As befits a rapidly evolving asset, new use cases for stablecoin continue to emerge in addition to recognised benefits such as ease of payment and speed of transaction.
There are various benefits to the use of stablecoins depending on geography and socio-economic circumstances including speed, accessibility, economic efficiency, finality and settlement, and interoperability.
“Stablecoins are increasingly used due to low cost and near-instant settlement for both retail and wholesale transactions,” explains Nejc Bizjak, head of strategy and business operations at Bitstamp. “They also offer currency exposure without access to banking in a specific currency.”
Earlier this year, Bitstamp announced a partnership with Stablecoin Standard that the company says highlights its commitment to driving innovation in digital finance and promoting stablecoins as a transformative use case for cryptocurrencies. By joining forces, Bitstamp aims to contribute to the development of a robust and compliant stablecoin ecosystem while supporting innovative projects and use cases.
Despite their benefits, cryptocurrencies are short-term volatile so the DeFi ecosystem and its participants also need everyday currency to transact in. This is still predominantly US dollar, which is a short term store of value and ‘weapon of choice’ in global daily commerce.
Despite their benefits, cryptocurrencies are short-term volatile
Mature instrument
Stablecoins represent a vehicle to conduct transactions and financial operations on the blockchain. Fully backed stablecoins are easy-to-understand and mature financial instruments and traction is growing as different parts of the value chain become more developed in terms of user experience. “For example, in remittance stablecoins are growing in popularity when on-ramping and off-ramping becomes easy and more accessible via services such as MoneyGram,” says Bizjak, who adds that sending USDC via the Stellar network from an exchange such as Coinbase to an exchange (for example, Bitstamp) and then to a SEPA-network bank account enables the sender to avoid the 2.5% margin currently collected by intermediaries.
“These amounts can quickly become material and this is a corridor between two of the largest currencies in the world,” he says.
The most trumpeted use case for stablecoins is cross border remittances. They can provide financial services to unbanked and underbanked populations, promoting financial inclusion, but the most important and popular use case is ramping from fiat to crypto and trading.
“For digital assets, the key advantage of stablecoins is the ability to move fiat into the crypto world seamlessly, a single, stable unit of value to leverage as liquidity and drive the maturation of the entire industry,” says Matthew de la Fuente, CEO of KYAX, a web3 financial reporting tool.
He refers to stablecoins as the backbone of DeFi, providing stability for lending, borrowing and trading across digital assets. “Everyday transactions are still a little way off, but in the land of FX they are driving massive adoption and engagement from a trading perspective.”
“Stablecoins are increasingly used due to low cost and near-instant settlement for both retail and wholesale transactions”
Nejc Bizjak
By cutting out intermediaries and replacing them with a software layer, stablecoins and DeFi dramatically reduce transaction costs compared to traditional banking, streamlining the transfer process.
Stablecoins that mirror currencies and operate across blockchains also offer leverage, hedging and arbitrage opportunities many times the potential of conventional FX.
“The only missing elements are liquidity and parties to trade with, but the opportunity is so huge that I am absolutely convinced that they will arrive,” says de la Fuente. “All of the traditional players will be there including banks and asset managers as well as DeFi degens.”
Stablecoins have the potential to revolutionise foreign aid delivery
Aid impact
Matthew de la Fuente believes that stablecoins have the potential to revolutionise foreign aid delivery by enabling transparent, cheap and targeted deployment of capital from donor to recipient.
“In regions with limited banking infrastructure, stablecoins can provide access to financial services, while smart contracts can be used to create conditional aid programmes, ensuring funds are used for specific purposes and delivered based on predetermined criteria, driving accountability, transparency and limiting the need for intermediaries,” he says.
He encourages the stablecoin community to focus on specific industries and use cases, with an understanding that there are definitive, valuable use cases available for them to support which are primarily (but not limited to) emerging markets and payments.
“Market participants also need to collaboratively engage and educate critical stakeholders to increase their understanding of stablecoins and their benefits”
Matthew de la Fuente
“Promoting interoperability across chains and currencies will supercharge the FX component of the market enabling seamless transfers, leverage, and arbitrage opportunities, expanding their utility and integration with traditional finance,” says de la Fuente.
