digital dollars in action
A Guide to Global Stablecoins for Banks & Fintechs
Global Stablecoins: The Future of Money
USD Coin (USDC) is issued by regulated financial institutions and redeemable on a 1:1 basis for US dollars. Moreover, all USDC reserve assets are subject to monthly attestation reporting from global auditing firm, Grant Thornton LLP. That means banks and fintech startups can add dollar digital currency payments, knowing that each USDC is backed by assets held at a regulated financial institution. USDC is open, global, transparent, liquid, and regulated, which explains why it has become a market-leading stablecoin with over $20 billion in circulation. What’s more, USDC has experienced broad ecosystem adoption since its launch in September 2018. Today, USDC has been integrated into hundreds of products and services and is used for trading, payments, remittance, lending and in the growing DeFi market.
What Are Stablecoins?
Stablecoins are blockchain-powered digital currencies that combine the benefits of open, borderless cryptocurrency with the price stability of traditional fiat currencies.
Stablecoins operate on a distributed blockchain network that enables anyone with an internet connection to send value across the globe within minutes. To provide price stability, stablecoins are typically backed by fiat currency held in reserve for each issued stablecoin token.
Since the first stablecoin was launched in 2014, stablecoins have grown to over $11.5 billion in circulation with 50+ different price-stable digital currencies pegged to over half a dozen global currencies.
Below, you can view the growth of the three largest stablecoins by market capitalization — Tether USD, USD Coin, and Paxos Standard — over the last four years. These three dollar-backed stablecoins account for over 90% of the stablecoin market. Thus, they illustrate the substantial jump in demand for stablecoins in the past six months and the steady growth since Q1/2019.
In the twelve-month period from January 2019 to January 2020, the global stablecoins market more than doubled in value from $2.5 billion to over $5 billion in total market capitalization.
The market increased two-fold in size again in the six months to follow as the demand for a price-stable digital currency ballooned as the COVID-19 pandemic gripped the world.
In line with the stablecoin market, the world’s fastest-growing fully reserved digital dollar stablecoin, USD Coin (USDC), experienced a two-fold increase in USDC in circulation since January 1, 2020.
Stablecoins Are Booming: Here’s Why
Global stablecoins have witnessed an aggressive surge in demand in the past six months. The three most impactful drivers we have identified are:
- The global economic crisis and growing counterparty risk;
- Increased currency volatility relative to the stability of the US dollar;
- The explosion in stablecoin use cases across payments, commerce, and financial applications.
The unfolding global economic crisis is resulting in growing counterparty risk as the stability of the financial system is being tested, and corporate bankruptcies are on the rise. Stablecoin transactions are irreversible and do not require a financial intermediary to process funds, which means counterparty risk is greatly reduced.
Global currency volatility relative to the US dollar has increased since the start of the year, driving demand for the greenback. Placing funds into a digital dollar stablecoin provides individuals and companies with the opportunity to use dollars as a store of value without having to worry about losses from adverse currency fluctuations.
The market has also witnessed an explosion in stablecoin use cases that range from payments and remittances to ecommerce and financial applications. When first introduced, stablecoins were primarily used as a base currency for crypto trading. Today, stablecoins are actively being integrated into more and more ecommerce solutions and applications within the traditional financial industry.
USD Coin: The Fastest-Growing Full Reserve Digital Dollar Stablecoin
USD Coin (USDC) is a fully reserved digital dollar stablecoin that empowers financial institutions, businesses, and individuals to store, send, and receive US dollars over the internet.
"Our core mission with USDC is to create a protocol for digital money that allows people to make value transfers over the internet as effortlessly as sending a text message or sharing content."
Circle CEO Jeremy Allaire
Stablecoins for Banks: The Benefits
Tech-savvy banks, fintech companies, and financial application providers are adding stablecoins as a new internet-native rail for critical business use cases and seizing growing opportunities in new market segments.
