Stablecoins upcoming foray into the western financial system

Stripe’s recent $1.1 billion acquisition has the potential to be a deciding moment of digital assets intertwining into western financial systems. In the wake of FTX humiliating the crypto industry, Silvergate bank’s rippling downfall, and the cyclical scepticism that crypto assets seemingly always face, this Stripe deal is a major credibility nod to the industry. And more specifically, to stablecoins' potential as a mainstream payments tool. 

Stripe is not the only large-sum enterprise investing into stablecoin markets either — Visa, PayPal, and Robinhood are also quietly vying for their share of the pie. In this piece, we’ll give an update on how these companies are investing into stablecoin sectors, the potential changes forthcoming in stablecoin usage, and our opinion on what it may mean moving forward.

Stablecoins are a new, alternative money in Emerging Markets

Up until this point, it seemed the stablecoin story was mainly about inviting monetary competition into Emerging Markets. Because stablecoins are a very easy way to hold US dollars offshore, each government currency is up against a new entrant — the world’s reserve currency — as a genuine alternative to their locally issued money. 

When facing dollars running on crypto rails, prevention to protect local currency use is no longer as simple as setting capital controls, freezing bank accounts, or outright banning asset holdings. Even the more centralised crypto networks are often squarely outside of the legislative reach of emerging market countries.

This could create dramatic changes in the world of emerging market currencies. The nasty consequences of central banks and/or governments mismanaging their money is now much more likely to materialise, whenever citizens have access to the internet and knowledge of crypto assets.

More and more evidence is emerging that these competitive forces have already started making their mark. Stablecoin adoption in the last five years has grown rapidly, increasing tenfold to a total market value of $170bn — in large part because of the global desire for US dollar savings.

Stablecoins are a Stepwise Improvement in the Custody, Speed, and Transparency of US Dollars

But it’s beginning to look like stablecoins usage is entering a period of change. Rather than remaining an Emerging Market phenomena — primarily simplifying access to a storehold of wealth in places with bad or mediocre local currencies — stablecoins may ultimately realise their fuller potential as a more advanced version of the US dollar. 

Akin to early paper money receiving an upgrade in their ability to be transferred at higher speeds and across long distances with the invention of the telegraph, and then again with the internet, the plumbing of crypto systems is similarly emerging as a competitive offering to hold, send, and receive dollars. It is a stepwise improvement — in custody, transparency, payment cost and speed — that is inviting stablecoin usage to take hold in a broader sphere of usage.

Crypto assets systems have successfully achieved cheap and fast transactions, at scale, outside the traditional banking system over the past few years. However, these systems have not converged into a single winner wherein all crypto asset activity resides. Rather, it is highly competitive and at the users' preference. Some may simply use and keep using the first platform they try, others may choose the one that best suits their needs up front, whether it be privacy, speed, or to access a certain app. Regardless, users and liquidity have become fragmented across the crypto landscape.

Bridge aims to Solve Crypto Systems’ Interoperability Challenges

One of the challenges of practically advancing crypto adoption with a segmented setup is interoperability. Apps struggle to transmit or convert crypto assets across multiple networks and wallets, leading to a more cumbersome experience of natively using these systems. To those unfamiliar, sending funds may look and feel somewhat hacky, like early stage internet browsers. But, these inefficiencies have created opportunities for third-parties like Bridge, which is perhaps why Stripe elected to pay the pretty penny of $1.1 bn instead of pouring the time and resources into building a product themselves.

Bridge offers a service of handling interoperability on their customer’s behalf, abstracting away the concept of assets being wielded across different crypto networks, with the integration of a standard API. This concept should not be foreign to Stripe, who similarly offers an API for payments that abstract away private payment networks, like Visa or Mastercard.

Bridge is essentially like another layer that sits across all crypto platforms that can orchestrate the movement of digital assets, which makes for a promising service that merchants and neobanks may leverage to avoid navigating the weeds of crypto systems.

Visa, PayPal, Robinhood are all betting on increasing crypto payment services

This may seem small but in our view, it is one of the missing pieces in the crypto plumbing system that would allow stablecoin fintech apps to, at last, make sense in western financial systems. The other main piece being the passing of friendly and clear regulatory guidance, perhaps similar to the Lummis-Gillibrand Stablecoin Bill in the US or MiCa in the EU (humbly, we are not certain what the best path forward is when it comes to regulatory guidance). 

But one thing is certain, Stripe did over $1 trillion in global payment volume this year. On a list of companies well positioned to push the envelope on digital assets integration in the payments industry, Stripe would be one of the leaders.

However, Stripe is not the only one betting on this future. PayPal and Visa are each taking their own approaches to capture growth in crypto-related financial services. 

• PayPal has integrated stablecoin transactions into business accounts as well as within its subsidiary mobile payment app Venmo, allowing users to buy, hold, and transfer PYUSD — its own stablecoin. In about a year, PYUSD had already surpassed $500m in circulating supply.

• Revolut, meanwhile, has also hinted at launching their own stablecoin. On the other hand, Robinhood, whose revenue is already largely driven by crypto trading, has partnered with many long time US crypto service companies like Galaxy and Kraken on a stablecoin initiative called the Global Dollar Network, which includes a newly issued stablecoin. 

• Visa, by contrast, is leveraging both Solana and Ethereum for settling stablecoin transactions, using these crypto networks for their speed and cost relative to traditional banking. And this is a type of use case that we find particularly compelling. 

Legacy financial institutions face an existential challenge as crypto systems, through lower transaction costs and disintermediation, drive the financial services industry to compress their margins, but perhaps simultaneously increase their volumes. Businesses that have relied on regulatory barriers, like banks and remitters, will be increasingly pushed to adapt. Stripe, PayPal, Visa, and other fintech leaders clearly recognise this shift and are positioning themselves accordingly.

Stablecoin Infrastructure will Imminently Disrupt Banking Services in the Payments Industry

The demand for U.S. dollars has been a persistent theme in emerging markets, where local currencies often struggle with inflation and volatility. Stablecoins, which deliver dollar-backed stability on crypto rails, continue to offer a unique solution to these issues. For users worldwide, particularly in regions with capital controls and financial surveillance, stablecoins provide a bridge to dollar access without the usual hurdles and restrictions associated with offshore dollar accounts. 

But now, we view Stripe’s acquisition as part of a broader movement that could make stablecoins a much larger fixture in global payments, while also creating conditions that foster bitcoin’s growth in the process (for more on how stablecoin adoption impacts bitcoin, see this).

We’re convinced by and share Nic Carter’s opinion that existing fintech apps, as well as those being created today, will leverage stablecoin infrastructure as opposed to traditional banking. Moreover, users are likely to prefer holding and transacting stablecoins through fintech platforms, which will tend to offer higher yielding accounts and more intuitive interfaces. We already see this occurring in Emerging market countries, and we don’t expect this trend to be an isolated phenomena. 

Looking forward, stablecoins will continue to put competitive pressure on central banks offering subpar currencies. They will also soon add competitive pressure to the legacy banking systems serving users and businesses, particularly fintechs. In the further future they might even threaten most global fiat currencies. In other words, stablecoins have barely come off the starting block.