As traditional finance firms face increasing competition from digital alternatives, the stablecoin market is entering its third phase. With banks and payment firms set to enter the industry, the potential for $2 trillion in growth by 2028 makes stablecoins a crucial player in shaping the financial future.
Stablecoins, blockchain-based tokens designed to mimic fiat currencies, have become a significant player in the financial industry. The largest stablecoin, Tether‘s USDT, has a market capitalization close to $145 billion, while Circle‘s USDC has over $60 billion in circulation.
A stablecoin is a type of cryptocurrency that maintains a stable value relative to a fiat currency, such as the US dollar.
It's designed to reduce price volatility and provide a more stable store of value.
Stablecoins are often pegged to a specific currency or commodity, ensuring their value remains consistent.
They're commonly used for cross-border transactions, trading, and as a hedge against market fluctuations.
As regulations evolve, banks and payment firms are set to enter the stablecoin industry. According to Ran Goldi, SVP of payments at Fireblocks, there will be as many as 50 more stablecoins by the end of this year. This latest stage of competition is expected to feature banks, large and small, as well as incumbent payment firms weighing up the best way to integrate tokens into their existing businesses.
The Evolution of Stablecoins
Stablecoins have grown in prominence as an essential means of moving money between volatile cryptocurrencies. They blossomed further with the explosion of decentralized finance (DeFi). The early days of crypto saw a wave of payment service providers (PSPs), which evolved into business-to-business PSPs like Bridge and Zero Hash.
Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to a specific currency, such as the US dollar.
They were first introduced in 2014 and have since gained popularity due to their potential to reduce volatility in cryptocurrency markets.
The first stablecoin was issued by Tether, which pegged its value to the US dollar.
Since then, numerous other stablecoins have been launched, including DAI, USD Coin, and Binance USD.
These coins use various mechanisms, such as collateralization and algorithmic stability, to maintain their value.
Cross-Border Payments and Stablecoins
For a typical use case, consider an importer in Brazil that wants to bring in a container and pay someone in Turkey or Singapore. They convert the Brazilian reals to a stablecoin and either send the funds directly to the exporter or change them to the destination currency and pay with that. Some banks have already caught on to this cross-border payments use case, while others are still weighing the best use case for them.
Cross-border payments refer to transactions that involve sending or receiving money across international borders.
These payments are typically facilitated by banks, financial institutions, or specialized payment services.
According to the World Bank, cross-border payments account for over $6 trillion in transactions annually.
The process often involves conversion of currencies, fees, and compliance with regulations such as anti-money laundering (AML) and know-your-customer (KYC).
Digital payment solutions are increasingly used to streamline cross-border transactions, reducing costs and increasing efficiency.
Banks‘ Strategic Plans
Fireblocks has been approached by dozens of banks, asking whether they should be on/off ramps, holding reserves, or issuing a stablecoin. Most banks are writing strategic plans that will likely be submitted by the end of this quarter. According to Goldi, large tier-1 banks like JPMorgan and Citi will build their own tech, while smaller banks will want to use hosted tech providers.
The Future of Stablecoins
Growth in international payments is expected to drive the stablecoin market forward. The European Union‘s Markets in Crypto Assets (MiCA) regime and U.S. legislation are working their way through Congress, providing a regulatory framework for the industry. With the potential for $2 trillion in growth by 2028, stablecoins are set to play a significant role in shaping the financial landscape.
The Role of Fireblocks
Fireblocks is well-positioned to capitalize on the growing demand for stablecoin services. The company has been approached by numerous banks and is working with them to develop strategic plans. With its expertise in digital asset cryptography and custody, Fireblocks is poised to become a major player in the stablecoin market.
Conclusion
The stablecoin market is entering a third phase, driven by the growing demand for cross-border payments and the evolving regulatory landscape. As banks and payment firms enter the industry, it will be interesting to see how they integrate stablecoins into their existing businesses. With the potential for $2 trillion in growth, stablecoins are set to play a significant role in shaping the financial future.
