I agree with your analysis below. There is virtually no incentive to keep balances in Stablecoins for very long. The key users today are active crypto traders who use Stable as an intermediate step between fiat & crypto, so they need the ready liquidity, but virtually no one else does. As I pointed in the post, 85% of Circle's coins were redeemed in the same year they were minted.
There are ways to change the incentives: 1)The coin issuer can reward the coin holder in some fashion as PayPal is doing with 3.7% "rewards"; 2) The coin issuer can introduce onramp or offramp fees to make it costlier to go in and out rather than stay in.
Of course, the first solution may cause holders not to spend their coins at all and the second may cause them to avoid coins except for exact amounts when they are required by the receiver. So there is no outcome that keeps everyone happy.
Alaina -- thank you for the comments! I don't get enough of these. You are correct of course that any electronic payment is subject to Reg E or Z. What I meant was not that they weren't subject to the regulations, but that they were not configured to deal with legitimate Reg E disputes like "never delivered" and "wrong item", or second-party fraud or ATO. They just don't have mature chargeback processes to deal with consumer commerce. So the disputes will still happen but the friction associated with those disputes is much higher than the card ecosystem which has been dealing with chargebacks since inception
It does not show any signs of displacing debit in the US. The closest would be use of Zelle which is instant availability but next day settlement. But Zelle can only be used at small merchants.
The challenges are different here: 1) we have two, non-interoperable Instant systems 2) Not every bank has adopted both yet 3) Most merchants don't accept them yet. 4) Debit is already fairly inexpensive (70% of transactions cost around 25 cents). 5) Instant systems don't have robust chargeback mechanisms which are needed to comply with Reg E (consume protection rules) 6) consumer inertia (Instant may be cheaper for merchants but does nothing extra for consumers
Love this content! I’m a new reader and still relatively new to the payments space, but I’m finding your posts super insightful and well-explained. One slightly tangential question on this post (that maybe presupposes some level of stablecoin usefulness as well): do you think real-time conversion of stablecoin-to-fiat payments could pose an (eventual) threat to the stablecoin revenue model?
You mentioned that USDC earns 95–99% of its revenue by monetizing fiat collateral. From what I understand, this works because 1) settlement of fiat isn’t instant, which gives issuers time to hold and invest reserves and 2) the net stablecoin supply stays high because new minting offsets redemptions — creating a persistent reserve balance that earns yield.
If redemptions of stablecoins into fiat happened in real-time, wouldn’t that erode the float stablecoin issuers rely on to earn interest — and significantly reduce their revenue?
Assuming this understanding is directionally correct (please correct me if not), I’m curious how you think about this longer-term. Considering future demand and technological feasibility, is real-time stablecoin-to-fiat redemption / settlement a realistic long-term threat to the current stablecoin revenue model? And if so, does this imply that stablecoin issuers eventually need to develop new revenue streams or incentivize merchants/users to hold inbound stablecoins (e.g., if those merchants can easily spend them natively without converting to fiat)?
with increases of instant P2P payment (like FedNow, India's UPI, Sinapore's PayNow, etc..), I find Debit card usage is dropped in India, South East Asia.. if FedNow works similar than this can replacement debit card usage in US.
Super helpful blog as always. One minor correction: instant systems do have Reg E protections. An instant payment from or to a consumer account is an EFT and so Reg E’s error resolution requirements apply. Of course there is no inter-bank liability shift for unauthorized instant payments since they are credit-push and, as you note, they are irrevocable so no guarantee that funds will be returned by the receiving bank. But this does not change a sending bank’s Reg E obligations to its consumer sender.
Beyond the use case, that still needs some tweaking as you mention, what does the actual value chain with a stablecoin as the rails look like?
Consumers will still 'swipe' their credit card most likely, unless we expect them to use their alternative wallets (a crypto wallet, Paypal wallet etc) - which sounds too niche to me.
Sounds like a back end use case IMO and not a consumer facing one?
