This is how I understand the uprising of stablecoins, let me know if I am wrong:
One of the best businesses is to offer this service:
Give me your money, I'll give it back to you later.
Because then you can lend out that money to someone who offers this service:
Give me your money, I'll give it back to you later. Plus some interest.
You now have a business which, at almost no cost, generates money. The interest offered by the latter service.
Doing so is regulated. You need to jump through a lot of hoops and you are very limited in whom you can lend out your customers' money to.
But you can design the same type of business with stablecoins. By offering:
Hello! I have two offerings: 1: I sell someNiceCoin for a dollar. 2: I buy someNiceCoin for a dollar.
For your customer it is the same. They give you money and get it back later.
But now you are not a "money holder". You are a trader. A trader of some coin you invented. You don't need to jump through so many hoops and you can lend out the money you earn from selling someNiceCoin to services with higher yields.
I think this is somewhat reasonable, but with plenty of asterisks / not the "arbitrage" this would imply.
There is still a "real", regulated money-holder in the loop - it's just Bridge (the manager of the cash reserves backing the coin - and licensed money transmitter etc etc). Or in the case of USDC - Circle, the "money-holder" / manager of reserves (also has tons of licensed / is very regulated). And the ETH network (where the coin itself sits) for much of the tech / logistics of making that held-money usable.
In fact - because neither Bridge nor Circle are banks, they can't do the fractional reserve that banks do, and are only allowed to do the 1:1 backed thing, with super regulated entities like BlackRock. "you can lend out the money you earn from selling someNiceCoin to services with higher yields" is strictly not true - they _cannot_ lend the money out, they have to store the money in ways that the end-consumers could do themselves, directly.
In that frame - the "efficiency" for you as a fintech is that instead of having to work with a bank on a "stored value" program, you can just work with Bridge and Circle, whose technological primitives are leaps / bounds ahead of the bank, but more importantly - who are much more flexible to work with than the median "partner bank", because they are not banks.
The whole "partner bank" ecosystem only really even scales because there are API providers like Increase.com / Unit.co etc to wrap them.
What you describe sounds like the opposite of my perspective.
You make it sound like stablecoins offer a benefit to all sides because of better technology.
My expectation is that they offer a benefit to the borrower because the borrower is less regulated and can lend out the money with higher risk and by doing so generate a higher yield.
You mention "1:1 backed thing, with super regulated entities" as if that means the money is safe. But as we have seen with Silicon Valley Bank, even lending out the money to the government via bonds is not safe enough in all circumstances. And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
The difference is in the assumption of "higher risk". Most of this borrowing is eventually the US Govt because the stablecoins are backed by T bills. So its not as much of an arbitrage as you say.
But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
> But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
This strikes me as among the biggest macro risks, and (IIRC) is one of the reasons banks are fighting to prohibit stablecoins from granting yield (to keep the banking system working).
A different primitive that is related to stablecoin but not the same thing, popular among banks, is the "deposit token" - basically a stablecoin, but backed by bank deposits rather than 1:1 cash reserve, and operated by banks. eg. JPM's "JPMD": https://www.jpmorgan.com/payments/newsroom/kinexys-usd-digit...
Not sure how popular / active they are yet, but I imagine they will become a bigger deal as stablecoins are further regulated / banks push harder on their own interests.
> you can lend out the money you earn from selling someNiceCoin to services with higher yields.
> And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
To be clear - stablecoin issuers are not allowed to "lend" the money out like a bank or a regulated lender _at all_ - much less doing "riskier" lending. Bridge and Circle still have to, by law, maintain 1:1 cash/cash-equivalent [0] reserves, which means the best they can do is things like US treasuries / money-market funds - which are also primitives accessible to consumers and businesses directly (ie. not inherently competitive).
Certainly there is still great benefit to Bridge, Circle, and the customers issuing stablecoins through them - because it gets them MMF/treasury yield without having to do a "stored value" program at a bank etc - but the issuers who are converting user deposits into stablecoins are also only getting user deposits in exchange for doing useful things.
People don't deposit funds into Mercury just because Mercury gives them 4% (there are plenty of places you can get 4%). You put money into Mercury for the software - this is primarily an implementation detail of how Mercury manages that money, affords to give you a competitive (4%) rate, and affords to give you great software.
1:1 cash/cash-equivalent reserves, which means the
best they can do is things like US treasuries /
money-market funds
Whether US Treasuries are "cash equivalent" is debatable / depends on the specifics. A dollar is worth a dollar tomorrow. A 10-year US treasury might not.
