Interest Rates are the Next Battleground in the Stablecoin Wars

4 min readFeb 18, 2019


By Su Zhu and Hasu

So far, dollar backed stablecoins like Tether’s USDT or Circle’s USDC don’t pay any interest to holders of their coin. We think that is about to change in 2019. As of today, the users of stablecoins are effectively giving their providers free loans in return for a service (digitally transferring bank dollar certificates) that is not very distinguished from one provider to the next.

Stablecoin providers make money by putting their customers’ money in the bank and collecting interest from these deposits. At the time of writing, the five largest stablecoins collectively hold $2.67B of customer deposits. At a rate of 2.5% per year, these deposits generate an annual $67.5M in revenue for them. In addition, Circle, already announced that “in the future, [they] may also invest these fiat funds in highly-liquid, AAA-rated fixed income securities.”

When there’s no interest, on the other hand, there’s no business model. So as a result of the zero interest rate policy of the BoJ and ECB, there is no competition for a EUR or JPY stablecoin.

To evaluate the stablecoin market of tomorrow, let us look at the US banking market of today. While the national average interest rate for many brick and mortar banks is still 0.1% or less, online banks are starting to undercut them heavily on prices. They can do that by giving much of the interest they receive from lending the funds in the interbank market (currently ~2.7%) straight to their customers.

The result is a price war where major banks like Goldman Sachs, HSBC, and Barclays as well as fin-tech companies like American Express or Wealth Front have all started to offer online savings accounts that pay over 2.1% p.a.

The brick and mortar banks can survive at much lower rates because they offer ancillary services in the form of branch banking, ATM networks and personal support that are also valued by their customers. Their customers tend to value the personal connection and comfort that these local banks have to offer, while customers of online banks are on average more price-sensitive.

Stablecoin providers are definitely closer to online banks in comparison. They all offer roughly the same service and level of…