Stablecoins are essentially banking as a service, and their uses are far from being truly explored

Original author: Jack Chong

Original translation: TechFlow

Stablecoin is an internet-native form of monetary liability and a new generation of Banking as a Service (BaaS).

The form of stablecoins (assets) will not change, we are only just beginning to explore their utility. Here are some mental models to predict the future development of stablecoins:

Stablecoins are the next generation of Banking as a Service (BaaS)

In Web2 Fintech, a wave of startups offer Banking as a Service (BaaS) for building new applications on top of it.

These BaaS companies act as middleware, simplifying the complexity of interacting with traditional banks. For example, companies such as @Venmo, @wise, @CashApp, @Affirm, etc. have benefited from BaaS and launched new types of products, such as new P2P payments, buy now pay later (BNPL), and cross-border payments.

All account holders who deposit their funds in fractional reserve banking take the risk that the bank will not fail. But the failure of Silicon Valley Bank taught us that nothing is absolutely certain.

Unfortunately, one of the leaders, Synapse, has gone bankrupt, causing great distress to its customers and partners.

And one of the main sponsoring banks, Evolve Bank, also suffered a massive data breach when it was attacked by Russian hackers.

So, what are the alternatives to Banking as a Service? If BaaS has driven the development of Fintech 2.0, then stablecoins are enabling Fintech 3.0.

Fiat-backed stablecoins (e.g. @circle, @Tether_to, @Paxos) represent claims on-chain, where these tokens are backed by some form of fiat collateral and held somewhere off-chain.

assets

Issuers do not make loans; they are narrow banks.

Liabilities

Tokens are now distributed on the blockchain. Anyone with a wallet and internet access can buy and hold these tokens from the secondary market.

Functionally, stablecoins provide consumers with the same services as Banking as a Service (BaaS).

Holding $USDC as a non-US user is equivalent to having a USD account through @Wise.

If you hold $USDC, you face the risk of Circle as the issuer, the risk of BlackRock as the securities broker, and the risk of Circle’s banking partners.

If you have a USD account through @Wise, you are exposed to the risk of Wise’s BaaS partners and the sponsoring banks behind them (fractional reserves).

So why have stablecoins achieved such huge growth in such a short period of time?

It all comes down to how liabilities are distributed (deposits in Web2 vs stablecoins in Web3).

In Web2, deposits are trapped in closed networks (e.g., domestic payment networks and SWIFT).

In Web3, stablecoins are recorded on public blockchains from the beginning and are open networks.

This also explains why public blockchains may achieve the Lindy effect (Translators note: The Lindy Effect means that the longer something exists, the greater the probability that it will continue to exist in the future), because they are the focus of coordination for all market participants.

See tweet for details

This brings me to my next point:

The form of stablecoins (i.e. the asset side) will not change in the future

1. Because stablecoins must focus on distribution (i.e. liabilities), issuers will naturally tend to have the same asset composition.

About Regulation

Regulators (such as the United States, the European Union, Hong Kong, etc.) are narrowly focusing stablecoin regulation on the asset side, where it is relatively simple to specify asset types and how to manage assets.

If you want to protect consumers, it also makes sense to regulate the asset (see algorithmic support for Terra/Luna).

2. While the form of stablecoins will not change much, the utility of stablecoins (i.e. how liabilities are used) is far from being fully explored

Imagine that the essence of payment is to transfer $x from one place to $y, subject to certain conditions.

This is my mental model.

The payment process is divided into three steps:

• Payment entry

• Conversion

• Payment export

In this workflow, you need to think about, for example, what is this payment for? Once the transaction is completed, you need to record it in the ledger, and once the transaction is received, you need to combine it with the invoice.

Currently, stablecoins have a very clear utility: deconstructing the traditional correspondent banking network through a new set of service providers. No longer relying on a single SWIFT transaction, you can now break it down into: deposit -> BaaS -> LPs conversion -> BaaS -> withdrawal. In this way, you can combine the best services in each link and provide a better user experience.

In fact, this is how @mgiampapa 1, @will_beeson, @bkohli described it on the @rebankpodcast.

For details, please refer to

But are cross-border payments the only use of stablecoins?

I dont think so.

There is a lot of untapped potential around programmable money.

If the logic of “if X, then Y” can be applied to the entire payment workflow, what about the mutual transfer of value between machines?

See tweet for details

How do companies like @sentient_agi monetize data feeds for large language models (LLMs) per inference call?

See tweet for details

About Regulation

How do regulators view the utility of stablecoins? In my opinion, the only thing that matters is Know Your Customer (KYC).

The most obvious regulatory conflicts I see are:

• If stablecoins are indeed similar to banking as a service (BaaS), should regulators regulate stablecoins in the same way they regulate BaaS? This is the question of functional equivalence.

• Should stablecoins allow anonymity like cash?

If the first scenario happens, the entire stablecoin industry will collapse, and both market capitalization and trading volume will be halved. In this way, the United States will lose a large source of demand for U.S. Treasury bonds (UST).

See tweet for details

While the second scenario is possible, I expect strong opposition from incumbents and offshore banks that benefit from the status quo.

See tweet for details

This article is sourced from the internet: Stablecoins are essentially banking as a service, and their uses are far from being truly explored

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