Stablecoins: making financial services internet-native
By Daniel Fraai, Tom Mendoza, Kaushik Subramanian, Leila Pirbay, Marnix van der Ploeg, Alexandre PONS
For centuries, financial services have operated offline. While the internet has transformed virtually every aspect of our lives, the way we move money remains largely unchanged. Today, we can text, call, and send anything to anyone in the world in a matter of seconds. Yet, sending money across different banks or countries is still cumbersome, costly, involves multiple intermediaries, and often takes days to settle.
Online payment processes have given us efficient front-ends, but they still rely on inefficient, constrained back-ends, with e-money issuers creating isolated experiences. Today’s money is electronic, but not truly digital.
Imagine if sending money was as easy as sending a text. Enter stablecoins: internet-native money.
What are stablecoins?
Stablecoins are digital currencies pegged to an external reference, like the US dollar, other fiat currencies, real-world assets, or another digital currency. Transactions are recorded on a digital ledger, typically a blockchain, enabling them to be traded 24/7 between any two wallets on the same network. These transactions settle in milliseconds, with fees a fraction of those in traditional finance.
Fiat-collateralized stablecoins, which are the focus of this research, are issued by a central entity that holds a reserve of fiat currency (e.g., USD) equivalent to the stablecoins in circulation. When a user deposits fiat currency, the entity mints an equivalent amount of stablecoins and transfers them to the user’s wallet via a blockchain transaction. To maintain stability, the entity ensures that each stablecoin is backed 1:1 by the fiat reserve in custody usually a money market fund, which is regularly audited for transparency. Users can redeem stablecoins for the underlying fiat currency, prompting the entity to burn the redeemed stablecoins and adjust the supply accordingly. This mechanism ensures the stablecoin’s value remains pegged to the fiat currency.
While there has been considerable scepticism and debate about the utility of cryptocurrencies and blockchain technology, we believe that stablecoins will play a major part in the future of money.
Internet-native money
Unlike other cryptocurrencies that attempt to serve both as payment mechanisms and securities, stablecoins are designed purely as a means of exchange. Their value being pegged to a fiat currency ensures price stability, and they represent a shift towards a more cash-like digital currency — cash as it was always meant to be: efficient, universal, and simple.
By leveraging a distributed ledger, stablecoins also introduce a whole new set of rails to simplify the movement of money, reducing costs and reducing the number of intermediaries involved, without compromising on what is important. Everyone has visibility and control. It is just simplifying what we already know.
The distributed ledger allows for the shared ledgering among unaffiliated parties, to settle movements of tokenized assets, and stablecoins are the first significant application of this tokenization, facilitating real-time, efficient transactions. But, in theory, all assets could eventually settle in the blockchain. And we believe that that is where the future is headed.
This is true digital money: stable, instant, global, programmable and inclusive. An opportunity to make money and financial services truly internet-native.
Stablecoins are one of the most concrete manifestations of crypto’s promise. They can protect individuals against currency devaluation, reduce the cost of global payments, and build infrastructure for a more open, accessible financial system. Fundamentally, stablecoins are not just a new asset but a radical new platform: the foundation for future fintech innovation and a redesigned financial system. But it is not burning down the house of traditional financial services as we know it. Think of it more as a ‘back to the future’ scenario. Unlike their predecessor e-money, stablecoins are analogous to cash: instant, trusted, optionally self-custodied, and simple. Stablecoins move cash into the digital age.
The vision and the reality
Stablecoins have already reached a $135bn market cap with three early use cases: crypto hedging and off-ramping, inflation protection, and remittance. This has led to the creation of two highly profitable businesses: Tether and Circle. Tether, the largest stablecoin globally, has surpassed a $100bn market cap, generating $6.2bn net profit last year. Circle, the second largest, has a $30bn market cap and generated estimated $1.5bn revenue last year.
A note of caution for the reader: do not conclude that the race has been settled with the two already successful companies. There is, by all means, an opportunity for new companies to enter the stablecoin issuing space. Similar to the early days of the internet, initial successful players may be displaced by a second and better generation.
Despite stablecoins making up less than 15% of the broader crypto market, they typically represent around 60–70% of traded volumes. And the transaction volume of stablecoins, at $11.1tn, was nearly on par with Visa’s $11.7tn in 2022.
Stablecoins are beginning to solve crypto’s use case problem, with new enterprise use cases emerging. Paypal has launched its own USD stablecoin. Visa is piloting using stablecoins to settle payments. Telegram has embedded a wallet into its chat platform, meaning you can now transfer money via stablecoins as fast as a text. And our portfolio company Volt is using stablecoins to enable real-time global payments.
Despite these advancements, the stablecoin market remains in its infancy. Only about seven million people have transacted with stablecoins, while more than half a billion people live in countries with 30%+ inflation. There are very few stablecoin issuers, a handful of traditional depository institutions (banks) facilitating on and off ramping and even fewer major liquidity providers. Stablecoins make up less than 2% of total money supply globally. There is a huge market still to go after.
What if stablecoins are neither stable nor coins?
