Once a fringe tool for cryptocurrency traders, stablecoins could provide critical infrastructure for payments, banking, and credit cards. Here are the top-line bullets you need to know.
Cryptocurrencies have earned a reputation for having wild price volatility. Bitcoin’s price, for instance, went from less than $5,000 in Q1’20 to more than $30,000 in Q4’20, fueled by unprecedented institutional demand.
While a positive sign for adoption and speculation, this volatility has prevented cryptocurrencies like bitcoin and ethereum from becoming an everyday medium of exchange. Nobody wants to pay for a cup of coffee with an asset that could balloon in price.
Meanwhile, stablecoins — cryptocurrencies that are pegged to other assets, such as the US dollar — are much less volatile.
Stablecoins first caught on with cryptocurrency traders as a way to quickly exit positions in volatile cryptocurrencies without the fees and hassle of converting back to fiat. However, stablecoins are now being piloted to potentially undergird credit cards, banking back-ends, and e-commerce.
WHAT YOU NEED TO KNOW:
- Recent corporate activity is creating hype in the space. In December 2020, Visa announced a partnership with Circle, the blockchain unicorn behind USDC, a stablecoin pegged to the US dollar. The partnership allows Circle’s corporate card members to spend USDC anywhere Visa is accepted. Cuy Sheffield, head of crypto at Visa, said, “Stablecoins like USDC represent a promising payments innovation and provide an emerging platform for fintechs and digital wallets to enable new payment flows.”
- In January 2021, the US Treasury OCC (Office of the Comptroller of the Currency) published new guidance for banks to use public blockchains and stablecoins for bank functions. This means national banks and federal savings associations can use blockchains as they would ACH or SWIFT transfers.
- Stablecoins are making inroads with regulatory bodies. In late 2018, Paxos Standard (PAX) and the Gemini Dollar (GUSD), stablecoins from New York-based crypto exchanges Paxos and Gemini, respectively, launched with approval from New York regulators. In early 2019, JPMorgan introduced its own stablecoin, JPM Coin, which is subject to the same regulatory oversight as the bank’s other operations. JPM Coin saw its first commercial payments use in late 2020.
- Stablecoins may offer a way for payments incumbents like Visa to cut costs in international transfers and data processing. Similarly, banks, which are under threat from digital challengers, could implement stablecoins and blockchain tech for rapid digitization in the back office.
- Stablecoins could soon be leveraged for peer-to-peer (P2P) payments among digital wallets. Major wallets like Venmo and Cash App have enabled crypto buying in recent months. In time, these wallets could use stablecoins to facilitate P2P payments and circumvent credit card networks in e-commerce.
- Merchant adoption will be key to watch. Crypto platforms like Bitpay and Coinbase Commerce already allow merchants to accept stablecoins, as well as other cryptocurrencies, as payment for goods and services.
- Stablecoins can be useful in decentralized finance (DeFi) applications like loan issuance. MakerDao, for example, issues collateralized loans in its native stablecoin DAI. Expect more innovation from this area.