The rise of stablecoins: a platform revolution from payment channels to financial infrastructure

Foreword

Every Fintech Company Will Be a Stablecoin Company

While stablecoins have generated a lot of hype, skepticism, hope, fear, etc., I believe we have crossed an important watershed. From the era of "Banking as a Service" (BaaS), to the era of stablecoins as infrastructure. B2C, B2B, and infrastructure companies with stablecoins at their core will shape the industry in the next decade.

This shift will be ten times more dramatic than the Fintech boom of the past decade.

Because we are moving to a new infrastructure layer. When people still see stablecoins as a new payment channel, and when they see them as a platform above all other layers, we will eventually move completely to stablecoin native. Stablecoins are a platform.

Key points of this article:

• The previous era: Banking as a Service (BaaS) and its enlightenment to stablecoins

• Why stablecoins are the infrastructure layer (not just a new channel)

• Stablecoin gold rush and regulatory unlocking

• Full-stack application scenarios

• Strategic positioning and future prospects

1. Lessons from BaaS to Stablecoins

As the saying goes, fools are always impulsive.

We have just witnessed this in BaaS.

The financial services era of the 2010s was characterized by companies adopting mobile-first distribution and cloud-first infrastructure.

We saw a generation of new infrastructure providers built specifically for financial services. Every department and IT system in a bank is now accessible through APIs. This includes customer onboarding, anti-fraud, anti-money laundering (AML), credit card services, and in some cases even customer service. This enabled new companies to launch mobile apps, wallets, and “accounts” to acquire and serve customers at a much lower cost than incumbents.

By combining API, mobile, and cloud technologies, fintechs also benefited from the help of a small number of “sponsor banks” who saw an opportunity to provide banking channels, store funds, and move funds to this new space. Some banks were very successful because they were “easy to work with.”

Image source: Klaros Partners

For FinTech companies, their initial business model is:

1. Gain revenue through card swipe fees (Interchange)

2. Reduce customer acquisition costs (CAC) through frictionless digital onboarding

As the saying goes: Show me the incentive mechanism and I will show you the results?

Some (not all) fintechs optimize for conversion, and when you do that, many of the norms of financial services look like friction. For example, requiring customers to provide multiple pages of documentation for Know Your Customer (KYC) checks, or monitoring transactions for international terrorism risks, when the vast majority of customers are domestic.

When I wrote “BaaS is Dead” in March 2023, we were already seeing the writing on the wall.

Account onboarding is a critical moment for both parties to catch criminals. If you view account onboarding as a checkbox process that must be completed with minimal friction, then a minimalist interpretation of the BSA/AML rules will result in a high-conversion onboarding process. Over the past two years, this has enabled fraud and money laundering to be conducted remotely at scale, attacking the weakest parts of the system. ———Excerpt from "BaaS is Dead"

If you are a bad guy, it is easy to attack small new banks and digital banks.

But the results are not good.

On April 22, 2024, tens of thousands of customers lost their life savings when blockchain as a service (BaaS) provider Synapse went bankrupt. Fintech applications could not access these funds, and the underlying banks could not track or verify where the funds went.  

The incident has generated headlines in mainstream media and, within the banking industry, regulators have issued a series of consent orders finding banks deficient in:

• Third-party risk management (i.e. API vendors and fintechs)

• Anti-money laundering (i.e. controls may not be consistent across these firms)

• Board governance (i.e. is management held accountable)

Image credit: Klaros Partners

The consequences of these failures are huge.

If you can’t stop the flow of money to the bad guys, the criminals get paid, thereby funding human suffering.

The lesson here, however, is not that BaaS or FinTech are bad; far from it.

Today we have:

• The ability for immigrants and low-income people to open free accounts

• The ability to use cash flow (money you have) for loan approval, meaning more people can avoid bankruptcy

• Nice spending management cards

• Embedded lending for marketplaces, SMEs, and vertical SaaS

Successful large financial brands have reshaped the industry. Cash App, Venmo, Chime, Affirm, Revolut, Monzo, Nubank, Stripe, Adyen, and your favorite brands have become household names in their markets and industries. Fintech has fundamentally changed how finance is distributed and raised the bar for user experience.

We just learned some lessons along the way.

The scale of stablecoin investment and cross-border activity could make any collapse have epic consequences.

While I know that it is impossible to completely prevent bad things from happening, I hope that companies with stablecoins at their core can learn from the mistakes and successes of the BaaS era and not get carried away by the upcoming gold rush.

2. Regulatory Unlocking and Funding Surge

2.1 Regulatory Unlock

The current draft of the GENIUS Act could change everything. According to the draft, if you are a permitted stablecoin issuer, you can treat stablecoins as cash equivalents on your balance sheet. This is a significant thing.

Take prepaid cards as an example. They require money transmission licenses, repatriation rules, and consumer protection requirements. Cash is like money in your pocket. It’s just much simpler to hold and manage. Stablecoins could inherit that simplicity.

2.2 The Stablecoin Gold Rush

Funding for stablecoin-related businesses is expected to grow 10x year-over-year.

