Stablecoins are cryptocurrencies that have their value pegged to fiat currencies, that have reshaped the ecosystem of digital assets as we know it today. Unlike cryptocurrencies that can be fairly volatile by nature, stablecoins can be used as stores of values or units of account. This is particularly useful when deploying capital on-chain through DeFi protocols, making them a yield-farmer’s go-to asset for securing collateral.
Apart from the obvious benefits to those who dabble in the world of decentralised finance, stablecoins also play an important role for the everyday user looking for a way to quickly convert their fiat currency into crypto, and vice versa, serving as an important on-ramp.
However, for institutions, the newest class of crypto investors, stablecoins form a crucial component of their investment strategy. These firms have long been looking for an efficient way to transfer funds, manage liquidity risk and tap opportunity in the digital asset industry. For them, a stablecoin represents a gateway into the realm of blockchain-based assets, being the closest thing to a digital version of cash.
The Stablecoin Conversation In Australia
The interest in stablecoins in Australia is evident, with two major Australian banks launching their own AUD-pegged digital assets. In March 2022, ANZ partnered with crypto custodian Fireblocks to mint a stablecoin for the Victor Smorgon Group. The latter transferred stablecoins to trade on Melbourne-based exchange Zerocap – a transaction that took 30 minutes compared to the usual 24 to 48 hours for a fiat transfer of similar size.
Earlier this year, National Australia Bank (NAB) created a stablecoin pegged to the AUD, testing it in a cross-border transaction on the Ethereum blockchain.
“Bringing multi-currency stablecoins to market demonstrates NAB’s focus on simplifying international banking protocols to increase speed and transparency while lowering costs and reducing complexity for customers,” said NAB Executive General Manager, Markets, Drew Bradford, at the time.
Australian fintech firm Novatti, which participated in the RBA’s limited-scale central bank digital currency (CBDC) project, also brought its own stablecoin to the market dubbed Australian Digital Dollar (AUDD). It was designed to create an instant connection that allows
international institutions to receive and pay in AUDD without the need for an AUD-denominated bank account.
“Despite the growing acceptance and usage of US dollar stablecoins, a significant gap exists between domestic and international liquidity for Australia,” said Novatti.
A December report from the RBA on stablecoins concluded that while these assets have the potential to enhance the efficiency and functionality of payments, they carry associated risks that depend on their inherent design and links to the traditional finance system.
While regulators across the world are working out how best to include these assets in the system, the firm’s that have had the most success with launching their own stablecoins include ones that are issued by a regulated custodian.
PayPal’s Stablecoin Foray
PayPal USD or “PYUSD" is a stablecoin pegged to the value of the U.S. dollar that operates on the Ethereum blockchain. PYUSD is issued by the Paxos Trust Company, a firm regulated by the New York State Department of Financial Services (NYDFS), and its reserves are 100% backed by U.S. dollar deposits, short term U.S. Treasuries and similar cash equivalents.
PayPal's move into the stablecoin space has caught the attention of both crypto-native industry watchers and traditional financial institutions, with both camps acknowledging the significance of a major payments provider launching its own U.S. dollar-pegged stablecoin.
For the initiated, PayPal’s move could signal an impending wave of adoption, and a potential on-ramp into the realm of digital assets for the firm’s 435 million active accounts. For the financial firms holding out on their own blockchain initiatives amid heightened regulatory scrutiny, it means potentially losing a first-mover advantage to a major player.
What The Market Thinks
Interestingly, Circle and Tether, the issuers of the two largest stablecoins by market cap have supported the newest entrant. Circle CEO Jeremy Allaire said he hopes that PayPal makes stablecoins a more important part of how their ecosystem interacts with the rest of the world, in line with Circle’s vision for stablecoins to become the interoperability layer for the broader financial system.
Tether CTO Paolo Ardoino told The Block that the development would be “positive for the crypto industry in general” and could possibly erode revenues for payments that have been fueling Mastercard and Visa.
Still, a month after its launch, users are hardly lining up to acquire PYUSD and use it for transactions. Data from Etherscan shows that there are just around 522 holders of the stablecoin, and barely a fraction of the 44 million tokens in existence have been circulated since the launch.
The Stablecoin Landscape Going Forward
While PYUSD may be off to a slow start, things might be very different for the stablecoin landscape if (and more likely, when) the adoption does come. After all, this is the first time a traditional financial institution has brought a stablecoin to the masses, and with decades of running a payments network, is in a position to work closely with regulators.
With a market cap of $125 billion, it’s safe to say stablecoins have proven themselves to be one of the cornerstones of today’s crypto ecosystem. Even so, the perceived risks associated with anything to do with crypto has left many companies and individuals unsure about a shift to blockchain-based transactions, regardless of how much cheaper, faster and safer they may be.
Enter PayPal, a $67 billion-dollar company, that will soon make its Ethereum-based stablecoin available on Venmo. Aside from the credibility and ease of access this brings, PayPal also has the ability to transition its backend infrastructure to the blockchain, while its front-end interface remains largely the same. In this way, the everyday user can transact with stablecoins in a way that is distinctly similar to their current experience.
Research from Bernstein foresees the stablecoin market growing to $2.8 trillion over the next five years, and expects the growth to be led by “regulated, onshore stablecoins.” The firm believes that major global financial and consumer platforms will issue co-branded stablecoins to power value exchange on their own platforms.
Regulatory Implications
Perhaps, the most important aspect of this development, is the fact that naysayers who thought that a tokenised form of currency would never be a legitimate part of the economy may now be forced to grapple with the reality that stablecoins are here to stay.
A payments giant venturing into the stablecoin space is one thing in itself, but it’s hard to imagine regulators advising against doing business with a firm like PayPal. Instead,
anti-stablecoin regulators may be forced to ask themselves how to put forth a legislative framework that welcomes innovation, now that traditional financial institutions are testing the waters.
Dr. Tony Richards, the Chair of the CBDC steering committee and former head of payments at the RBA, conceded that it is too early make a call on central bank digital currencies being the way forward to enable the trend of tokenisation, given the fact that AUD-regulated stablecoins and tokenised deposits haven’t been fully explored.
If anything, the launch of PYUSD will be an eye opener for policymakers to look into experimenting with tokenised digital assets, now that PayPal has demonstrated that stablecoins can be done with all the necessary consumer protections in place.
Matt Hale, Redbelly's Head of Product, believes that stablecoins will have a key role to play in legitimising web3 business models and technology.
"Stablecoins and CBDCs will serve as key pillars of the convergence of traditional finance and decentralised finance through compliant asset tokenisation, helping to forge a path where the strengths of the past meets the potential of the future."