Why stablecoins are the future of money

With growing institutional, regulatory, and political interest in stablecoins, Robin O'Connell, CEO of Enterprise at Uphold, explains why they are the future of money.

Stablecoins are having a moment. Last month, Christopher Waller, the Federal Reserve Governor, commented that 'stablecoins are effectively 'synthetic' dollars that can bring benefits to the financial system', and that 'stablecoins could have a lot of potential benefits and eliminate inefficiencies in the financial system'. These remarks came on the heels of Stripe's USD 1.1 billion acquisition of stablecoin startup Bridge. Stripe joins a host of many other financial institutions, such as Visa and PayPal, that are integrating stablecoins into their core services. There can be little doubt that there is a rapidly growing institutional, regulatory, and political appetite for stablecoins. It's now a matter of 'when' not 'if' they will become a standard element of the global payments infrastructure. 

The growing success of stablecoins owes everything to the fact that the decentralised, blockchain-based digital currency solves the challenges inherent in today's global financial system. Flaws in this system add friction to cross-border payments, reduce liquidity, and act as a brake on growth.

The main issue is that today's international payments landscape is reliant on traditional banking infrastructures and systems such as SWIFT, and therefore comes with significant inefficiencies and high costs. SWIFT is a messaging system. It was not designed to manage funds, but rather to communicate information about transactions between banks. This capability gap has led to a 'make do and mend' approach where the actual movement of money across borders remains cumbersome and expensive. 

Credit card companies and financial intermediaries benefit disproportionately, often charging fees of up to 4% for essentially transferring information. These costs are borne by consumers and businesses alike. Furthermore, while digital payment systems in regions like Europe and the US provide seamless local transactions, this is not the case when it involves cross-border transfers. For example, organising a bank transfer from London to New York entails multiple banks, each taking a cut, escalating the total cost of the transaction. This fragmented approach slows down payments, thereby reducing liquidity, and introducing layers of opacity. 

Stablecoins overcome these and other challenges, enabling cross-border payments that are rapid, seamless, and a much better fit for our digital world. Stablecoins combine blockchain technology with traditional financial mechanisms to offer more efficient alternatives to conventional currencies. The stability of stablecoins comes from their being backed by fiat currencies—each stablecoin is typically pegged to a stable asset like the US dollar, ensuring its value remains consistent. This fiat-backing is widely regarded as the most dependable stability mechanism, as it leverages the inherent stability of established national currencies. 

By migrating traditional payment flows onto the blockchain, stablecoins facilitate faster, cheaper, and more transparent transactions, sidestepping many of the inefficiencies of the current banking systems. Crucially, stablecoins are not cryptocurrencies in the traditional sense; they are a digital representation of fiat on the blockchain, designed to meld the benefits of digital currency technology with the reliability of conventional money.

Given the many benefits of stablecoin, it's unsurprising that central banks are looking to get in on the act. Although not a stablecoin, a Central Bank Digital Currency (CBDC) does much the same job, providing a digital version of a nation's fiat currency issued by the central bank. Notable examples include the Swiss Frank, issued by the Swiss National Bank, Digital Renminbi issued by the People's Bank of China, and the e-krona under consideration by Sveriges Riksbank in Sweden.

However, granting governments control over programmable, trackable money, such as CBDCs, raises significant concerns about privacy and surveillance. With the ability to track every transaction in real-time, governments could potentially monitor the spending habits and financial activities of individuals at an unprecedented scale, leading to a possible erosion of financial privacy. It is also a waste of energy given that the private sector has a proven stablecoin infrastructure already in place. 

Stablecoins will fundamentally reshape the global financial landscape by enhancing liquidity and expediting payment processes. By accelerating transaction speeds, stablecoins enable businesses to reduce the need for large cash reserves to cover payments, freeing up capital. This heightened liquidity means that firms can react more swiftly to market opportunities without the hindrance of traditional banking delays and the associated holding costs. 

Moreover, the adoption of stablecoins can lead to significant cost savings and efficiencies for businesses. By reducing the transaction fees typically associated with cross-border payments and currency conversion, companies can decrease operational costs. Stablecoins also enhance the visibility of global financial transactions, allowing for more intelligent and informed financial management. The transparency and traceability of blockchain technology aid businesses in simplifying the reconciliation processes, saving both time and money that would otherwise be spent on manual tracking and correcting financial records. 

Early movers are already deploying stablecoins across a number of use cases. SAP, for example, is testing cross-border USDC payments. Participants will receive USDC on the test network and use it to pay for sample invoices. Argentina-based start-up Agrotoken, meanwhile, is bringing new financial options to the agribusiness sector by enabling farmers to convert soybean crops into a commodity-backed stablecoin that can be spent with merchants and investors.

Another key use case is for companies that need to make payments to people or companies in markets that have limited access to US dollars. A US company, for example, will pay a worker in, say, Argentina in stablecoin, which sits in a custodial wallet for them to either use or save. This particular use case has huge potential and will likely grow exponentially in the years ahead.

Transformation is coming to the financial world, driven by regulation, technology, and the growing availability of digital solutions. Stablecoins, with their unique proposition of being 'oven-ready' for use, are at the forefront of this transformation. By treating money as digital information on a ledger, stablecoins make international transactions as easy as sending an email. The technology ensures that moving money globally is effortless and cost-effective and heralds a new era in financial operations and global trade.

About Robin O’Connell

Robin O'Connell is the Enterprise CEO at Uphold and an experienced Fintech expert specialising in Crypto and Payments. He has worked with large financial institutions like Visa to multiple Fintech startups. Robin joined Uphold in 2015 and is responsible for the B2B Business which provides API access to Uphold's Digital Platform enabling Web3 and Crypto Payments. Uphold's B2B Solution services large crypto ecosystems like Brave (digital content), IMVU (metaverse), and Mythical Games (NFTs in Gaming).

About Uphold

Uphold is a web3 financial platform, serving millions of customers in more than 140 countries, providing easy access for businesses and consumers to digital assets and services. Uphold smart routes orders across 30 trading venues delivering optimal execution and superior liquidity to customers. Uphold never loans out customer assets and is always 100% reserved. The company has pioneered radical transparency and uniquely publishes its assets and liabilities every 30 seconds on a public website.