apps,” collectively accounting for $172B in aggregate market cap, with the largest stablecoin, Tether (USDT), being the third largest digital asset in the entire industry. But what does the success of stablecoins say about the digital asset industry and blockchain technology more broadly? By looking at their benefits and drawbacks, their success might reveal some important aspects of the industry.
Decentralization Has Mattered Little
For all the lip service the industry pays to the concept to “decentralization,” it seems to be the first attribute of blockchain technology that goes out the window when other motives are at play. Fair enough. Decentralization is the hardest metric to quantify and often difficult to assess from the outside. Rest assured though that just because something is on a blockchain does not mean it is decentralized.
For the most popular style of stablecoin, off-chain reserve backed, like USDT or USDC, there is little aspect of decentralization. These are digital assets issued by a central entity in a 1:1 ratio (hopefully) with dollars held in a bank account. Coins can be frozen, minted, and withdrawn from circulation, all by the issuer, without input from any outside forces. For stablecoins, decentralization might be a bug rather than a feature.
Trading is the Pre-Eminent Use Case
To understand why stablecoins have been so popular, a bit of industry history is in order. In the early days, the hardest thing for crypto investors to do was to convert their fiat into crypto, oftentimes resorting to risky methods, technologies, or services to do so. The reason was that it was extremely difficult for crypto exchanges to obtain bank relationships that would allow investors to send fiat via an ACH transfer, wire, or similar technology. As a result, many crypto exchanges emerged as “crypto only,” (RIP Cryptsy) and the most popular quote currency was bitcoin (so XRP-BTC or LTC-BTC trading pairs). “Crypto only” exchanges allowed users to send crypto to their trading accounts, but only after their fiat had been converted in some other manner. One of the reasons Coinbase became the biggest US exchange (well “service” before GDAX launched) was that it was able to obtain and maintain a banking relationship, which allowed for an easier ingress into the crypto ecosystem.
Enter Tether, which performed that third-party money exchange service for users, issuing them a digital token, USDT, in exchange for their fiat. This was a great utility for both users and exchanges. Now there was a digital token that stood in for the USD, with a “stablish” value, that could act as the quote currency on crypto only exchanges that couldn’t get banking relationships, including many in Asia, a hub of crypto trading. Even today there’s a stark contrast of trading pairs on east vs west exchanges – Binance, OKX (OKEx), HTX (Huobi), and Bybit are all still mostly “crypto only” exchanges, while Coinbase, Kraken, and Gemini are fiat (USD) exchanges.
What’s the highest volume traded cryptocurrency today? Tether by a long shot, with 2x the monthly volume of bitcoin and nearly 4x that of ether.
The USD is Still King
The interesting thing about stablecoins is that they are denominated in nearly every major fiat currency, USD, EUR, CNY, GBP, CHF, JPY, and INR. None of the other fiat currencies, however, even come close to matching the size of USD stablecoins. While there has been much pontification about the USD loss of preeminence in the world of finance and trade (there doesn’t seem to be any evidence to suggest that’s true), the USD dominance is stablecoins far surpasses anything we see in the real world, accounting for ~99.8% of the stablecoin market. The crypto community loves to dunk on fiat currencies and it may just be that the USD is the best house on the worst block, but to say that crypto users love the USD would be an understatement.
Clarity Was Not the Panacea It Was Expected to Be
It has been over 7 years since some members of the crypto community began to publicly question Tether’s operations and backing. What has Tether done in those 7 years since those questions were first asked, a time that includes fines paid to CFTC and NYAG? Explode in popularity. It is not only essential to the functioning of many crypto exchanges, but it has emerged as one of the largest holders of US government debt, enshrining itself as systematically important to both the digital asset industry and the US Treasury.
In 2018 – 2019 there was an industry move to supplant USDT as the pre-eminent stablecoin. It was believed that better clarity, through monthly asset and liability attestations performed by third parties, would be favored by users. Hence, we had the launch of USDC, GUSD, BUSD, and PAX, to name a few. While USDT would go on to lose some share in the stablecoin market, definitionally it had to with nearly the entire market to itself (except for DAI issued by MakerDAO), the challengers were never able to unseat USDT. Either USDT’s grip on the market was too strong, or the clarity benefits brought by other off-chain reserve-style tokens weren’t great enough (or worse, were a liability for some stablecoin users) for users to make the switch.
Payments an Enticing Use Case
While volatile cryptocurrencies like bitcoin have always offered the promise of being used for commerce, cross-border payments, and other medium-of-exchange applications, for technical (speed) and psychological reasons (hindsight bias) that use case has largely taken a backseat to the store of value/digital gold use case. But it is these applications where stablecoins could potentially shine. Certainly, the ability to lower credit card processing fees, which could eat up an entire merchant’s margin, is appealing from the merchant’s side. From the payor’s side, there could be benefits as well. Speed of money movement, ability to transact 24/7, and lower-cost international transactions are all things that stablecoins enable, benefiting those who send stablecoins.
Stablecoins Inherit the US's Policies
One downside is that these USD stablecoins all inherit the economic, monetary, fiscal, and political policies of the US. That may be too much for those who have opted out of the regime entirely for something like bitcoin, but for many that is an improvement on either their current home country fiat currency, banking system, or both.
While the Federal Reserve, US Treasury, and politicians have given a tepid response to an official US CBDC (central bank digital currency), perhaps they don’t need to do more. The current digital asset ecosystem seems to be promoting the USD just fine. Given the overwhelming response for USD stablecoins over any other fiat currency, maybe the reality is that if we broke down the fiat silos created by national borders, the USD is underappreciated, instead of overappreciated as many economic and financial pundits would argue.
