Road to $3.7 trillion stablecoin market is full of obstacles

Bloomberg

The passage of stablecoin legislation in the Senate marks a leap forward for the potential mainstreaming of cryptocurrencies that track the U.S. dollar one-to-one.

Yet there are still big problems to solve before banks and businesses can capitalize on the opportunities that are arising. Now, stablecoins are shifting from their original use as crypto-market poker chips to common mediums of exchange, offering merchants and consumers cheaper and more efficient payment systems.  

Among the hurdles getting in the way of the hype: An uneven regulatory environment between major markets like the U.S. and the European Union that threatens to create compliance risks, as well as gaps in know-your-customer standards that raise concerns about fraud and illicit activity. What's more, the potential proliferation of competing stablecoins from issuers large and small could create complexity that stymies their adoption.   

"As with any new form of value, widespread adoption necessitates regulatory clarity, consistent legal frameworks across jurisdictions and — importantly — interoperability with existing infrastructure and assets," said Tom Zscach, chief innovation officer at Swift, the global bank-messaging cooperative. "Without this last point, new assets just risk creating additional fragmentation in an already complex financial ecosystem."

The eye-popping success of stablecoin issuer Circle Internet Group's initial public offering — its shares are trading at about five times their offering price less than two weeks later — speaks to the optimism surrounding the potential growth to be found in this once-obscure corner of the crypto market. Meanwhile, financial giants including PayPal, Banco Santander and Deutsche Bank are among those who have recently explored or already entered the space, while others like Visa and Stripe have adapted their existing infrastructure to be stablecoin-friendly. Even President Donald Trump has launched a stablecoin via his family's venture World Liberty Financial. 

For merchants and other businesses, the advantages of using the tokens could be significant: lower transaction costs, faster payments and 24/7 availability. Banks and fintechs are not the only ones taking notice. Amazon.com and Walmart are among large multinational companies that have recently discussed issuing their own stablecoins in the U.S., the Wall Street Journal reported last week, citing unidentified people familiar with the matter. 

It all could lead to an explosion of growth in the sector. The world's supply of stablecoins could swell to as high as $3.7 trillion by 2030 if growing integration of digital assets into traditional finance and favorable macroeconomic conditions continue, Citigroup analysts said in an April report. But there's a caveat to that prediction. Should risks like delayed regulations, fraud and security concerns go unmitigated, Citi estimated the figure could be closer to $500 billion, which nonetheless is still about double what it is today. 

While the sector has already rapidly grown in popularity, stablecoins are still largely used for transactions related to the cryptocurrency market rather than business payments. The total volume of all stablecoin transactions was nearly $4 trillion in February, according to data compiled by Allium Labs and Visa. Yet only $6 billion in stablecoin transactions categorized as payments were recorded that month, an analysis of data collated by Artemis, Castle Island Ventures and Dragonfly Capital showed.

Lower fees and faster

The use case for payments has started to gain traction, even before U.S. legislation officially goes into the books. Shadeform AI, a San Francisco-based startup running a marketplace for providers of artificial intelligence technology, started accepting stablecoins as a payment method in February, facilitated by its existing payments processing partner Stripe. 

Since then, Shadeform has seen transaction cost savings of up to 70% when a customer chooses to pay using Circle's stablecoin USDC, Chief Technology Officer Ronald Ding said. At sticker prices, Stripe charges 2.9% for payments using credit cards in the U.S., plus a small flat fee, with an added 1.5% on top if the customer is paying with an international card. While Automated Clearing House payments and wire transfers can be cheaper than credit cards, those transactions can take up to a week to clear. 

For stablecoin payments, that Stripe fee drops to 1.5% — and the cash arrives instantly. As a result, customers paying in USDC don't have to wait for the check to clear before Shadeform can give them access to the computing power they've bought, and Shadeform isn't exposed to potential chargebacks, Ding said. 

"Being able to save the difference, in certain cases, can save us a lot more on the actual profit that we're making," he said.

Companies are also finding stablecoins useful for streamlining payments to workers around the world. 