The devil’s advocate might argue that stablecoins fail to deliver on their core promise: stability and being a coin. Let us examine each point in detail.
The instability argument stems from the risk of a stablecoin losing its peg to the underlying asset. This has occurred several times with leading providers, particularly those using algorithmically-backed and on-chain asset-backed models. Even for Circle and their stablecoin, USDC, maintaining the peg has proven challenging, as when USDC lost its peg to the USD following the collapse of Silicon Valley Bank in 2023.
This stability risk implies slower adoption, as both consumers and institutions will be more cautious and less likely to exchange their fiat currencies for stablecoins. However, this issue is more about trust than technology. Many countries have successfully pegged their currencies for decades despite occasional disruptions. Denmark, for example, has pegged the Danish krone to the Euro under the European Exchange Rate Mechanism. Despite fluctuations, or even losing the 2.25% peg at times, the Danish Central Bank and Government have consistently acted to reassure trade partners of the currency’s stability, maintaining the peg since 1999. Similarly, the Swiss Franc deliberately broke its peg with the Euro in 2015. Both countries have healthy and growing economies with continued positive growth in net trade balances. Ultimately, whether a currency is pegged or not comes down to trust.
Secondly, the devil’s advocate contends that stablecoins are not “real” coins. While stablecoins achieved volume parity with Visa in 2022, Visa argues that much of this volume consists of inorganic transactions or non-human activities, such as automated bot programs performing stablecoin arbitrage, liquidity provision, and market making.
Comparing stablecoin transactions to Visa might seem like comparing apples to oranges. However, it is more akin to comparing clementines and oranges. Clementines represent the small consumer retail transactions Visa handles, while the larger oranges symbolize the capital market transactions that are larger in volume and value, such as market making and trading, managed by exchanges. Combined, the volume of these “clementines and oranges” of stablecoins matches Visa’s.
Turning this critique around reveals the immense potential of stablecoins. The ability to integrate a payment network and a market exchange into a single coin is profound. We firmly believe that once stablecoins are fully implemented into domestic payment regimes, the volume of transactions will surpass both Visa and the largest capital markets exchanges combined.
Why now?
Regulation will be the big unlock.
We are seeing a wave of green light, led by Europe and Singapore. In 2023 European regulators took key steps to implement clarity on stablecoins through the Markets in Crypto-Assets Regulation (MiCA), with full implementation in December 2024. The UK is expected to follow suit with a parliament vote in Q1 ’25. Similarly, Japan, Hong Kong, UAE, Nigeria and Switzerland, are establishing regulatory frameworks to facilitate stablecoin adoption in retail and business payments.
Even in the US, where regulation has been hesitant if not outright disapproving, things are changing. The US has found product market fit with USD-denominated stablecoins, and with HR 4766 expected to pass through Congress in 2025, stablecoins could soon integrate into the domestic payment regime with bank charters and payment licenses. This regulatory clarity will enable new startups and allow existing financial institutions to work with stablecoins.
Digital dedollarisation
The USD-backed stablecoins have found product-market fit in a less-regulatory friendly environment, and the Federal Reserve is increasingly satisfied with how the USD stablecoins strengthen the US dollar globally. However, in the coming years, we expect the USD-backed regime to be challenged in the era of digital dedollarisation.
The global economy will never enter a situation where there is only one currency. Naturally, alternatives will emerge like a EUR-backed stablecoin. The USD:EUR currency exchange makes up 40% of total global money movement and the EUR makes up 31% of all payments on the SWIFT network. EU regulators have already finalized and implemented the first piece of legislation that enables EUR-backed stablecoins to emerge, and they have got a lot of space to grow.
The dollar competition comes not only from across the Atlantic but equally from other parts of the world like the Chinese Renminbi and Japanese Yen which have signalled interest in implementing digital currencies into their export flows. A second wave of digital asset issuers are working alongside regulators, which in China are somewhat decentralized, to enhance the current Renminbi clearing flow with a tokenized version on the blockchain. In that way, a payment could settle between Chinese domestic rails and Hong Kong or Singapore domestic rails within minutes, rather than the usual T+1 or more.
Dedollarisation is an old argument in the offline world for replacing the US dollar as the world’s reserve currency. Some central banks have in the past moved significant proportions of their reserves away from US dollars — for example China 2005–2015, and Russia more recently has been frozen out of dollars and euros. So far with little substance, the US dollar holds 59% of global foreign exchange reserves.
However, in the digital world, since there is no one established reserve currency yet and the overall stablecoin ecosystem is nascent, the race is still on. The technology works and there is product-market fit, but regulation will decide what stablecoins evolve into and which currency if any will dominate. As regulatory frameworks develop clarity over the next couple of years, consumers and institutions will be encouraged to adopt stablecoins, enabling off-ramping, ensuring interoperability with fiat currency — and opening up a universe of new use cases.
Evolution of use cases
We do not know exactly what the future will hold for stablecoins, but by looking at how people are using stablecoins today, we can see where new value will be created.