“Market participants also need to collaboratively engage and educate critical stakeholders to increase their understanding of stablecoins and their benefits, demystify the sector and promote financial education to empower individuals and companies to make informed decisions, for example through the Institute of Directors’ web3 group, which connects members with Blockchain related initiatives,” he adds.
Finally, there is a need to understand the complex competitive dynamics involved in the relationship with traditional finance.
As trading assets, stablecoins serve as quote currency – the second currency listed in an FX pair – in many offshore cryptocurrency exchanges and are also traded by businesses, corporates and individuals without access to the US dollar system.
Investment vehicle
In high interest environments they become interesting investment vehicles, especially if they are interest rate bearing. “We now have projects like Ondo Finance, Hashnode and PV01 that offer yield bearing stablecoins which provide very competitive yields with acceptable robustness, security and liquidity compared to traditional financial products, whilst being magnitudes more accessible,” says Bizjak.
Given that digital assets can efficiently transfer value across borders, one of the most interesting potential roles for stablecoins is in the delivery of foreign aid.
According to de la Fuente, the main limitations around how stablecoins can be used relate to new technology challenges, regulatory hurdles, market risk and user adoption.
“The overwhelming constraint for stablecoins right now is user adoption,” he says. “This is an entirely new digital ecosystem – think wallets, on-ramps, coins, wrapped tokens (a type of cryptocurrency that represents a pegged equivalent value of another cryptocurrency on a different blockchain). New language, concepts, business models and trust will take time to embed.”
Bizjak acknowledges that there are still issues with last-mile payouts where a banking intermediary still often needs to step in. However, in countries with high levels of inflation a parallel economy with high penetration of blockchain wallets has started to develop with high levels of utility, enabling non-government non-profits to effectively deliver aid by solely using blockchain based channels.
stablecoins also have a role to play in evolving tokenised markets as a settlement asset and as yield bearing collateral or cash equivalent.
“We already see indications that large financial institutions are experimenting with moving parts of their portfolios of securities or investment vehicles to the blockchain,” says Bizjak. “In such cases, stablecoins serve as the most natural settlement asset for those products.”
He says there are a number of steps the stablecoin community could take to identify new use cases, including effectively identifying the largest financial markets by size and looking at their inefficiencies and focusing on user experience and accessibility of different stablecoins through last mile partnerships and last mile utility.
Industry consolidation
As for how the market will develop, Bizjak says we can reasonably expect that the majority of everyday consumers will not notice that they are using stablecoins or dollars/euros. On the infrastructure side, following a series of new and expected market entries in 2024, there should be a degree of industry consolidation as players will struggle to achieve economies of scale. This can also be achieved through partnerships, multi-issuance and consortium approaches.
“However, the big goal is for peer-to-peer transfers between corporates and individuals becoming easier, more transparent and more global (in other words, more interoperable) whilst preserving a level of privacy,” he adds. “If it is hard to make peer-to-peer transfers between a US and EU person now, stablecoins unlock such use cases.”
Another potential area of development is the non-USD stablecoin. A report published last year by DRW subsidiary Cumberland noted that although USD stablecoins account for almost all the market cap of all fiat-linked stablecoins, there are several key use cases for non-USD stablecoins that should have a role to play in the future of crypto.
de la Fuente notes that stablecoins have been accelerated by a definite shift towards a digital, Web3-native world and the (troubling) decline of physical cash, forces that are pushing central banks to explore their own digital currencies.
“This could lead to a new era of digital money issued, controlled and backed by governments,” he says. “The dangers in transparent, ‘always reporting’ money are obvious and will need to be addressed head on. However, in some cases in more deprived areas, stablecoins can provide access to financial services for the unbanked and underbanked, expanding the reach of monetary systems.”
Compared to traditional banking systems, stablecoins offer faster, cheaper and more efficient transactions. “While adoption, regulation and security challenges need to be addressed, the long-term potential of stablecoins to reshape the financial landscape have already proven significant,” concludes de la Fuente.