Agility Writer, an AI content software business based in Malaysia, started using stablecoins after it lost a developer in Argentina because fees for traditional payment methods were too costly and took too long to clear. Now about 30% of the company's external payments go through USDC, according to CEO Adam Yong, including those made to some of its own software providers. 

"What convinced me was seeing how much smoother our operations run when we're not waiting on bank transfers or dealing with currency conversion headaches," Yong said over email. 

Stablecoins are also becoming a practical payment solution for companies with suppliers in areas with limited access to traditional banking services. Win Win Coffee, a Philadelphia-based merchant, has been testing out PayPal's PYUSD stablecoin and is considering using it to pay for coffee from a farmers' cooperative in Colombia. 

"A lot of people need cash, and a lot of these producers are unbanked. When they're living in areas where banks aren't very close by, stablecoin helps," said Matt Nam, co-founder of Win Win. "If we're doing things more securely and we're sending payments faster, that helps us to have some competitive advantage."

Low liquidity

Still, stablecoins remain cumbersome for very large payments due to relatively low liquidity compared with the vast volumes handled by global banks each day. JPMorganChase alone processes about $10 trillion in daily transactions.

"Where it gets clunky is in the hundred of millions of dollars," said Chris Harmse, co-founder of stablecoin payments company BVNK. "If you are moving interbank-sized flows, it will get clunky." This is likely to change as stablecoins gain further acceptance by existing payment processors, he added.

Some jurisdictions like the European Union, Singapore and Hong Kong now have rules for stablecoins, but major players like the U.S. and the U.K. aren't expected to have regulation fully implemented for months or even years to come. That uncertainty currently makes it harder for businesses weighing whether to use them for payments.

"Firms are kind of stuck because 18 months, from a policymaking perspective, is incredibly fast, almost overly ambitious," said Laura Navaratnam, U.K. policy lead at the Crypto Council for Innovation, speaking on a panel organized by Stripe in London last month. "But from a commercial perspective, it may as well be a decade away."

As a result, it's hard for businesses to know whether they're in compliance with existing rules in areas like KYC checks and anti-money-laundering measures. Operating on brand-new and complex technology means businesses also have to get up to speed on how to use some services, or spend time and money converting their back-end systems to work with new suppliers. 

And while cross-border payments is a compelling use case for stablecoins, liquidity is limited for non-dollar tokens since most of the $250 billion stablecoin market is denominated in the U.S. currency. This makes it hard to settle payments efficiently in local currencies.

German manufacturing giant Siemens is not testing or considering stablecoins, in part because they still "bring a number of structural disadvantages," Heiko Nix, the company's global head of cash management and payments, said. These include currency conversion steps and FX risk, especially when stablecoins are U.S. dollar-pegged and used in a euro environment, Nix said.

Instead, the company has been using JPMorgan's blockchain-based payment network Kinexys Digital Payments for two years, currently processing about 1,000 payments a month. "We see no added value in stablecoins compared to tokenized commercial bank money, especially for industrial or treasury use," Nix said. 

Tokenized deposits are typically digital tokens issued by regulated banks that represent claims on bank deposits. They are in essence bank account balances represented on a blockchain.

"Tokenized commercial bank money offers all technical benefits — 24/7 availability, programmability, atomic settlement — while retaining the legal and accounting features of conventional cash," Nix said. "It integrates seamlessly into our systems without added complexity," he added.

Regulatory uncertainty

Today, compliance with taxes and local rules are taking priority for businesses over speed or cost efficiency, according to Gabriele Zuliani, chief revenue officer for crypto exchange Bitso's business division. "Unless you provide the clarity on these two fundamental pieces — they may love the technology and the speed of the settlement and everything — but there is a huge barrier for adoption because they don't know if they're getting themselves into trouble," said Zuliani, speaking at the Stripe event in London.

Still, issuers like PayPal remain positive that stablecoins will get their moment. 

"It's not a silver bullet, and I think people sometimes get a little bit impatient," May Zabaneh, PayPal's vice president of product for digital currencies and remittances, said. "These are things that we have to work hard at."