Funding for Stablecoin-Related Businesses

If the GENIUS Act passes, there would be a new, regulated stablecoin channel and a new narrow class of banks called licensed payment stablecoin issuers (PPSIs).

This means that every entrepreneur, venture capitalist, payment company, shadow banker, and even big banks will take action to defend or seize this new opportunity.

3. Thesis: Stablecoins as a platform

Today, stablecoins are used as alternative cross-border payment channels, and in the future, they may become domestic payment channels.

But if you only see this, you are missing the big picture. Stablecoins are also a platform that sits above channels like SWIFT, ACH, PIX, and UPI, becoming the infrastructure that connects all of them. This will unlock new use cases and opportunities.

Ultimately, stablecoins will create an abstraction layer on top of existing payment channels, just like the Internet did for telecom operators. Similarly, entire industries will become "stablecoinized", as we have seen with video, messaging, and e-commerce. This network layer will eventually eliminate middlemen and reduce costs. ———Excerpt from “Stablecoins are not cheaper; they are better”

I envision it as follows:

Stablecoins as a platform

This is what platform disruption looks like. Telecom traffic is growing 60% year-on-year, and revenue is growing 1% year-on-year. In 15 years, traffic growth has exceeded revenue growth by more than 1,000 times.

Incumbents that fail to adapt to the new platform layer will be commoditized.

Stablecoins will do to payments what the internet did to telecoms — creating a platform layer that makes the underlying infrastructure a commoditized conduit.

We can see this infrastructure layer emerging in every payment flow and business model. Here’s how it works.

4. How Stablecoins Work in the Whole System

Yes, stablecoins operate today as alternative payment rails. But that’s just the basics. Most people see it as a payment channel as in the image below, rather than a platform:

Stablecoins as payment channels - they are all that and more.

The real opportunity lies in what they can enable as infrastructure.

4.1 Stablecoins for international payments - the starting point

Without a doubt, the main use case for stablecoins is cross-border payments. The main currency routes are Asian countries, followed by the US to Latin American countries (Mexico, Brazil, Argentina).

G20 Leads Payments to Global South with Tron and Tether

There are multiple types of cross-border payments. Let’s dive deeper into each payment process.

B2B Early Adoption Use Cases:

• Scale-ups for market expansion (e.g., SpaceX): for financial management, supplier payments, and inter-company payments.

• International Payroll and Payments (e.g., Deel, Remote): Contractors and employer representatives will pay into stablecoin wallets.

Artemis surveyed over 30 companies working in stablecoins and found that B2B as a category is growing 400% year-over-year (and accelerating), making it the fastest growing category. (Note: the volume shown in the chart below is only a portion of the overall market)

As the growth curve shows, this is significant growth.

Currently, last-mile liquidity and FX spreads are bottlenecks, but new companies like Stablesea, OpenFX, and Velocity are entering the market to change this.

Cross-border stablecoin use cases for consumers include:

• Remittances and P2P (e.g., Sling Money): Customers use stablecoins to send money across borders, which is faster and often cheaper.

• Stablecoin-linked cards: Also known as “dollar cards,” these allow consumers in southern hemisphere countries to purchase services from Netflix, ChatGPT, or Amazon.

Artemis’ survey also showed that P2P and stablecoin-linked cards grew by more than 100% year-over-year, with at least $1 billion in transaction processing volume (TPV) in their sample.

Stablecoins are becoming a feature of neobanks like Revolut and Nubank, and while their use cases are still narrow today, they are likely to expand in the future. Apps like Revolut, which started out as remittances and P2P, are uniquely positioned to take advantage of this new channel.

Currently, FX spreads are often higher and liquidity is lower for local currency transactions. But this is changing.

The domestic payments landscape is still taking shape, but it is fascinating.

4.2 Stablecoins for domestic payments (future direction)

Domestic B2B use cases include:

• Stablecoins with 24/7 returns (e.g. ONDO or BUIDL): Currently, crypto-native treasuries convert stablecoins into tokenized treasuries to avoid converting to fiat currency. If this 24/7 functionality could be implemented in an enterprise resource planning (ERP) system, it could be very attractive to any corporate treasurer.

• Stablecoins as an alternative to FBO structures (e.g. Modern Treasury): One of the features of US regulation is that as a non-bank institution, to transfer funds on behalf of a client, a "for the beneficiary account" (FBO) structure is usually required. These accounts are complex to set up. Modern Treasury's stablecoin product allows finance teams to set up payment processes for clients without the need for an FBO structure.

• Stablecoin-native B2B accounts (e.g. Altitude): “Borderless accounts” offered by Wise or Airwallex could be stablecoin-native. These accounts are denominated in USD but offer an operational front end to manage invoices, expenses, and finances.

Domestic consumer use cases are in the early stages and include:

• Stablecoin-native “checking” accounts (e.g. Fuse): Similar consumer experiences to Wise, Revolut, or remittance apps, but global by default. These services are currently found in the global south, but could be a new, low-cost model for consumer fintech projects.

