What makes stablecoins so attractive? (Part 2)

Stablecoins: what makes them so attractive?

With the GENIUS Act, the United States has made a clear choice in favour of stablecoins – and therefore private players – as an alternative to a digital dollar. A public digital currency, a retail CBDC issued directly to citizens by the central bank, is explicitly prohibited. According to Republicans, such a currency would “threaten the personal freedom and privacy of Americans”. So, while the digital dollar is not dead in Washington, it has effectively been privatised.

The new money-makers

Once the law comes into force, only ‘Permitted Payment Stablecoin Issuers’ will be allowed to legally issue stablecoins. Their business model is as simple as it is brilliant: they issue a digital dollar balance, users spend it, and the issuer invests the incoming cash in ultra-safe, short-term assets. The margin? It’s the difference between zero interest for the user – interest is prohibited – and a positive return for the issuer, who invests in treasury bills, cash, or repos. This is quasi-banking without a banking licence, but with a loyal community and potentially eye-watering margins. Tether reported an operating profit of $54 billion in 2024. With an estimated workforce of just 100 FTEs, that amounts to an astonishing $535 million in income per employee. Tether and Circle are by far the leading stablecoin issuers today.

Why might a company embrace stablecoins?

• Speed: stablecoins operate on blockchain networks, or ‘on-chain’, so messaging, settlement and reconciliation all happen in a single ledger update. This makes payments virtually instant, which is a major advantage especially for cross-border transactions. Traditional correspondent banking is much slower, particularly when sending payments to countries with less developed financial systems.
• Cost: Again, the main benefits are seen in international payments. According to the Boston Consulting Group (BCG), traditional banks can charge up to 13.6% of the transferred amount. Every step in the system, from exchange rates, correspondent banks and fees, takes a cut. Even domestic card payments incur costs: so-called ‘swipe fees’ totalled $224 billion in the US in 2023, with profit margins of 35% for card issuers such as Visa, according to payments consultancy CMSPI.

On the blockchain, by contrast, transaction fees are minimal. These so-called ‘gas fees’ vary depending on network congestion. In May 2024, for example, they ranged from $0.02 to $3.33 per transaction on Ethereum-USDT, which is still relatively small. However, there are caveats: converting between fiat money (traditional notes and coins) and stablecoins – known as ‘on/off-ramping’ – can cost up to 7%, according to BCG. If companies want to switch to stablecoins, they must overhaul their entire back office, including new procedures, treasury systems and compliance rules… The blockchain is fast, but companies must keep up.

International remittances: dollars without borders

Individuals can also make payments using stablecoins. Again, the main benefit lies in cross-border payments. Take Juan, who sends $200 from the US to his family in Mexico. Using an app like Wise, he pays a fee of around $3.50 plus a currency exchange fee. The money arrives within minutes to hours.

However, with a stablecoin like USDC, transactions can be even faster and cheaper, with low processing fees and almost instant transfers. The catch? The family needs to convert the USDC into pesos, which can cost an additional $4 to $10 depending on local crypto providers. These costs are expected to fall, but for now the advantage is relative. Nevertheless, according to the Tokenised Newsletter, 10% of global remittances are already made via stablecoins or other cryptocurrencies.

Stablecoins are thriving particularly well in countries with weak or unstable currencies – think Nigeria or Turkey. There, digital dollars are favoured over local currencies affected by inflation. In Turkey alone, purchases made with stablecoins totalled an astonishing $38 billion in the twelve months to March 2024, equivalent to 4.3% of GDP. However, as with companies, private users face challenges too. Not everyone is digitally savvy, and the risk of fraud remains real. In many countries, regulations are still catching up, though the GENIUS Act is accelerating the process.

Customer loyalty as a superpower

The real goldmine for stablecoin issuers? Customer loyalty. Issuing a currency means building a mini-economy. And then the network effect kicks in. Imagine if Walmart launched ‘Wal-coin’. The more people who use it, the greater the trust and the more likely other companies will be to accept it. What starts as a loyalty card could evolve into a parallel payment system.

Every additional user generates more interest income. Walmart could then reinvest this income in promotions, lower fees or loyalty schemes. At the same time, the company could save millions on card fees that would otherwise go to credit card companies. As the ecosystem grows, it becomes increasingly attractive for other businesses to join. The winning coin wins more, welcome to the ‘Winner’s Economy’.

However, the battle is far from over. Will consumers switch en masse to stablecoins, even for domestic payments? Payment cards are deeply embedded, offering benefits such as refunds for errors and built-in fraud protection. Blockchain transactions are final – once sent, they cannot be recalled. Ultimately, the contest will come down to convenience, speed and cost. In the end, the proof of the pudding is in the paying.