Stablecoins are becoming just like money - Olaf Ransome

Correspondent banking as we know it is broken. For the most part we associate that term with things cross-border; for myself or my business I need a bank account and payment services in another currency and therefore country. In days past, if you were a financial institution (FI) which needed a USD correspondent, or Nostro, you called one of the “usual suspects” (Citi, JPM, StanChart, Deutsche Bank, Wells Fargo and so on) and said: “I want to open a bank account” and you would be serviced. 

No more. Access is hard and probably expensive. I have first hand evidence of how hard. I am helping a client obtain a FinTech license here in Switzerland, a kind of banking license light. Locally, even the state owned bank, ZKB, said no even for the simple request of an operating account. Several of the “usual suspects” said no for requests to open a USD account. 

More info:

I recommend a recent report from the folks at Visa, Castle Island Ventures & Brevan Howard: Stablecoins: The Emerging Market Story.

In last month’s article, I shed some light on how tokenised money market funds might be used for making a payment.

The observations from that Visa report are worth spelling out here:

1) Overall use of stablecoins is growing fast; the estimate is that settlement value grew globally by 100% from ’23 to ’24. Across Nigeria, India, Brazil, Indonesia and Turkey, users in those five markets are expected to grow their stableoin usage by at least 50%.

2) At least in emerging markets some 50% of all stablecoin activity is not crypto / trading related but rather related to one or other of the functions of money: a store of value, i.e. a way to hold a currency which is not volatile, a medium of exchange, i.e. a way to settle trades and a means of payment, i.e. for cross-border payment, payrol, even remittances. One of the drivers is that USD are hard to access point I made above, another is that it is easier, cheaper and faster than traditional rails.

3) There is a generational gap. Those 18 to 24 are more than 2x more likely to use a stablecoin that those 55+. And some of that group of young folks trust stablecoins more than a bank account. 

What’s new or changing with Stablecoins?

Let’s look a little more closely at each of those functions of money and then I’ll offer some thoughts on the better, cheaper and faster of stablecoin life.

Before that though a modicum of philosophy. I have written a lot on things stablecoin in the last eight or so years. I’ve done that with an investment banking operations lens. Amongst other things, I’ve made the case that Tether is a layer cake of risk. I still believe that. The VISA report sort of says: a big driver for folks to use Tether is because it is widely used. From what I see, USDC has better governance and less risk, but for now many are happy to take some risk by holding Tether because it has established a network of people and businesses willing to accept it. As 2024 draws to an end, my view on things stablecoin is:

1) I would still not use a stablecoin to settle inter-bank or wholesale banking market obligations.

2) I do though very much see the value and potential in the retail market generally, as well as in some parts of the corporate banking world, as long as good risk management is applied. Eggs and baskets being the key control.

3) I fullly appreciate that in countries with volatile currencies, any market & counterpart risk from holding a stablecoin may be attractive relative to the risk of holding the fiat currency. 

Stablecoins as a store of value: I would say there are two dimensions to this. One is very much an emerging market thing: “I want to hold my money in a currency that is not volatile and in a format that others accept”. Given that a stablecoin can be held in a wallet which “you”, the individual or the company control, i.e. there is no intermediary, then that gets you past the “access is hard” plus potentially some part of the cost related issues. The other dimension is that it allows you to have easier ALM, asset & liability management. Let’s say you are a business in Turkey. You import raw materials and export an end product, normally for a pre-agreed fix price. If by using a stablecoin you can have them in the same currency and not have to convert to your own local currency, then life is easier. This is where the USD has an edge and why virtually all stablecoin volume is in USD; you could store value in Swiss francs and indeed we know all about “flight to safety” here in Switzerland. But, if you want to pay to others or for things, few folks want to take Swiss francs, and if they do, not at attractive rates. The reverse is true too: you can pay in EUR in many places in Switzerland but the rates are horrid.