Are you saying the holder of a stable coin is not taking a higher long-tail risk than the holder of a dollar in a checking account of a bank?
To be even more specific though, "cash equivalent" and the sorts of treasuries that implies are specifically short-duration ones (ie. this cash cannot be parked in a 10-year US treasury either)
Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount"
I think the difference is that there is still a maintenance of stored value, but that stored value is now able to earn more yield than what you would by depositing it at a bank.
In both the cases described in the article - using Unit or Bridge - you pass on the work of stored value to someone else. But Unit doesn't earn as much by being the stored value as Bridge would because Bridge is invested into T bills / MMFs. Hence, Mercury coin is better than running a bank using Unit.
(For those of us who remember what runs on a bank with your savings in it feel like) What if any protection is there, that you will be able to withdraw your money when a massive dunk in Bitcoin crashes a bunch of major holders and you want your savings back?
"It’s always backed one-to-one by the equivalent value of US dollars held in cash and short-duration money market funds at BlackRock."
So while there are other (potentially novel) sorts of counterparty risks - the backing is definitely more robust than (and pretty much entirely decoupled from) Bitcoin/the rest of the crypto sphere, and is closer to dropping funds off in a Fidelity money market.
Indeed, and good call out; one likely source of the "novel" counterparty risk I allude to (though really not even novel - "different" is probably the more reasonable word).
There are some real questions here. If you issue a "branded stablecoin", are you responsible if the company holding the reserves goes bust or is "hacked"? Probably.
You're certain to be sued. Can't disclaim that liability. Can't be anonymous. See the new GENIUS Act [1].
Seems like a really inefficient way to do points… my CC company gives me 3 points and I eventually redeem them for USD.
Is that not the L1 L2 network stuff, but just far less efficient than a DB write?
From the consumer perspective totally - but those credit card points come from the interchange the issuer makes from issuing the card / your card txns (ie. as a proportion of your _spend_ using the card).
The sort of rewards you get for storing your business's cash at eg. Mercury, or using a wallet like Cash App - have to come from yield generated by the actual cash deposits, which is the sort of program that is much harder to operate / requires close ongoing partnership with partner banks / etc.
If I'm eg. Mercury, storing the dollars you (business) deposit into my platform in a "branded" stablecoin will get me the same rewards - bc it's backed 1:1 by eg. a money-market fund at Blackrock - for much less of the operational burden, _because_ I'm not participating in a stored value program at an actual bank. The alternative today is that Mercury does store it at a bank, does have to maintain a "stored value" program with that bank, and the yields are standard bank interest (rather than eg. MMF).
Moreover - through Bridge, I can withdraw fiat USD and deposit fiat USD into that "branded stablecoin", and it's just an in-app balance in the fintech app - so the fact that it's a stablecoin doesn't change my experience at all other than in conferring standard rewards. If you look at how eg. Stripe Stablecoin Account labels the balance, it just calls it "Digital dollars" - so it's not much more than a backend implementation detail, really.
I'm not sure if I'm missing the point here, but stablecoins could be exchanged for something of value at a fixed price. The USD used to be this - you could exchange it for gold. But it was more convenient to give paper money than exchange gold.
A Big Mac may cost $5 now, $10 in the future. But I would like a Big Mac Coin that lets me exchange it for one Big Mac in any time in the future. It has value as long as McDonald's exist and is willing to accept the coins, which is better than you can say of most crypto.
It may be a different sized burger, it may have somewhat different ingredients. Even our "classic coke" is nothing like the original coke. But this is what I'd expect from branded stablecoins.
I think you have a much cooler, futuristic vision of a "branded stablecoin" than what I'm talking about :) Almost like a more practical/feasible version of the "flatcoin" concept Balaji Srinivasan (of Coinbase/a16z/etc) had a while ago: https://x.com/balajis/status/1422993084002934788.
Frankly also my initial source of disappointment when I found out what this _actually_ is.
But yeah - in the case of this post / Bridge's offering, "branded" stablecoins are still redeemable for 1 USD, the only point of the "branding" is who is entitled to the yield and for how much "program management" around the stored value (relative to eg. a "stored value" program at a partner bank).
This is how I understand the uprising of stablecoins, let me know if I am wrong:
One of the best businesses is to offer this service:
Because then you can lend out that money to someone who offers this service: You now have a business which, at almost no cost, generates money. The interest offered by the latter service.Doing so is regulated. You need to jump through a lot of hoops and you are very limited in whom you can lend out your customers' money to.
