Even as bitcoin surges in values and institutional investors move heavily into crypto, widespread adoption of digital currencies as a mainline payment vehicle remains on a distant horizon. Then there are stablecoins. These programmable digital currencies are coming into their own, as their resistance to volatility and ability to be programmed in transactions open up a range of compelling use cases.
In a new report, Stablecoins and the Path to Innovative Money Movement, Javelin Strategy & Research Analyst/Content Specialist Craig Lancaster examines the world of service providers who are rising up to help financial services implement stablecoin programs. He also explores the use cases for stablecoins, which are now mostly apart from consumer payments, although this is expected to change dramatically.
The Stablecoin Moment
Stablecoins are having a moment right now, in part because of the major players that have entered this landscape. Tether and Circle remain far and away the leaders, but PayPal made a big splash when it introduced its own currency last year. JPMorgan Chase, MasterCard, Visa, and other major financial institutions are offering stablecoins programs of various kinds.
“If you’re a player in these in these areas and you’re not developing a stablecoin program, you’re missing something,” Lancaster said.
The most popular and useful stablecoins are generally pegged one-to-one to an underlying asset, like the U.S. dollar. That makes them less prone to volatility and more suitable for a variety of payment use cases.
“The holder of it essentially holds the dollar,” Lancaster said. “You can store value with it, and you can employ it in a transaction. In a country with a currency that is not at all stable, an asset like the U.S. dollar is highly desired.”
Developing Use Cases
The most compelling present-day use cases for stablecoins reside in commercial payments, closed-loop payment ecosystems, and stored value for investors. Consumer-facing use cases for stablecoins and other cryptocurrencies have been slower to develop, but as decentralized finance and legacy systems of money movement increasingly intermingle, consumer adoption should rise.
Using stablecoins for cross-border payments is one highly promising use case. These have long been historically difficult transactions that are opaque, slow, and costly. They incur fees at each step of the old correspondent banking system and can be made more complex by fluctuating exchange rates. Stablecoins stand to alleviate many of these problems.
There are other potential use cases as well. “Any kind of lending that involves escrow is ripe for stablecoins,” Lancaster said. “They’re programmable and stable, which is good news for anyone who sweated out a house purchase, and all the liquidity issues and risk that go along with that. You can transform that by essentially programming the money, so when the thresholds and criteria are met, it funds the loan and completes the transaction.”
Stablecoin as a Service
An entity looking to create a branded stablecoin will often engage a service provider for the underlying design and architecture. PayPal worked with blockchain technology provider Paxos to design and develop its PayPal USD stablecoin, which reached a $1 billion market cap little more than a year after launch. Stablecoin service providers, such as Paxos and Netherlands-based Quantoz, provide the technological underpinning and know-how to administer stablecoin programs.
One area that has been especially fertile for stablecoin-as-a-service operations has been loyalty programs. Through branded stablecoins, companies can use blockchain technology to gain better insights into who their customers are and engage them in ways that are more effective than legacy loyalty programs. This allows companies to let the architecture work in the background while customers reap the benefits on the front end.
Like branded reward cards, through which consumers pick an airline, hotel chain, or retailer, this raises the potential for stablecoins to fade into the background and turn into loyalty points. Starbucks holds over $1 billion of customers’ money in its app, and one could easily imagine Walmart or Amazon entering the fray. Target’s successful RedCard program could be replicated with a stablecoin by anyone with a loyal customer base, driving revenues away from the card companies.
“Stablecoin-as-a-service providers can be a big help in getting those conceived and launched,” Lancaster said. “Take a lesson from banking as a service, which has gotten a little battered lately because of compliance issues. You might be able to outsource the compliance, but it’s all going to roll back to your door if there’s a problem. We urge companies to adopt the most stringent regulatory compliance stance as a starting point. If you’re compliant with the most stringent regulations, you’re compliant with all of them.”
Regulatory Concerns
Regulation, particularly in the United States, remains challenging at best and inscrutable at worst. This is to the detriment of companies that wish to explore the space, as well as to the consumers and commercial enterprises that could benefit from innovation.
Clarity is coming in other parts of the world, however, and that inspires some hope that a course can be charted here. There is still no guarantee that even the most scrupulous participant in stablecoins will not run afoul of regulators in the short term. Despite the likelihood of regulatory overreach, Lancaster predicts that stablecoins are an inevitable part of the future of financial technology.
