Who will drive stablecoin innovation in 2024?

December 29, 2023 11:12 AM

The brokerage firm Bernstein recently projected that the stablecoin market will hit $3 trillion by 2028. That's a massive number, particularly considering it's a $130 billion market at the end of December 2023.

Stablecoins are a type of cryptocurrency that's pegged to a "stable" traditional currency, such as the U.S. dollar, to avoid the volatility of other cryptocurrencies for investors. And the card brands are keen to see if people will use stablecoins to buy things. But in the past few years, stablecoins have made as many bad headlines as good.

What's changing in the new year is that stablecoins are expected to integrate with consumer platforms. That would lead to massive growth, since these consumer platforms will make stablecoins more available outside of the traditional world of crypto investors, according to Bernstein; the firm did not return a request for comment by deadline.

Payments

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Mainstream payment companies such as PayPal are increasing their exposure to stablecoins, while crypto companies such as Circle are building partnerships with firms that can provide scale.

For example, Circle's latest roster of partners includes firms with millions of users, including Asian ride-share firm Grab and e-commerce firm Shopify.

"The trends are showing that stablecoins are not just a fad, but an important tool in both traditional financial services and distributed finance," said James Hiester, a principal consultant at Capco.

Here are some of the players that will influence the next chapter in the stablecoin market.

Circle CEO Jeremy Allaire

Circle

Circle's USDC is the second-largest stablecoin, with a capitalization of about $24 billion (Tether is about $90 billion) and the firm is preparing for a possible IPO in 2024 that could influence competitive moves from other firms.

"Stablecoin networks will become some of the most important financial structures in the world," said Jeremy Allaire, CEO of Circle, during a recent Circle virtual conference.

Circle is like a pied piper for stablecoins, said Allaire, discussing his firm's aggressive plans to pair its USDC stablecoin with other products via a slew of partnerships.

"Stablecoins are a cog in the internet financial system … a utility that people can plug into," he said at the conference.

Circle recently launched a virtual stablecoin card that can be used at merchants on Mastercard's network. Circle partnered with the card network and Australian fintech Stables to offer the product in Australia, with plans to launch in Europe, Asia and other markets in the coming year.

"Looking at USDC and some of the other value propositions coming from Circle, a U.S. company that may go public, it can create a lot of trust in the stablecoin market," Hiester said.

Circle is additionally developing stablecoin use cases for Web3, which refers to blockchain-powered internet development. Circle's Web3 project will enable developers to access coding that can build smart contracts, or programming that triggers a transaction under specific conditions. Circle is attempting to use this tech to power NFTs, stablecoins, cryptocurrencies and other blockchain-powered products.

"It's a huge undertaking," Allaire said. "Any startup internet company can build Web3 apps for user-controlled wallets. There's a lot more to come here."

David Paul Morris/Bloomberg

PayPal

PayPal in August launched PayPal USD, which is backed by U.S. dollars, short-term U.S. Treasuries and similar cash equivalents.

PayPal's one of the first non-crypto-adjacent firms to release a stablecoin following the failure of the Diem stablecoin, which was associated with Facebook and later Silvergate Bank. Silvergate folded in early 2023, partly due to its exposure to crypto firms.

PayPal can potentially differentiate itself through its large user base, core competency as a payment company and its existing crypto activities, which include enabling consumers to buy, sell and hold crypto. Most stablecoins do not have a preexisting non-crypto audience to which they can cross-sell other financial products.

PayPal's stablecoin has gotten off to a relatively slow start but it has picked up steam with firms such as crypto payment company BitPay, gaming firm Xsolla and travel site Zeni.com.

PYUSD had a market capitalization of about $44 million at launch, and currently has a market cap of about $160 million, which is still well below the largest stablecoins such as Tether and USDC — but also an expansion of almost 300% in less than half a year.

While stablecoins have emerged as a hedge against the volatility of other cryptocurrencies and as a way to aid cross-border transactions, a market for direct payments at retailers will take longer to develop, according to Hiester. "For most everyday transactions, users are accustomed to cards. Credit cards are more or less instant and have relatively low fees," he said.

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Ripple

Ripple is developing stablecoins and central bank digital currencies in several countries, including a recent project with the Pacific island nation Palau to issue a government-affiliated stablecoin. The XRP Ledger is issuing the stablecoin, which is called PSC and is backed by U.S. dollars.

An initial report says users in a pilot program successfully made payments with the stablecoin at local merchants. The merchants redeemed the coin in U.S. dollars. The government plans to make the stablecoin available to the entire country.

