Technology and crypto companies, and even a US state, have joined a rush to cash in on the recovery in the digital assets market by launching new stablecoins, but some industry experts warn there is little use for these tokens and many may not survive.
Latin American ecommerce group Mercado Libre, payments bank Banking Circle, crypto business Paxos International and Hong Kong-based IDA, and the state of Wyoming have unveiled plans for their own stablecoins in recent months.
They follow Ripple and payment group PayPal in trying to latch on to the recovering stablecoin market, which has swelled to a record $169bn of coins in circulation as prices of tokens such as bitcoin and ethereum have hit all-time highs earlier this year.
Stablecoins are akin to a form of digital cash that tracks the price of a reserve sovereign currency and also allow holders to trade more efficiently between different crypto assets.
The rush of launches highlights a growing conviction among entrants that crypto will transform everyday payments for consumers, despite the limited use of stablecoins in daily life so far.
But critics warn that most lack distinguishing features that would draw users away from industry giants Tether and Circle, which are widely used by traders, and many will not survive.
“The reality is a lot of them are just going to burn out,” said a senior crypto executive. “[Stablecoins] sit in two different dimensions, there’s Tether and there’s everything else.”
Entrants have been drawn in part to the potential profits on offer to stablecoin operators. Stablecoins typically track the value of the US dollar one for one and promise to keep the equivalent amount in dollars in reserve. Most put the billions of dollars in US Treasuries and keep the interest they earn on it. Rates in excess of 5 per cent helped Tether, which has about 70 per cent of the market, to a net profit of $5.2bn in the first half of this year.
“People see money, they see margin and think we can almost king-make a stablecoin,” the crypto executive added.
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Newcomers are largely betting on the idea that stablecoins will make payments easier, faster and cheaper, even though very few goods and services are available for purchase with them.
Ripple said its stablecoin, which it began testing last month, will “dramatically improve” the experience of people sending money across borders.
Wyoming’s stablecoin, set for early 2025, is intended to be used to pay for everyday goods such as coffee. Among the most crypto-friendly US states, Wyoming has sought to attract digital asset companies by passing laws recognising decentralised organisations and removing taxes on crypto investments, among others. It plans to use some of the proceeds from interest earned from the stablecoin to fund local schools.
But stablecoins remain largely used for crypto trading. According to data from Visa, on September 3 nearly 11.3mn payments used stablecoins. However, this number dropped by nearly 80 per cent when Visa stripped out trades linked to preprogrammed trading algorithms. Visa itself processed on average more than 802mn transactions a day last year, according to its annual report.
Etay Katz, partner at law firm Ashurst in London, said stablecoins so far have been “a novelty asset which some people find useful and some people just buy because they like the concept of retaining a cash-equivalent value in a digital wallet”.
“No significant bank is going to take risk on a stablecoin issuer on a new name, unregulated name or a start-up,” said Katz said, adding that in order to be used by major institutions, stablecoin developers “will need to get regulated in numerous places around the globe”.
To that end, many new operators are promoting their willingness to be regulated as a distinguishing virtue. Hong Kong-based digital asset company IDA raised $6mn this week to fund its development of a stablecoin regulated in the territory. Irish payments company DECTA created a euro-denominated stablecoin last month.
Many new entrants acknowledge that their primary uses are trading other cryptocurrencies or as an alternative store of value.
The banking arm of Mercado Libre created its own US dollar-backed stablecoin, which it said Brazilian customers can use “to protect themselves” from exchange rate volatility.
“Largely, stablecoins are used for trading purposes but we believe there are a lot of other use cases for a regulated stablecoin, for example, cross-border payments,” said Daniel Lee, head of web3 at Banking Circle, a bank with its headquarters in Luxembourg that launched its euro-denominated Eurite stablecoin last week.
But the coin’s “first-use case would always be trading”, he added.
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