Stablecoins as a means of exchange: If you want to buy digital assets, for example a tokenised money market fund, then that exchange is easier and faster if you have a stablecoin. Moving it is near instant and you can easily have atomic trading & settlement; you could deal with any exchange anywhere with the interoperabilty afforded by DLT or blockchain meaning the trade is only done if the seller can deliver you the security to your wallet and you can pay for it with a stablecoin in your wallet. 

Stablecoins as a means of payment: There is potentially a bit of a chicken and egg problem. You could use a stabelcoin to make a remittance, or even a regular domestic payment, as long as the recipient can either use the stablecoin in its native form or easily off-reamp to fiat. For a remittance, you might find the process is faster but not cheaper. But, as soon as lots of people are happy to accept a stablecoin, then payment is likely to be both faster and cheaper. The VISA report highlighted that some stablecoin users like the fact that receiving a stablecoin gives them a little protection from the typical fee / rate gouging when a cross-border payment and is immediately converted to local fiat currency. The recipient or payee now has optionality and perhaps some more freedom to choose, or shop around.

What is better, cheaper or faster about stablecoins relative to traditional fiat rails?

Firstly, faster. Payments are peer-to-peer, form one wallet to another. But wait, I here you cry, we have instant payments in many currencies. True that. But, and it is a big one, those rails are domestic; they don’t normally work across borders. 

Secondly, on the cost front, I have seen estimates that it costs $19 for every $200 in remittances to sub-Saharan Africa. That is a big burden for those on the giving and on the receiving end. So, there is plenty of room to be cheaper. The folks at Chainalysis suggest using stabelcoins might be 60% cheaper. 

Turning to better. Access is easier, as you just set up a wallet and immediately people can transfer money to you. Over a coffee the CEO of Yodl set me a up a wallet and sent me some USDT, Tether. From that wallet I can make a payment to an individual or a merchant, both domestically and cross-border. Next comes a really important capability which new digital asset rails have which legacy fiat rails don’t: interoperability. Imagine I want to buy some securities. Traditionally I send fiat cash to a bank or broker and then follow up with an order to buy the securities. If I see a better price elsewhere, it is awkward for me to go to that venue. I have to open an account, then I have to transfer funds first.  Interoperability is what will allow me to connect my wallet to any venue and submit an order. The technical process will then earmark my funds, so that I cannot double spend them, and then submit my order to the chosen venue. If and only if my order can be executed will there be an exchange of my earmarked funds for the asset I have bought. That is atomic trading and settlement; either two things happen or nothing happens. You might even use this is in a retail context. I live in Switzerland, I might order some goods from a supplier in Germany. If I pay up front, I have credit risk. So, typically I’ll pay by credit card, because we have a form of consumer credit act which effectively says the credit card company is a party to the contract and I can make a claim against them if the merchant does not deliver, or delivers faulty goods. That of course, is for the usual FX fee and quite expensive. A stablecoin could be used with an escrow concept in a so-called smart contract; my funds are earmarked, and held. They do not transfer until either I confirm the goods are delivered or the seller cancels the order. 

What is the future of Stablecoins?

As I wrote this, I had a sense of déjà vu all over again. Where we might go with stablecoins seems as unknown right now as when we had Netscape and Napster. They felt amazing when we had them and now, we can hardly remember them. 

They created new opportunities and triggered creative destruction. 

I believe that in the future we will hold our financial assets in Web 3.0 wallets. That will enable us to benefit from the kind of peer-to-peer connectivity I have described here. In the same way that I see stablecoins will be able to fulfill the same functions of money as fiat, I expect we will need to have the same protections and regulations we know from today’s world: KYC, AML, Trasaction monitoring. I see Fis being the sponsoers of those wallets, but the FI sitting in the background. The same construct as with mobile phones; if you know my mobile number, you can call me. You are indifferent as to who my carrier is. If I change carrier or provider, you don’t mind and you don’t need to know.

Thanks for reading. Please do let me know what you think of these notes. Feedback via the comments would be great.

Have a great holiday season and I wish you a very successful 2025.

Please feel free to get in contact via LiquidityFinder here.

Author

Olaf Ransome is a liquidity and financial services expert. He is the founder of 3C Advisory  You can message Olaf directly here.