Tech and crypto groups are eager to profit from stablecoin boom

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Technology and cryptocurrency companies, and even U.S. states, are eager to capitalize on the recovery in digital asset markets by issuing new stablecoins, but some industry experts say has little use for its tokens, and warns that many may not survive.

Latin American e-commerce group Mercado Libre, payments bank Banking Circle, cryptocurrency business Paxos International, Hong Kong-based IDA, and the state of Wyoming have announced plans for their own stablecoins in recent months.

They follow Ripple and payments group PayPal in trying to take over the recovering stablecoin market, which saw the prices of tokens like Bitcoin and Ethereum hit all-time highs earlier this year. The stablecoin market has grown to a record $169 billion in total coins in circulation.

Stablecoins are similar to a type of digital cash that track the price of a reserve sovereign currency, and also allow holders to more efficiently trade between different cryptoassets.

Despite the limited use of stablecoins in everyday life so far, there is a growing belief among entrants that cryptocurrencies will change the way consumers make everyday payments. This launch of Rush is highlighting.

But critics warn that many will not survive as most services lack distinguishing features and will drive users away from industry giants Tether and Circle, which are widely used by traders. .

“The reality is that many of them will burn out,” said a senior crypto executive. “(Stablecoins) exist in two different dimensions. There's Tether and everything else.”

Entrants are drawn in part by the potential benefits offered to stablecoin operators. Stablecoins typically track the value of the US dollar on a 1:1 basis and promise to keep an equal amount of dollars in reserve. Most people park billions of dollars in U.S. Treasuries and keep the interest they earn on them. Thanks to interest rates above 5%, Tether, which controls about 70% of the market, made a net profit of $5.2 billion in the first half of this year.

“People look at money and margin and think stablecoins can pretty much become king,” the crypto executive added.

Despite the fact that few goods or services can be purchased with stablecoins, new entrants are primarily betting on the idea that stablecoins will make payments easier, faster, and cheaper.

Ripple said the stablecoin, which it began testing last month, would “dramatically improve” the experience for people to send money across borders.

The Wyoming stablecoin, which will be launched in early 2025, is intended to be used to pay for everyday items like coffee. Among the most crypto-friendly states in the US, Wyoming has sought to attract digital asset companies by passing laws allowing decentralized organizations and eliminating taxes on crypto investments. A portion of the interest proceeds from the stablecoin will be used to fund local schools.

However, stablecoins are still primarily used for cryptocurrency trading. According to Visa data, as of September 3, about 11.3 million payments were made using stablecoins. However, this number dropped by nearly 80% after Visa eliminated trading associated with pre-programmed trading algorithms. Visa itself processed an average of more than 802 million transactions a day last year, according to its annual report.

Etay Katz, a partner at law firm Ashurst in London, said stablecoins so far have been popular with “some people buying them because they find them convenient and because they like the concept of holding value equivalent to cash in a digital wallet. “It's a novel asset that also includes people.”

“No major bank is going to take a risk on a new name, an unregulated name, or an upstart stablecoin issuer,” Katz said, adding that for large institutions to use it. Stablecoin developers “need to be regulated” in many places around the world, it added. ”

To that end, many new businesses tout being regulated as their signature virtue. Hong Kong-based digital asset firm IDA raised $6 million this week to fund the development of a regulated stablecoin in the region. Irish payments company DECTA created a euro-denominated stablecoin last month.

Many new entrants have admitted that their primary use is trading other cryptocurrencies or as an alternative store of value.

Mercado Libre's banking arm said it has created its own stablecoin backed by the U.S. dollar that Brazilian customers can use “to protect themselves” from exchange rate fluctuations.

“Primarily, stablecoins are used for transaction purposes, but we believe there are many other use cases for regulated stablecoins, such as cross-border payments,” the company said. said Daniel Lee, head of web3 at Banking Circle. Last week, Luxembourg launched the euro-denominated Urite stablecoin.

But he added that the coin's “first use case will always be trading.”

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Letter in response to this article:

Why the stablecoin boom has echoes of the South Sea bubble / From Paul Hallwood, professor of economics at the University of Connecticut in Storrs, Connecticut, USA