I agree with your analysis below. There is virtually no incentive to keep balances in Stablecoins for very long. The key users today are active crypto traders who use Stable as an intermediate step between fiat & crypto, so they need the ready liquidity, but virtually no one else does. As I pointed in the post, 85% of Circle's coins were redeemed in the same year they were minted.
There are ways to change the incentives: 1)The coin issuer can reward the coin holder in some fashion as PayPal is doing with 3.7% "rewards"; 2) The coin issuer can introduce onramp or offramp fees to make it costlier to go in and out rather than stay in.
Of course, the first solution may cause holders not to spend their coins at all and the second may cause them to avoid coins except for exact amounts when they are required by the receiver. So there is no outcome that keeps everyone happy.
Alaina -- thank you for the comments! I don't get enough of these. You are correct of course that any electronic payment is subject to Reg E or Z. What I meant was not that they weren't subject to the regulations, but that they were not configured to deal with legitimate Reg E disputes like "never delivered" and "wrong item", or second-party fraud or ATO. They just don't have mature chargeback processes to deal with consumer commerce. So the disputes will still happen but the friction associated with those disputes is much higher than the card ecosystem which has been dealing with chargebacks since inception
It does not show any signs of displacing debit in the US. The closest would be use of Zelle which is instant availability but next day settlement. But Zelle can only be used at small merchants.
The challenges are different here: 1) we have two, non-interoperable Instant systems 2) Not every bank has adopted both yet 3) Most merchants don't accept them yet. 4) Debit is already fairly inexpensive (70% of transactions cost around 25 cents). 5) Instant systems don't have robust chargeback mechanisms which are needed to comply with Reg E (consume protection rules) 6) consumer inertia (Instant may be cheaper for merchants but does nothing extra for consumers
Love this content! I’m a new reader and still relatively new to the payments space, but I’m finding your posts super insightful and well-explained. One slightly tangential question on this post (that maybe presupposes some level of stablecoin usefulness as well): do you think real-time conversion of stablecoin-to-fiat payments could pose an (eventual) threat to the stablecoin revenue model?
You mentioned that USDC earns 95–99% of its revenue by monetizing fiat collateral. From what I understand, this works because 1) settlement of fiat isn’t instant, which gives issuers time to hold and invest reserves and 2) the net stablecoin supply stays high because new minting offsets redemptions — creating a persistent reserve balance that earns yield.
If redemptions of stablecoins into fiat happened in real-time, wouldn’t that erode the float stablecoin issuers rely on to earn interest — and significantly reduce their revenue?
Assuming this understanding is directionally correct (please correct me if not), I’m curious how you think about this longer-term. Considering future demand and technological feasibility, is real-time stablecoin-to-fiat redemption / settlement a realistic long-term threat to the current stablecoin revenue model? And if so, does this imply that stablecoin issuers eventually need to develop new revenue streams or incentivize merchants/users to hold inbound stablecoins (e.g., if those merchants can easily spend them natively without converting to fiat)?
with increases of instant P2P payment (like FedNow, India's UPI, Sinapore's PayNow, etc..), I find Debit card usage is dropped in India, South East Asia.. if FedNow works similar than this can replacement debit card usage in US.
Super helpful blog as always. One minor correction: instant systems do have Reg E protections. An instant payment from or to a consumer account is an EFT and so Reg E’s error resolution requirements apply. Of course there is no inter-bank liability shift for unauthorized instant payments since they are credit-push and, as you note, they are irrevocable so no guarantee that funds will be returned by the receiving bank. But this does not change a sending bank’s Reg E obligations to its consumer sender.
Beyond the use case, that still needs some tweaking as you mention, what does the actual value chain with a stablecoin as the rails look like?
Consumers will still 'swipe' their credit card most likely, unless we expect them to use their alternative wallets (a crypto wallet, Paypal wallet etc) - which sounds too niche to me.
Sounds like a back end use case IMO and not a consumer facing one?