The three key benefits of digital dollar stablecoins for financial services companies are:
- Facilitate secure, fast, and low-cost global payments
- Provide powerful new solutions to business customers
- Access to new markets and industry segments
Facilitate Secure, Fast, and Low-Cost Global Payments
Financial services companies can use digital dollar stablecoins for secure, low-cost, borderless international payments.
Instead of having to wait days for a cross-border payment to settle, stablecoins can be used to make secure global payments that settle within minutes and cost only a fraction of the price of a traditional money transfer.
Provide Powerful New Solutions to Business Customers
Additionally, digital dollar stablecoins enable financial services companies to offer a range of new solutions to its business customers. Four key areas where stablecoin adoption can facilitate payments include:
Businesses that are required to make global mass payouts on a regular basis can benefit from the low cost and versatility of digital dollar stablecoins. For example, an internet business that has to pay suppliers, remote staff, and freelancers across three continents can pay each of these stakeholders using USDC, which the recipients can seamlessly convert into local currency.
Businesses that offer digital marketplaces can use stablecoins as a new payment rail to receive payments from buyers and process payments to sellers almost instantaneously. By offering digital dollar stablecoins, banks can better serve customers that operate digital marketplaces because stablecoins, such as USDC, can be used to manage multi-sided payment flows.
B2B payments are another powerful use case where banks leverage stablecoin payments to provide an alternative, low-cost payment rail to its business customers. Companies that regularly process business-to-business payments can use digital dollar payment to reduce costs and payment settlement times.
Stablecoins can also play a powerful role in trade finance, where speed and transparency are of utmost importance for payments. By offering digital dollar stablecoin payments, businesses involved in trade finance transactions can have an unprecedented level of transparency and traceability.
Liechtenstein-based Bank Frick is among the first banks to support global stablecoins. The digital-first bank announced in June that its customers can now use USDC to process USD money transfers and store US dollars digitally.
"[This is] a trend we are seeing and expecting to surge in the year ahead — regulated banks adding support for USDC, which is becoming a significant alternative rail to value transfer for banks."
Jeremy Allaire comments on Bank Frick’s move to adopt USDC.
Access to New Markets and Industry Segments
Finally, the implementation of stablecoins enables financial services providers to access new markets and industry segments.
For example, the growing Decentralized Finance (DeFi) market has the potential to become a profitable new market segment of the global financial markets in the next five to ten years. By implementing a stablecoin, such as USDC, banks and fintechs can provide their customers with direct access to these new financial products at minimal setup costs.
Additionally, adopting stablecoins can be a first step towards integrating blockchain technology, which is poised to disrupt the financial sector in the coming years.
Stablecoins for Banks: The Challenges
Historically, providing stablecoins as a payment rail has required companies to secure digital assets, have access to liquid on and off-ramps for fiat currency conversion, provide crypto custodianship, and run blockchain nodes and wallet infrastructure.
Operating stablecoin infrastructure as a regulated service is time-consuming, costly, and challenging due to the regulatory and operational risks that need to be managed.
Additionally, offering stablecoins to customers in a simple, user-friendly manner that non-blockchain customers can comprehend may offer another challenge.
Fortunately, for companies that want to take advantage of digital dollar stablecoins, Circle removes the complexity, manages the risks, and accelerates the speed to market for financial services companies and businesses that want to implement stablecoins into their product offering.
Circle’s Stablecoin Platform Services
Circle provides a one-stop-shop for banks and fintech startups that want to leverage global stablecoins to process internet-native payments and enhance their product suite. Banks and fintechs can leverage the Circle product suite to add support for digital dollar stablecoin payments and wallets in their own products and services.
Circle’s solutions enable banks and other fintechs to:
Seamlessly source USDC liquidity and manage treasury flows to transact and custody USDC, with flows that can map to any existing fintech and bank treasury operations.
Provide end-customers with storage and payments flows using USDC on public blockchains without needing to stand-up their own infrastructure or manage the risk and complexity of crypto custody and blockchain management.
Support a wide range of use cases and fund flows that can integrate both public blockchain payments with conversions to and from existing banking infrastructure such as SWIFT wires, card payments and ACH transfers.