Stablecoins have become a major focus of both the crypto and traditional financial industries. These digital assets are usually backed 1:1 by other stable reserve assets, like the U.S. dollar. Price stability These tokens, often known as stablecoins, offer greater price stability compared with their more volatile cryptocurrency counterparts. This characteristic is what renders them attractive to use for transactions and payments. Such widespread use continues despite the fact that they’re still under regulatory scrutiny and debate as to their overall risks and rewards on business enterprise remains ongoing.
Rising Popularity and Use Cases
Stablecoins derive their name from their value-stabilizing mechanism. Instead, like stablecoins, they peg their value to some other asset, generally a fiat currency such as the U.S. dollar. This peg serves to provide added stability, distinguishing them from the volatile price movements typically associated with other digital assets.
The true allure of stablecoins is in their promise to disintermediate and simplify financial transactions. Traditional alternatives such as wire transfers are costly and cumbersome. As an example, international wire transfers typically take four to five business days to settle! Stablecoins provide a quicker, more efficient method of transferring funds.
Payment entities are increasingly utilizing stablecoins. In fact, companies such as PayPal, Mastercard and Payoneer are already using stablecoins in their transactions. This change marks the growing acceptance of stablecoins within the broader financial ecosystem.
PayPal sees stablecoins as “the first killer use case for crypto,” because you're basically taking this concept of [a dollar] and tokenizing it and then adding to it and unleashing the power that a blockchain can provide.” - Paul Bances
The total value transacted through stablecoins has grown dramatically over the past few years. Large companies, vendors, and payment providers accelerating adoption. But it hasn’t stopped there.
Regulatory Landscape and Concerns
Stablecoins face their own risks despite their increasing popularity. The first and best-known worry is about the reserves backing these stablecoins. If a stablecoin is unable to maintain sufficient reserves, its purported value will quickly collapse. This decline can occur even when the asset it’s pegged to is thriving, particularly if the entity issuing it maintains a balance sheet of dubious quality.
Regulatory agencies have been closely monitoring the burgeoning market for stablecoins, with some pushing for tougher regulatory requirements. The STABLE Act recently passed out of the House Financial Services Committee. This bill would provide comprehensive regulation for stablecoins. Yet, despite these important steps forward, the bill has continued to get strong pushback from lawmakers, marking the continued debate over how much regulation is appropriate.
TaxBit President, Michelle O’Connor, recognizes that there have been some iffy projects in the crypto ecosystem.
“I think there are those projects that unfortunately will continue to cast a shadow over us, but also with traditional finance, my hope, and where I see this going is, there's a lot of good coming that hopefully overshadows some of the nonsense and the meme coins and all of that,” - O’Connor
She too said she was glad that the market hasn’t cycled through bad cycles like it has in the past.
“With where the market has gone recently, I was worried that we could go into another cycle of that. I haven't seen it as much.” - O’Connor
“There will also be those in the crypto space which are looking to make a “quick buck,” - O’Connor
Implications for Finance Leaders
Stablecoins are under consideration by finance leaders as a possible alternative. But it's not easy to get stablecoins into the everyday financial lifeblood of a large company. Further, educating finance and treasury teams on stablecoins, how they can be used, and what advantages they offer is no short order.
Many in the finance world continue to question the value proposition of stablecoins for most enterprises. Jack Castonguay, CFO of Wave, sounds off on why stablecoins are an avoidable risk for businesses. This worry is particularly acute for anyone with close access to the assets that stablecoins are backed by.
“For most US-based companies, stablecoins are a solution looking for a problem to solve. Most of our companies and CFOs have access to the actual assets the stablecoins are pegged to in value. In my opinion, stablecoins create an unnecessary risk for companies who hold them,” - Jack Castonguay
“To me, stablecoins remain all risk with little reward,” - Jack Castonguay
Castonguay suggests a simpler alternative.
“They would be better off just buying the asset: dollars, foreign currencies, etc., outright and placing it on their balance sheet instead of investing through a stablecoin.” - Jack Castonguay
“It is just a net operating part of moving money,” - Michelle O’Connor