Compared to traditional banking systems, stablecoins offer faster, cheaper and more efficient transactions
Realising the potential of stablecoins: Exploring their uses and importance
As befits a rapidly evolving asset, new use cases for stablecoin continue to emerge in addition to recognised benefits such as ease of payment and speed of transaction.
There are various benefits to the use of stablecoins depending on geography and socio-economic circumstances including speed, accessibility, economic efficiency, finality and settlement, and interoperability.
“Stablecoins are increasingly used due to low cost and near-instant settlement for both retail and wholesale transactions,” explains Nejc Bizjak, head of strategy and business operations at Bitstamp. “They also offer currency exposure without access to banking in a specific currency.”
Earlier this year, Bitstamp announced a partnership with Stablecoin Standard that the company says highlights its commitment to driving innovation in digital finance and promoting stablecoins as a transformative use case for cryptocurrencies. By joining forces, Bitstamp aims to contribute to the development of a robust and compliant stablecoin ecosystem while supporting innovative projects and use cases.
Despite their benefits, cryptocurrencies are short-term volatile so the DeFi ecosystem and its participants also need everyday currency to transact in. This is still predominantly US dollar, which is a short term store of value and ‘weapon of choice’ in global daily commerce.
Despite their benefits, cryptocurrencies are short-term volatile
Mature instrument
Stablecoins represent a vehicle to conduct transactions and financial operations on the blockchain. Fully backed stablecoins are easy-to-understand and mature financial instruments and traction is growing as different parts of the value chain become more developed in terms of user experience. “For example, in remittance stablecoins are growing in popularity when on-ramping and off-ramping becomes easy and more accessible via services such as MoneyGram,” says Bizjak, who adds that sending USDC via the Stellar network from an exchange such as Coinbase to an exchange (for example, Bitstamp) and then to a SEPA-network bank account enables the sender to avoid the 2.5% margin currently collected by intermediaries.
“These amounts can quickly become material and this is a corridor between two of the largest currencies in the world,” he says.
The most trumpeted use case for stablecoins is cross border remittances. They can provide financial services to unbanked and underbanked populations, promoting financial inclusion, but the most important and popular use case is ramping from fiat to crypto and trading.
“For digital assets, the key advantage of stablecoins is the ability to move fiat into the crypto world seamlessly, a single, stable unit of value to leverage as liquidity and drive the maturation of the entire industry,” says Matthew de la Fuente, CEO of KYAX, a web3 financial reporting tool.
He refers to stablecoins as the backbone of DeFi, providing stability for lending, borrowing and trading across digital assets. “Everyday transactions are still a little way off, but in the land of FX they are driving massive adoption and engagement from a trading perspective.”
“Stablecoins are increasingly used due to low cost and near-instant settlement for both retail and wholesale transactions”
Nejc Bizjak
By cutting out intermediaries and replacing them with a software layer, stablecoins and DeFi dramatically reduce transaction costs compared to traditional banking, streamlining the transfer process.
Stablecoins that mirror currencies and operate across blockchains also offer leverage, hedging and arbitrage opportunities many times the potential of conventional FX.
“The only missing elements are liquidity and parties to trade with, but the opportunity is so huge that I am absolutely convinced that they will arrive,” says de la Fuente. “All of the traditional players will be there including banks and asset managers as well as DeFi degens.”
Stablecoins have the potential to revolutionise foreign aid delivery
Aid impact
Matthew de la Fuente believes that stablecoins have the potential to revolutionise foreign aid delivery by enabling transparent, cheap and targeted deployment of capital from donor to recipient.
“In regions with limited banking infrastructure, stablecoins can provide access to financial services, while smart contracts can be used to create conditional aid programmes, ensuring funds are used for specific purposes and delivered based on predetermined criteria, driving accountability, transparency and limiting the need for intermediaries,” he says.
He encourages the stablecoin community to focus on specific industries and use cases, with an understanding that there are definitive, valuable use cases available for them to support which are primarily (but not limited to) emerging markets and payments.
“Market participants also need to collaboratively engage and educate critical stakeholders to increase their understanding of stablecoins and their benefits”
Matthew de la Fuente
“Promoting interoperability across chains and currencies will supercharge the FX component of the market enabling seamless transfers, leverage, and arbitrage opportunities, expanding their utility and integration with traditional finance,” says de la Fuente.
