Future of Stablecoins

Stablecoins is an Internet-native money liability.

1. It is the new Banking as a Service.
2. The Form of stablecoin (Assets) will not change.
3. And we are just scratching the surface of its Utility.

Some mental models to predict the future of stablecoins ⬇️

1) Stablecoin is the new Banking as a Service (BaaS)

In Web2 fintech, a wave of startups offer Banking as a Service (BaaS) for new applications to be built on top. These BaaS companies are middleware, abstracting away the complexity of interacting with an actual legacy bank.

Companies e.g. Venmo, Wise, CashApp, Affirm etc. all benefit from BaaS and offer new types of products e.g. new types of P2P payments, BNPL, cross-border payments etc.

As account holders deposit their money in a fractional reserve bank, they are taking the risk that the banks will not collapse.

And the Silicon Valley Bank collapse has taught us that nothing is certain.

Unfortunately, one of the leaders in BaaS middleware, Synapse, has gone bankrupt, causing massive headaches for its clients and partners.

Synapse, backed by a16z, has collapsed, and 10M consumers could be hurt | TechCrunch

The collapse of Synapse shows just how treacherous things are for the often-interdependent fintech world when one key player hits trouble.

TechCrunchMary Ann Azevedo

And one of the leading sponsor banks, Evolve Bank, has also suffered from a massive data breach since it was hacked by Russian hackers.

Evolve Bank Shares Data Breach Details as Fintech Firms Report Being Hit

Fintech companies Wise and Affirm are impacted by the data breach at Evolve Bank, which shared additional details on the ransomware attack.

SecurityWeekEduard Kovacs

Nevertheless, what could be an alternative to Banking as a Service?

If BaaS unleashed Fintech 2.0, then stablecoin is empowering Fintech 3.0

Fiat-backed Stablecoins (e.g. Circle , Tether , Paxos) are the future of BaaS. They represent on-chain claims in the form of tokens on some fiat collateral held somewhere off-chain.

On the Assets side, issuers do NOT give out loans. They are narrow banks.

On the Liabilities side, they are now distributed as 'tokens', on the blockchain. Now, anyone with Internet access and digital wallets purchase stablecoins and hold these Liabilities.

Once we adopt this mental model, it is pretty clear to me that functionally, stablecoin is offering the same service to consumers as BaaS.

Holding $USDC as a non-US user == having a USD account via Wise.

Of course, even though the two are equivalent functionally as consumers, they are different structurally.

If you are a consumer holding $USDC, you face the risk of Circle as an issuer, BlackRock as the securities broker, and Circle's banking partners; If you have a USD account via Wise, you face the risk of Wise's BaaS partner and the underlying sponsor bank, which is run by their fractional reserve.

So why have stablecoins hit such growth over such a short period of time?

It is now over $200B+ of supply in circulation and has become the 18th largest holder of US Debt.

Stablecoin Issuers Now 18th Largest Holder of U.S. Debt

Stablecoin issuers are fast emerging as a significant source of demand for the U.S. Treasury notes as concerns about Washington’s debt management grow.

CoinDeskOmkar Godbole and Amitoj Singh

It is all because how liabilities (deposits in web2 vs stablecoins in web3) are distributed.

In web2, deposits are trapped in closed-loop networks (e.g. domestic payments network, SWIFT)

In web3, stablecoins are Day 0 ledgered on public blockchains. They are open-ended networks.

It also explains why public blockchains are likely to achieve Lindy effects because they are the Shelling point for all market participants to coordinate.

Public blockchains are useful NOT JUST because they are 'public' and 'permissionless'. No one cares about decentralization. What the market cares, however, is that public blockchains are neutral and serves as a coordination point.

Think about this in web2: if JP Morgan would like others to accept its digitalized deposits stored as bits somewhere at their data centers, they have to convince the whole market one-by-one. And other companies have to study JP Morgan's tech stack.

In web3, just deploy on-chain and everyone will follow the same tech stack of the underlying blockchain.

It brings me to my next point:

2️) The Form of Stablecoins (= the Assets side) won't change in the future

Sticky stablecoins have to focus on distribution. They need to increase their liabilities.

To do so, they need to convey trust and reliability. The best way to show that your stablecoin is trustworthy is to make it as risk-free as possible.

Hence, all issuers will naturally converge toward the same composition of assets i.e. Highly Liquid Sovereign Debt and Cash

On regulation

Regulators (US, EU, HK, etc.) are narrowly focusing stablecoin regulations on the assets side. It is easy to mandate what types of assets & how to manage assets. Regulating Assets also makes sense if you want to protect consumers (see Terra/Luna for algo-backed)

While the Form of Stablecoin won't change much,

3️) The Utility of Stablecoins (how liabilities are used) is massively underexplored

Think about this: payments are fundamentally about sending $x from one place to $y to another place, subject to some conditions.

Here's my mental model. Payment takes 3 steps:

1. Pay-in

2. Conversion

3. Pay-out

Surrounding this workflow you need contextualization

e.g. what is this payment for? Once txn is done, you need to ledger this. Once you receive this txn, you need to combine this with the invoice

There is a very clear utility of stablecoins right now: unbundling the correspondent banking network with a new set of providers.

Rather than relying on a single SWIFT txn, you now break it down into

< On-ramp -> BaaS -> conversion by LPs -> BaaS -> off-ramp>

You now combine best-in-class in each leg to give a better user journey.

If you're interested, I'd recommend listening to this podcast

But are cross-border payments the only Utility of stablecoins?

I disagree.

There's still a massive whitespace to build LOGICS around programmable money: If X, then Y. Apply it to the whole payments workflow

What about machines that transfer value with each other?

How would a company like Sentient_agi enable data sources of LLM to be monetized each time an inference is called?

On regulation

How would regulators view the utility of stablecoins? IMO, the only thing that matters is KYC

The STRONGEST regulatory tension I have seen is that

1/ If stablecoins are indeed like BaaS, should regulators regulate stablecoins the same as BaaS, given their functional equivalence?

VERSUS

2/ Should stablecoins be 'cash-like' and allow for anonymity, hence allowing the whole world to continue buying US Treasuries, funding the deficit?

If 1/ happens, the whole stablecoin industry will just crumble.

Market cap will half, volume will half.. Then the US loses a substantial source of UST demand.

2/ is likely, but I expect heavy pushback from incumbents & offshore banks that benefit from the status quo.

If stablecoins become a much useful form of greenbacks (that is anonymous, similar to physical cash),

why even bother with Swiss banks?