Ripple hopes the success in Palau can be replicated elsewhere.

For emerging economies, stablecoins have contributed to a rapid "cryptoization" driven by economic instability and rampant inflation, said Pegah Soltani, head of payments products at Ripple, in an email. "Stablecoins have the unique opportunity to grow exponentially in 2024 due to their underlying utility," Soltani said, adding that economic turbulence in emerging markets will be a contributing factor as firms look for a safe harbor from volatility.

Deutsche Bank

Deutsche Bank in late December announced it is developing a euro-backed stablecoin. A venture called AllUnity, the project is a collaboration with the bank, crypto investment firm Galaxy Digital and liquidity firm Flow Traders.

The stablecoin will launch in the next 18 months and will be regulated by German financial regulator Bafin.

Potential uses include payments for businesses that offer Internet of Things-powered services, supply-chain transactions and consumer payments.

MoneyGram

Part of MoneyGram's digital and product diversification strategy includes a crypto wallet on the Stellar blockchain network, a product it plans to launch in early 2024. The wallet will support instant payments and transfers between digital currencies and traditional money.

In an earlier interview, MoneyGram CEO Alex Homes said the use of a blockchain or stablecoin wallet provides more flexibility for consumers to manage currency fluctuations.

"There has been a lot of experimentation and ideation about how to create a different way to enable people to send money back home," Holmes said, adding that the use of a blockchain or a stablecoin wallet to store funds enables people to better manage currency fluctuations.

JPMorgan Chase

JPMorgan introduced programmable payments in November for clients that use the JPM Coin digital currency.

Programmable payments use smart contracts to automatically execute payments based on an "if-this-then-that" interface. The deployment is a business-to-business use case, with the bank envisioning it for supply-chain payments and other large transactions. Digital currencies such as stablecoins and central bank digital currencies can be used to speed large B-to-B payments, particularly between clients in different countries.

"Money is electronic today, but what is missing is programmability," said Naveen Mallela, head of coin systems for JPMorgan, in an earlier interview. "That is the holy grail."

Regulators

The biggest influence on stablecoins in the next year will likely come from regulators and politicians instead of companies. The lack of regulations can in theory slow stablecoin adoption, since the rules are not totally clear and can differ from one state to another.

Several major government figures say they want stablecoin regulation, but in the U.S. it's moving slowly. Federal Reserve Vice Chair for Supervision Michael Barr said in September that he is "deeply concerned" about unregulated stablecoins, saying the proliferation of stablecoins poses a risk to financial stability and the U.S. payments system. Fed Chair Jerome Powell also wants the Fed to oversee stablecoins. Stablecoin legislation that would set federal rules to govern stablecoins has moved slowly, hampered by disagreements over how the federal government would regulate state-licensed stablecoins.

The European Union has developed rules that are expected to go into effect in 2024. Stablecoin issuers will be required to be licensed in at least one EU country, and be able to demonstrate an ability to manage redemptions and have sound governance.

The rules are designed to quell concerns about the reserves backing the stablecoins. While stablecoins are marketed as having a 1:1 backing by an established currency such as the U.S. dollar or euro, there have been instances where other assets have been part of the reserves. Tether, which manages the world's largest stablecoin, was fined in 2021 over false claims of full U.S. dollar backing.

"The major headline for stablecoins in 2024 is the impending regulations in the U.S.," Hiester said, adding that regulation specific to stablecoins would boost confidence in them and aid in adoption. And most high-profile stablecoin issuers, such as Circle, have advocated for stablecoin regulation.

"There have always been questions about the collateral backing stablecoins and the nature of that backing. A regulatory framework would provide a way to verify that assets are real," Hiester said.

Singapore

While the U.S. and EU are signaling the promise of regulatory cover, rules for stablecoins already exist in Singapore.

In August, Singapore passed stablecoin-specific rules, which are part of the larger digital-asset guidance Singapore issued in 2019. Singapore's rules require stablecoins to be backed by low-risk liquid assets such as U.S. dollars or Singapore dollars that must exceed the value of the stablecoin at all times. Issuers must also be able to return the value of the digital currency to holders at par within five days of a request, and disclose audit results.

Beating the U.S. and EU to the punch at stablecoin regulations added to Singapore's reputation as a fintech hub, and helped attract Ripple and Coinbase to establish or expand operations in the city.

"Singapore stands out due to its regulatory clarity and proactive approach to responsible digital-asset regulation," said Yam Ki Chan, vice president of strategy and policy for Circle, in an earlier interview.