Stablecoins are entering the mainstream in many different ways. For the moment, payments done in stablecoins is lagging, something that will change as more traditional companies enter the market. This does not mean, however, that we are not seeing expansion.
Wall Street is about to take over. The reason I say this is because of where stablecoins are heading towards becoming a security. Remember, Wall Street excels at laying products on top of each other.
This is what is going to happen with stablecoins.
Right now, according to estimates, yield bearing stablecoins account for 6% of the market. This is going to explode over the next few years.
Yield bearing stablecoins are those that pay interest to the holding it. This is a bit different from coins such as Tether or USDC. For this reason, we will dive into what is happening.
To start, we are talking about an asset that is going to be considered a security. This is why it is under the realm of Wall Street (and part of their takeover).
With Tether or Circle, they issue out stablecoins that are backed by US Treasuries. We spoke of how US regulation is going to necessitate asset backing.
This is done with yield bearing instruments. For both these companies, the selection is T-Bills. Naturally, this pays a yield from the issuer, i.e. the government.
USDC and USDT are not securities since the "sale" to the public is nothing more than a token. If these coins paid the interest to the holders, that would shift the designation. Instead, Circle and the Tether Foundation keep the payouts for themselves.
Blackrock changed this by bringing out a yield bearing stablecoin called BUIDL. It is backed by Treasuries yet the yield is paid to the token holders. BUIDL is only available to institutions so Blackrock did not have to worry about filing as a security.
If, however, an issuer did want to deal with the general public (non-accredited investor), then a filing of this nature is necessary. Hence, the stablecoin issued would be a security. This means greater compliance and reporting.
Of course, this is commonplace for these firms. The problem arises for smaller entities that want to get involved.
According to JP Morgan, the stablecoin market is about to undergo a profound change. We are looking at the potential of 50% of the stablecoin total falling under this category.
That means a lot of stablecoins will be produced. It will also, in my opinion, alter a lot of the players.
As noted in past articles, we are going to see hundreds of companies bringing out stablecoins once US regulation is clear. The question is what will be created?
I can envision a realm where Big Tech takes control. They have the ability to offer this as a value add instead of as a money maker.
Blackrock charges between .20%-.50% management fee on its BUIDL fund depending upon the chain the tokens are located upon. This is how the firm makes its money. Whatever else is produced by the fund, from Treasuries or Repo agreements, is distributed to the token holders.
As we can imagine, if we are talking $100M-$200M, this adds up to some money.
Let us contrast this with Meta. If it offered a yield bearing stablecoin, that firm has the resources to navigate compliance. This checks one of the boxes.
If it opted to issue a security, what would be the advantage? As we can see, the fees that Blackrock charges are no longer necessary. To Meta, the revenue would be a drop in the proverbial profit bucket. In other words, it wouldn't be noticeable.
The same is not true for token holders, especially larger companies. There are entities (and individuals) who operate in tens of millions of dollars. If we apply .50% to that, we get a fair bit of money.
A company like Meta is more concerned with network effects as much as per feature profits. To Big Tech, it is all part of the package. Wall Street operates using a different model. This is where Fintech and traditional finance square off.
The lines are blurring. It is something to watch as we move forward.
