Stablecoins: like Heineken – they refresh the parts other payment rails can’t reach

Right now, my starting point on “Stables” is that I agree with Simon Taylor that they are better even if they may not be cheaper, at least for now. 

Usage Is skyrocketing, so there must be some folks who agree with me.

Are Stablecoins really better?

I do sometimes have my doubts about whether I understand things FinTech and digital assets. Fortunately, there are some really smart young folks out there who are willing to help educate me. 

Last week at PostTrade360 event in Stockholm, Phil Dettwiler from Crypto Finance in Zurich, and Nick Philpott from Zodia Markets turned up to help enlighten me and the audience. 

#1 Stables work where correspondent banking access is not easily available. Getting a bank account in the major currencies is somewhere between “hard and slow” and “just not possible”. A FinTech I am involved with is applying for a FinTech license aka EMI here in Switzerland. All under the Banking Act. So proper stuff, proper supervision. Largely, we have found that our potential business is just not wanted. Stables are an alternative.

#2 Availability matters. 24 x 7 x 365 availability matters. An example from shipping. If you are importing something like oil, then as soon as the seller delivers to your port, you need to offload the oil and pay the seller. Any delays lead to something called “demurrage charges”, which for those of us old timers who spent time in the securities industry is the same as an “interest claim”. And Murphy’s Law tells you that what can go wrong on a Friday afternoon will go wrong, and that will cost you 3x. So, a means of payment not tied to the cut-off times of correspondent banking is a good thing. 

#3 Wide acceptance reduces the risk of holding a stable. I once referred to USDT / Tether as a layer cake of risk. They have had plenty of press on the topic of whether they have assets to back their liabilities, as well as the quality of those assets. Yet, people use them. The simple explanation is that many businesses are happy to accept payment in Stables, because they know and can see that many of their suppliers take USDT, so in fact they don’t need to off-ramp to fiat, or at least not so much.

#4 It’s all about the US Dollar. Euros really don’t matter, at least right now. There is a risk of dollarization for smaller currencies. Whilst that is a threat, it is also an opportunity. Blockchains are ultimately transparent; it is easy to see which digital asset moves into and out of which wallets. If Stables are more and more accepted, then businesses will do more activity on chain, and that makes it easy for authorities to audit. Probably a good thing. 

#5 Lack of yield doesn’t seem to matter. If you have a correspondent bank account aka Nostro at the end of each day the following might happen: 1) if you are flat, then nothing happens, 2) If you leave the balance with the Nostro you might get a morsel of credit interest, 3) You sweep to either a money market trade, i.e. you make a loan, an overnight repo or to a money market fund (MMF). But and it is not a small one, there are a bunch of securities laws governing MMFs, so not everybody can buy them or their tokenised form aka tMMFs. Nick from Zodia Markets shared that volumes in tMMFs are 10’s of millions each month vs. some $36 billion in Stables. 

#6 Payments might get cheaper. Phil from Crypto Finance shared some stats. Our industry apparently spends some USD 2.8 trillion in fees of which 40 billion is “maintenance costs” – keeping an account open and all that goes with it. There is a lot of room to optimise.

In conclusion

Stables are useful where existing rails fall short. So, that means it helps those who cannot get access to correspondent banking rails and it helps in matters of timing. 

As I write, I am waiting for a GBP payment from somebody in South Africa to hit my account at RBS in London. I have been waiting for a week.

For wholesale markets, Stables are probably not the solution. More on that another time.

A few takeaways:

1) Stablecoins are compensating for the fact that correspondent banking is banking; access is difficult to obtain, then and when you get it, the payments process is slow.

2) Stablecoins’ positive characteristics: availability, interoperability and programmability outweigh the considerations around lack of yield, even some of the issuer risk.

3) Right now, this is an emerging market / faraway places thing and not a developed markets one.

Please feel free to get in contact via LiquidityFinder here. 

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