“Market participants also need to collaboratively engage and educate critical stakeholders to increase their understanding of stablecoins and their benefits, demystify the sector and promote financial education to empower individuals and companies to make informed decisions, for example through the Institute of Directors’ web3 group, which connects members with Blockchain related initiatives,” he adds.
Finally, there is a need to understand the complex competitive dynamics involved in the relationship with traditional finance.
As trading assets, stablecoins serve as quote currency – the second currency listed in an FX pair – in many offshore cryptocurrency exchanges and are also traded by businesses, corporates and individuals without access to the US dollar system.
Investment vehicle
In high interest environments they become interesting investment vehicles, especially if they are interest rate bearing. “We now have projects like Ondo Finance, Hashnode and PV01 that offer yield bearing stablecoins which provide very competitive yields with acceptable robustness, security and liquidity compared to traditional financial products, whilst being magnitudes more accessible,” says Bizjak.
Given that digital assets can efficiently transfer value across borders, one of the most interesting potential roles for stablecoins is in the delivery of foreign aid.
According to de la Fuente, the main limitations around how stablecoins can be used relate to new technology challenges, regulatory hurdles, market risk and user adoption.
“The overwhelming constraint for stablecoins right now is user adoption,” he says. “This is an entirely new digital ecosystem – think wallets, on-ramps, coins, wrapped tokens (a type of cryptocurrency that represents a pegged equivalent value of another cryptocurrency on a different blockchain). New language, concepts, business models and trust will take time to embed.”
Bizjak acknowledges that there are still issues with last-mile payouts where a banking intermediary still often needs to step in. However, in countries with high levels of inflation a parallel economy with high penetration of blockchain wallets has started to develop with high levels of utility, enabling non-government non-profits to effectively deliver aid by solely using blockchain based channels.
stablecoins also have a role to play in evolving tokenised markets as a settlement asset and as yield bearing collateral or cash equivalent.
“We already see indications that large financial institutions are experimenting with moving parts of their portfolios of securities or investment vehicles to the blockchain,” says Bizjak. “In such cases, stablecoins serve as the most natural settlement asset for those products.”
He says there are a number of steps the stablecoin community could take to identify new use cases, including effectively identifying the largest financial markets by size and looking at their inefficiencies and focusing on user experience and accessibility of different stablecoins through last mile partnerships and last mile utility.
Industry consolidation
As for how the market will develop, Bizjak says we can reasonably expect that the majority of everyday consumers will not notice that they are using stablecoins or dollars/euros. On the infrastructure side, following a series of new and expected market entries in 2024, there should be a degree of industry consolidation as players will struggle to achieve economies of scale. This can also be achieved through partnerships, multi-issuance and consortium approaches.
“However, the big goal is for peer-to-peer transfers between corporates and individuals becoming easier, more transparent and more global (in other words, more interoperable) whilst preserving a level of privacy,” he adds. “If it is hard to make peer-to-peer transfers between a US and EU person now, stablecoins unlock such use cases.”
Another potential area of development is the non-USD stablecoin. A report published last year by DRW subsidiary Cumberland noted that although USD stablecoins account for almost all the market cap of all fiat-linked stablecoins, there are several key use cases for non-USD stablecoins that should have a role to play in the future of crypto.
de la Fuente notes that stablecoins have been accelerated by a definite shift towards a digital, Web3-native world and the (troubling) decline of physical cash, forces that are pushing central banks to explore their own digital currencies.
“This could lead to a new era of digital money issued, controlled and backed by governments,” he says. “The dangers in transparent, ‘always reporting’ money are obvious and will need to be addressed head on. However, in some cases in more deprived areas, stablecoins can provide access to financial services for the unbanked and underbanked, expanding the reach of monetary systems.”
Compared to traditional banking systems, stablecoins offer faster, cheaper and more efficient transactions. “While adoption, regulation and security challenges need to be addressed, the long-term potential of stablecoins to reshape the financial landscape have already proven significant,” concludes de la Fuente.
Compared to traditional banking systems, stablecoins offer faster, cheaper and more efficient transactions