Right now, most use cases revolve around hedging and off-ramping for crypto trading — this is where Circle and Tether make the majority of their money. But Circle’s monetisation strategy illustrates the multiple avenues of revenue potential of stablecoins. While Circle earns substantial interest from holding USDC reserves, the majority of its revenue comes from transaction fees and API services provided to developers. Developers use Circle’s infrastructure and stablecoins to build applications like accounts, payments, payout services, and lending markets — each transaction generating value for Circle.
As adoption grows and banks begin integrating stablecoins, it will augment existing financial rails, facilitating real-time payments — internet-native money. Even at this early stage, there is the potential for a generation-defining company (GDC) to disrupt massive infrastructure players within the existing payments paradigm.
Money movement still relies on legacy systems and multiple intermediaries — card networks, payment processors, intermediary banks — each taking a cut and adding time, cost and complexity. The average SWIFT transfer settlement time takes three to five days. Domestic transfers cost $28 on average, or $44 for an international transfer. And Visa or Mastercard cross-border fees can reach up to 7%. Stablecoins cut the gordian knot.
The final evolution will appear as merchants and consumers adopt stablecoins as a means of payment. The need for off-ramps will decrease and the wallet infrastructure for consumers will mature. We will then start to see on-chain financial exchanges, lending, borrowing products, and yield-bearing structured products.
So stablecoins will be a tide that lifts all boats, increasing demand across the space.
It starts with the issuance of stablecoins. As adoption increases, more stablecoins will be issued. This demand will prompt issuers to distribute stablecoins through channels that hold direct relationships with customers like custodians, exchanges, and traditional finance companies. This in turn will increase the usage of wallets, and we will see increasing adoption of wallet infrastructure applications like KYC providers and on-ramping solutions. Ultimately, as customers are comfortable using stablecoins, we will move further towards the blockchain ecosystem that enables DeFi, social commerce, and gaming.
Where we are headed
Stablecoins are more than just a 1:1 fiat currency payment mechanism; they represent one of the few opportunities to fundamentally change the industry. Bringing together businesses, consumers and regulators, we have a once-in-a-lifetime chance to design a financial system exactly how it was always envisioned with transparent and easily accessible financial services products for users. Money is the lifeblood of any society, and financial products like lending, insurance and payments are meant to be building blocks for how to design our lives.
- Commoditization of payments. Most payments today involve exchanging spreadsheets and files via email or SFTP, with 81% of US businesses still using paper checks. Stablecoins can revolutionize payments by reducing costs to nearly zero, eliminating intermediaries, and enabling instant 24/7/365 settlement instead of the current T+2 days. There is $8tn of payment volume happening between businesses today globally. And faster payments at zero marginal cost is a billion-dollar opportunity in itself.
- Financial inclusion. Over half of Americans live paycheck to paycheck, and 82% cannot cover a $500 emergency expense. Globally, 1.7 billion people lack bank accounts, excluding a quarter of the population from the financial system. Stablecoins can offer accessible, transparent, and affordable financial services, promoting inclusion and financial education for those struggling with financial decisions.
- Digital FX. With several digital currencies serving consumers and businesses, we expect a new form of currency exchange to take place. Marketplaces and exchanges will be able to instantly settle into different currencies or stablecoin operators can exchange different currencies amongst themselves. Imagine what happens to global forex movement if an enterprise can swap between RMB and USD as easily as a consumer today changes currency on their Revolut or Wise wallet.
- Next era of CBDCs. Central bank digital currencies have often been touted as the premier threat to the existence of stablecoins. However, if stablecoin reaches mainstream adoption, governments are better positioned to partner with a private company’s technology instead of developing their own. Circle in the US has already established close ties to the US government to create company-friendly regulations. However, to win the stablecoin space race, the US government could make a stronger alliance with Circle or any other USD-stablecoin provider to cement its currency leadership position globally.
- Tokenization of real-world assets. Tokenization represents real assets as digital tokens, potentially transforming the financial industry. With a market opportunity projected to reach $16tn by 2030, traditional institutions like Blackrock and Franklin Templeton are investing in digital asset funds. One of the other many benefits is that people can access financial assets that they were not able to access before, such as supply chain trade finance and IP royalties from their favorite artist.
- Digital goods and marketplaces. Small businesses spend 50% of expenses on non-core activities and 22% on financial services. By using stablecoins, business owners can reduce operational costs, transitioning to a more efficient, internet-native market.
Back to the future
The opportunity for multiple generation-defining company here is very real. This is as frontier as it gets — to take financial services and money truly online.
While there are a lot of unanswered questions about how regulations will develop and technical challenges, the potential for innovation is vast. We are deeply optimistic about the prospects of stablecoins, not despite, but because of the challenges ahead. Stablecoins present a moonshot opportunity to rebuild the world’s economic infrastructure as internet-native technology. And we are excited to collaborate with the next generation of founders as they shape this space.
Our goal is to bridge the gap between real-world use cases of stablecoins and the technologies that can address them. We are actively investing in great teams building stablecoins as well as products on top.
For hundreds of years, financial services have operated offline. We are here to help build the next hundred years.
If you see the world differently and are driven by innovation in fintech, please reach out to fintech@eqtventures.com.
