A friend asked me recently what the fuss was about stablecoins. After all, he said, aren't they just like using online banking or mobile phone payments, but with less regulation? From a consumer point of view, he has a point. A customer can swipe a card to make an immediate purchase without being affected by settlement times or transaction fees, which merchants often pay and tack on to prices.
The appeal of stablecoins -- blockchain versions of traditional currencies -- is that they offer lower transaction costs and faster payment settlement, reducing the behind-the-scenes friction in payments. According to research from The Motley Fool, it can take days for a debit or credit card transaction to fully settle -- the point where it is finalized, and the seller receives the money. Blockchains can do it in minutes.
The biggest benefit of stablecoins for today's consumers is that they reduce the costs of global money transfers, which currently average 6.5% of the transfer amount. Even so, my friend was missing the bigger picture. If stablecoins become the default way to pay for goods and services, it would be similar to the shift from cash to credit cards. We're talking about a change in the world's financial plumbing.
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Stablecoin transaction volumes could reach $1.5 quadrillion by 2025
A recent report by Chainalysis, a blockchain data and research company, maps out various scenarios for stablecoin growth. Chainalysis uses adjusted stablecoin volume, which filters out bot activity and focuses on economic transactions such as payments and money transfers.
It says stablecoin transaction volumes could overtake those of Visa and Mastercard between 2031 and 2039. It also estimates adjusted stablecoin volumes could grow from $28 trillion in 2025 to between $719 trillion and $1.5 quadrillion by 2035. Its highest-growth scenario is a mind-blowing increase of more 5,000%.
The forecast is based on the speed of stablecoin growth in recent years, as well as the potential impact of a wealth transfer to crypto natives and increased merchant acceptance of stablecoins. It is also worth noting that soaring stablecoin usage is in Chainalysis' interests because the company offers compliance monitoring and other blockchain services.
How to invest in stablecoins
There are a few ways to get exposure to the stablecoin sector. One is to invest in cryptocurrencies like Ethereum (ETH 0.21%) that support stablecoins. Ethereum is the dominant player here, accounting for more than half of the stablecoins in circulation. If stablecoins boom during the next decade, it could translate into higher network usage, more transaction fees, and, ultimately, a higher Ethereum price.
CRYPTO: ETH
Key Data Points
Also consider public companies like Circle Internet Group (CRCL +9.94%), which issues USD Coin (USDC +0.01%), a dollar-pegged stablecoin. By law, Circle must back the USDC it issues with funds in readily accessible assets, such as cash or U.S. Treasuries. It earns yield on that money, so the more USDC in circulation, the bigger Circle's interest-generating reserves.
Finally, existing payment companies are investing in stablecoin rails. For example, Visa and Mastercard are already piloting stablecoin settlement programs and looking for ways to combine their strong market presence with blockchain technology.
The stablecoin sector has a lot of potential. However, changing the global payments infrastructure won't be a straightforward process. If a prominent stablecoin fails -- they have in the past -- or shrinking banking deposits strain the financial systems, stablecoin adoption could fizzle rather than surge.