But you can design the same type of business with stablecoins. By offering:
For your customer it is the same. They give you money and get it back later.But now you are not a "money holder". You are a trader. A trader of some coin you invented. You don't need to jump through so many hoops and you can lend out the money you earn from selling someNiceCoin to services with higher yields.
I think this is somewhat reasonable, but with plenty of asterisks / not the "arbitrage" this would imply.
There is still a "real", regulated money-holder in the loop - it's just Bridge (the manager of the cash reserves backing the coin - and licensed money transmitter etc etc). Or in the case of USDC - Circle, the "money-holder" / manager of reserves (also has tons of licensed / is very regulated). And the ETH network (where the coin itself sits) for much of the tech / logistics of making that held-money usable.
In fact - because neither Bridge nor Circle are banks, they can't do the fractional reserve that banks do, and are only allowed to do the 1:1 backed thing, with super regulated entities like BlackRock. "you can lend out the money you earn from selling someNiceCoin to services with higher yields" is strictly not true - they _cannot_ lend the money out, they have to store the money in ways that the end-consumers could do themselves, directly.
In that frame - the "efficiency" for you as a fintech is that instead of having to work with a bank on a "stored value" program, you can just work with Bridge and Circle, whose technological primitives are leaps / bounds ahead of the bank, but more importantly - who are much more flexible to work with than the median "partner bank", because they are not banks.
The whole "partner bank" ecosystem only really even scales because there are API providers like Increase.com / Unit.co etc to wrap them.
What you describe sounds like the opposite of my perspective.
You make it sound like stablecoins offer a benefit to all sides because of better technology.
My expectation is that they offer a benefit to the borrower because the borrower is less regulated and can lend out the money with higher risk and by doing so generate a higher yield.
You mention "1:1 backed thing, with super regulated entities" as if that means the money is safe. But as we have seen with Silicon Valley Bank, even lending out the money to the government via bonds is not safe enough in all circumstances. And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
The difference is in the assumption of "higher risk". Most of this borrowing is eventually the US Govt because the stablecoins are backed by T bills. So its not as much of an arbitrage as you say.
But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
> But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
This strikes me as among the biggest macro risks, and (IIRC) is one of the reasons banks are fighting to prohibit stablecoins from granting yield (to keep the banking system working).
A different primitive that is related to stablecoin but not the same thing, popular among banks, is the "deposit token" - basically a stablecoin, but backed by bank deposits rather than 1:1 cash reserve, and operated by banks. eg. JPM's "JPMD": https://www.jpmorgan.com/payments/newsroom/kinexys-usd-digit...
Not sure how popular / active they are yet, but I imagine they will become a bigger deal as stablecoins are further regulated / banks push harder on their own interests.
> you can lend out the money you earn from selling someNiceCoin to services with higher yields.
> And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
To be clear - stablecoin issuers are not allowed to "lend" the money out like a bank or a regulated lender _at all_ - much less doing "riskier" lending. Bridge and Circle still have to, by law, maintain 1:1 cash/cash-equivalent [0] reserves, which means the best they can do is things like US treasuries / money-market funds - which are also primitives accessible to consumers and businesses directly (ie. not inherently competitive).
Certainly there is still great benefit to Bridge, Circle, and the customers issuing stablecoins through them - because it gets them MMF/treasury yield without having to do a "stored value" program at a bank etc - but the issuers who are converting user deposits into stablecoins are also only getting user deposits in exchange for doing useful things.
People don't deposit funds into Mercury just because Mercury gives them 4% (there are plenty of places you can get 4%). You put money into Mercury for the software - this is primarily an implementation detail of how Mercury manages that money, affords to give you a competitive (4%) rate, and affords to give you great software.
[0]: https://en.wikipedia.org/wiki/Cash_and_cash_equivalents
Are you saying the holder of a stable coin is not taking a higher long-tail risk than the holder of a dollar in a checking account of a bank?
Yeah that's a good flag.
To be even more specific though, "cash equivalent" and the sorts of treasuries that implies are specifically short-duration ones (ie. this cash cannot be parked in a 10-year US treasury either)
Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount"
https://en.wikipedia.org/wiki/Cash_and_cash_equivalents
I think the difference is that there is still a maintenance of stored value, but that stored value is now able to earn more yield than what you would by depositing it at a bank.
