Stablecoins: The Unsung Heroes of Crypto Adoption

On September 12, 2023, a high-level panel discussion titled 'Stablecoins and the Path to Mainstream Adoption' was held in Singapore. The panel was moderated by Dwight van Diem from BCW Group and included Aishwary Gupta from Polygon, Kevin Kang from Reap, Gagan Mac from Circle, Nabil Manji from Worldpay, and Karl Mohan from Crypto.com. The group of industry experts discussed stablecoin adoption and the key use cases driving it. They also emphasized the role of stablecoins as a core driver of crypto adoption.  

Crypto markets experienced a significant downturn in 2022, with their market capitalization falling from a peak of $3 trillion in November 2021 to approximately $1.4 trillion at the time of writing. This downturn, marked by the failures of crypto exchange FTX as well as prominent hedge funds like Alameda and Three Arrows Capital, led to an overall loss in investor confidence.

Despite this drop, the crypto ecosystem has demonstrated resilience, in particular by sectors that focus on real-world assets (RWA). Tokenized RWAs are off-chain assets represented as digital tokens on a blockchain, enabling their ownership and trade in the digital economy. Stablecoins stand out as the RWA with the highest adoption, boasting a market capitalization of $126 billion, which, at the time of writing, accounts for more than 90% of RWAs in the crypto sector. 

Stablecoins serve as a bridge between the traditional financial realm and the burgeoning digital asset ecosystem by enabling the transfer of money onto the blockchain ('on-ramping') and vice versa. Therefore, they act as a digital twin of traditional money, bringing a sense of familiarity to the crypto space. By mirroring the value of conventional currencies (mostly the USD), they also offer a degree of stability amidst the often volatile crypto markets. Stablecoins are favored in the digital asset space for their versatility in a range of contexts, which can be categorized into 'on-chain' and 'off-chain' use cases. 

In the early stages of crypto adoption, on-chain use cases emerged to provide crypto market participants with an anchor of stability and trading convenience. Stablecoins serve as a safe haven from volatile cryptocurrencies like Bitcoin and Ether during market turbulence, allowing investors to move assets without leaving the crypto ecosystem. They also provide a more stable form of collateral to borrow funds. In the context of crypto trading, fiat-backed stablecoins often function as one side of a trading pair. While initially large crypto exchanges operated as pure crypto-to-crypto exchanges, the growth of exchanges with stablecoin pairs shows that traders have a preference to operate with the latter.  

As the digital economy expands, so does the versatility of stablecoins, stretching beyond the blockchain into off-chain applications, which are increasingly driving the growth of the ecosystem. They can be broadly divided into three categories: money movement, store of value, and customer engagement. 

First, regarding money movement, stablecoins can significantly improve upon existing financial infrastructure. Traditional merchant settlements often stretch up to a month, but stablecoins cut through this delay, offering immediate, 24/7 settlements. This efficiency is particularly pronounced in cross-border transactions. As Gagan Mac from Circle noted during the panel, “Crypto really shows its worth when it makes sending money across borders faster and cheaper,” pointing out the shortcomings of traditional bank-based rails in these scenarios. This becomes evident, for example, when looking at a recent partnership between Circle, Polygon, and Worldpay. (video here) The partnership uses stablecoins to allow for an almost instantaneous blockchain-based settlement process between customer payouts and merchant settlements. It caters to a wide spectrum of global merchants and is a clear signal that big players are betting on stablecoins to streamline commerce. 

Resulting optimizations are not only saving time and cutting out middlemen, but in times of positive interest rates, they come with considerable capital efficiency gains. During the discussions, Karl Mohan from Crypto.com observed that “Now we are settling with USDC (on crypto.com visa card transactions in Australia), which means that the average funding from previously 9-10 days is down to just 2 days. Speeding up payments to just 2 days can save a lot of money when borrowing costs are at 5%.” At current rates, this acceleration in settlement times is not just a minor improvement; it's a game-changer.  

Second, panelists discussed stablecoins' advantages as a store of value in regions with less stable financial systems. Stated Aishwary Gupta from Polygon, “Latin America is one big example where we see much higher demand for U.S. Dollar-backed stablecoins than native currencies.” In places like Latin America, regular people are using stablecoins to protect their money from inflation. This trend is particularly pronounced in countries like Argentina, where the demand for stablecoins is strong. The World Bank highlights that despite a slight dip in inflation expected in 2023, the region continues to face high inflation rates, providing a fertile ground for stablecoin adoption as a hedge against diminishing purchasing power. In line with this, stablecoins are also adopted by some of Latin America's biggest payments companies like Mercado Pago. These developments underscore the role of stablecoins in providing a reliable store of value and a viable alternative to traditional banking systems, especially for the unbanked population. 

Third, stablecoin use cases driven by customer engagement are becoming integral to new engagement strategies. Companies are pairing stablecoins with crypto wallets and non-fungible tokens (NFTs) to reinvigorate customer interaction. For instance, Grab, one of Southeast Asia's most prominent ride-hailing apps, has embraced the confluence of stablecoins, crypto wallets, and NFTs to foster a novel customer engagement strategy through its Web3 app. The venture embarked on this technological integration in collaboration with stablecoin issuer Circle, to let users create a blockchain-enabled wallet and engage them through digital collectibles. This use case has been adopted by leading brands, with Starbucks, Tiffany, Gucci, and Porsche being key examples. Starbucks, for example, has launched Starbucks Odyssey, an NFT-based rewards program that aims to build a connected community around the company, even offering the potential for profit on secondary markets.  

Key discussions on the above use cases stressed the important role of proactive regulators in facilitating mass adoption. Kevin Kang from Reap highlighted this sentiment, stating, "I look forward to working with regulators that are forward-thinking because their frameworks will influence what is going to be adopted in other regions around the world." Governments and regulatory bodies are waking up to the potential benefits of stablecoins and crypto payment rails, as exemplified by initiatives like MiCA and the Digital Pound. These frameworks are not just bureaucratic exercises, they are essential for the scaling and widespread adoption of stablecoins and the broader crypto ecosystem.  

MiCA, which entered into force in June 2023, is a comprehensive regulatory framework aimed at creating a standardized approach to crypto assets within the EU. With a strong focus on stablecoins and consumer protection, it seeks to provide clarity to crypto asset service providers and issuers. Its goal is to create a conducive environment for the digital asset markets to thrive within the EU. The Digital Pound initiative follows a more targeted approach and explores the introduction of a central bank digital currency (CBDC) for retail use. This would involve significant public-private cooperation, aiming to create a digital counterpart to physical cash for everyday transactions. The consultations carried out by the Bank of England and HM Treasury to advance their Digital Pound initiative exemplify a progressive stance, which according to panelists is key to advance digital currency innovation. 

The panel concluded that stablecoins have started moving into the mainstream, offering efficiency and a strong product-market fit across the various use cases discussed. However, the regulatory landscape still needs to catch up. In that respect, Nabil Manji from Worldpay highlighted that "The role regulatory frameworks assign to banks will have a major impact on what payment companies are able to do with stablecoins." Indeed, as we look to the future, the role of banks in this evolving landscape becomes pivotal. Will they continue to be the linchpin in financial systems, especially in areas like cross-border payments, or will they find themselves increasingly disintermediated by emerging (payment) technologies?  

This post is commissioned by WorldPay and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.