• Prepaid card projects: Because stablecoins may have cash equivalence, treasurers do not need to manage the complexities of prepaid liabilities, but have access to programmable money that is recorded on the balance sheet like cash, but flows like digital payments.

• P2P stablecoins: Zelle, Venmo, Pix, and Faster Payments dominate their domestic markets, but if stablecoins become an alternative development model, then these applications may only need to support it as a front end.

4.3 Finance and Infrastructure (Hidden Layer)

The hidden layer is infrastructure. Banking technology itself is becoming the native technology for stablecoins.

• Stablecoin issuance as a service (e.g. Brale, M^0): Banks and non-banks may want to create their own stablecoins to attract deposits, or avoid fees charged by other issuers.

• Stablecoins as a side-core (e.g. Stablecore): Banks may want to create a system of record that interacts with stablecoins, independent of their traditional platform. A "side-core" can achieve this, but still reconcile with the main core.

• Stablecoins provide BaaS-like infrastructure (e.g. Squads Grid): Provide developers with a simple API to quickly create consumer, B2B, or embedded financial products.

Most companies in the market have severely underestimated how much developers will love the convenience of stablecoins. For companies like Stripe, convenience has been the secret to success.  

You can imagine other possibilities. As a thought experiment, think of stablecoins as a global, programmable system of record that everyone can reconcile and view.

Each wallet address can be assigned to a known front-end or wallet creator, and these companies can collaborate immediately when KYC or AML issues arise.

4.4 Strategic Positioning of Stablecoins

The current market has attackers, opportunists, and participants who are still watching and formulating strategies.

Right now, the vast majority of activity is happening on new platforms like crypto exchanges and wallets, but the opportunists are some of the companies that are now positioning themselves to leverage stablecoins as new payment rails:

Here are my thoughts on which is which:

Offensive:

• Asset managers: BlackRock, Franklin Templeton, and Fidelity, among others, rely on banks for wire settlement. They have taken market share from banks in credit and money market funds since the financial crisis. Stablecoins connect it all with an instant, 24/7 settlement layer.

• Payments companies like Stripe, WorldPay, and Dlocal are expanding the number of markets they can operate in and the types of payment flows they offer. “Financial accounts” eat into the core business of large money center banks, but often target newer customer segments.

Defenders:

• Large Banks: JP Morgan, Bank of America, Citigroup, and other US banks discussed launching their own stablecoins early on. I think this may be an attempt to grab market share of this new domestic and cross-border payment “channel”, and just as banks dominate P2P payments through Zelle, they may “inevitably” dominate this new channel as well.

• Small Banks: Have begun lobbying against stablecoins. Stablecoin issuers, asset managers, and large banks are likely to siphon deposits from their lower-yielding checking accounts, so smaller banks stand to lose the most.  

There will be a crop of opportunistic banks that, like we saw with sponsor banking, stand to gain tremendous opportunities through stablecoin disruption.

The reality is that opportunities vary by use case. Startups are exploring new payment flows, while payment service providers (PSPs) are expanding market access through existing flows. In the future, asset managers and banks will find their niche in the market, perhaps closer to their existing core businesses.

5. Criticisms, Concerns, and Why Most Are Exaggerated

I will summarize the criticisms below:

Criticism: Stablecoins will trigger bank run scenarios. Criticism: Big Tech will form a monetary oligopoly. Refutation: This is a legitimate concern, but the framework makes it unlikely that Big Tech will issue stablecoins directly—they will use them, not issue them. Becoming a PPSI is a high regulatory barrier for them. Criticism: Will cause community banks to lose deposits. Refutation: Money market funds are already causing this. Community banks that adapt to offering stablecoin services will thrive. Criticism: “It’s crypto” means it’s full of crime and scams. Refutation: It’s time to abandon that view. The future of finance is on-chain, and institutional capital is building the infrastructure. There are real, novel risks, such as key management, custody, liquidity, integration, and credit risk, that should be focused on.

Criticism: Stablecoins are just regulatory arbitrage because "holding USDC should be as difficult as holding dollars." Rebuttal: Fintech itself has achieved regulatory arbitrage through the Durbin Amendment. It is easier to develop on stablecoins, but there is also a complete licensing system.

I believe this debate will continue.

Stablecoins will drive the next era of finance, and our vision for the future has just begun.

6. Finally, why every company needs a stablecoin strategy

Everything we do today can be made stablecoin native, and then finance will gain superpowers. We can build instant, global, and all-weather finance. We can reassemble financial Lego blocks and be more developer-friendly.

The BaaS era tells us that new infrastructure creates huge opportunities and huge risks. The companies that learn from the successes and failures of that era will win in the era of stablecoins at their core.

Every company needs a stablecoin strategy. Every fintech, every bank, every finance team. Because this is more than just a new payment rail. It’s the platform layer that everything else will be built on.

I implore every reader to build on the lessons of the past.

Crashes are inevitable, and things will go wrong, and that’s a given.

And that includes how you’re going to protect yourself when things inevitably break.

Build cool stuff.

And stay safe.