In both the cases described in the article - using Unit or Bridge - you pass on the work of stored value to someone else. But Unit doesn't earn as much by being the stored value as Bridge would because Bridge is invested into T bills / MMFs. Hence, Mercury coin is better than running a bank using Unit.
Is that fair to say?
(For those of us who remember what runs on a bank with your savings in it feel like) What if any protection is there, that you will be able to withdraw your money when a massive dunk in Bitcoin crashes a bunch of major holders and you want your savings back?
It's a good question - Stripe's Stablecoin Account documentation is good reference here (they denominate balances in USDB, one of these "custom stablecoins" from Bridge): https://docs.stripe.com/crypto/stablecoin-financial-accounts...
"It’s always backed one-to-one by the equivalent value of US dollars held in cash and short-duration money market funds at BlackRock."
So while there are other (potentially novel) sorts of counterparty risks - the backing is definitely more robust than (and pretty much entirely decoupled from) Bitcoin/the rest of the crypto sphere, and is closer to dropping funds off in a Fidelity money market.
Another good (early - 2023) read on this topic: "There are now two types of PayPal dollars, and one is better than the other " https://www.moneyness.ca/2023/09/there-are-now-two-types-of-...
Fairly sure money market funds have risks and carry interest (interest = risk).
People found that out the hard way in 2008.
Indeed, and good call out; one likely source of the "novel" counterparty risk I allude to (though really not even novel - "different" is probably the more reasonable word).
There are some real questions here. If you issue a "branded stablecoin", are you responsible if the company holding the reserves goes bust or is "hacked"? Probably. You're certain to be sued. Can't disclaim that liability. Can't be anonymous. See the new GENIUS Act [1].
[1] https://www.congress.gov/bill/119th-congress/senate-bill/158...
You're asking the wrong questions. You're asking for regulation in a field that's actively working around regulation.
Seems like a really inefficient way to do points… my CC company gives me 3 points and I eventually redeem them for USD. Is that not the L1 L2 network stuff, but just far less efficient than a DB write?
From the consumer perspective totally - but those credit card points come from the interchange the issuer makes from issuing the card / your card txns (ie. as a proportion of your _spend_ using the card).
The sort of rewards you get for storing your business's cash at eg. Mercury, or using a wallet like Cash App - have to come from yield generated by the actual cash deposits, which is the sort of program that is much harder to operate / requires close ongoing partnership with partner banks / etc.
If I'm eg. Mercury, storing the dollars you (business) deposit into my platform in a "branded" stablecoin will get me the same rewards - bc it's backed 1:1 by eg. a money-market fund at Blackrock - for much less of the operational burden, _because_ I'm not participating in a stored value program at an actual bank. The alternative today is that Mercury does store it at a bank, does have to maintain a "stored value" program with that bank, and the yields are standard bank interest (rather than eg. MMF).
Moreover - through Bridge, I can withdraw fiat USD and deposit fiat USD into that "branded stablecoin", and it's just an in-app balance in the fintech app - so the fact that it's a stablecoin doesn't change my experience at all other than in conferring standard rewards. If you look at how eg. Stripe Stablecoin Account labels the balance, it just calls it "Digital dollars" - so it's not much more than a backend implementation detail, really.
The story of literally all blockchain-based solutions.
I'm not sure if I'm missing the point here, but stablecoins could be exchanged for something of value at a fixed price. The USD used to be this - you could exchange it for gold. But it was more convenient to give paper money than exchange gold.
A Big Mac may cost $5 now, $10 in the future. But I would like a Big Mac Coin that lets me exchange it for one Big Mac in any time in the future. It has value as long as McDonald's exist and is willing to accept the coins, which is better than you can say of most crypto.
It may be a different sized burger, it may have somewhat different ingredients. Even our "classic coke" is nothing like the original coke. But this is what I'd expect from branded stablecoins.
I think you have a much cooler, futuristic vision of a "branded stablecoin" than what I'm talking about :) Almost like a more practical/feasible version of the "flatcoin" concept Balaji Srinivasan (of Coinbase/a16z/etc) had a while ago: https://x.com/balajis/status/1422993084002934788.
Frankly also my initial source of disappointment when I found out what this _actually_ is.
But yeah - in the case of this post / Bridge's offering, "branded" stablecoins are still redeemable for 1 USD, the only point of the "branding" is who is entitled to the yield and for how much "program management" around the stored value (relative to eg. a "stored value" program at a partner bank).
So, a future?