Stablecoins and TradFi: a new era of crypto integration

There's no question that stablecoins have emerged as one of the most dynamic sectors in digital assets and one of the most widely adopted applications of blockchain technology. They are digital tokens designed to maintain a stable value relative to a specific asset or basket of assets and pegged primarily to the US dollar, and are marketed as quicker and more cost-effective alternatives to traditional payment systems.

Indeed, as the bridge between volatile digital assets and the stability of fiat currencies, stablecoins have long been a cornerstone of the crypto ecosystem and have already gained traction for cross-border transactions, B2B settlements, and merchant payments.

Here we examine the key trends shaping the stablecoin landscape and highlight emerging use cases and the implications for institutional adoption and market evolution.

Stablecoin competition heats up as Fintechs step in

With US stablecoin regulation progressing, competition among issuers is intensifying at the same time TradFi and Fintech are showing a growing interest. Projections from Standard Chartered anticipate the sector reaching $2 trillion by 2028, a significant increase from the current $220 billion.

As the chart below illustrates, Tether’s USDT continues to dominate with a huge $144.8 billion in circulation, dwarfing competitors like USDC ($60.9B), USDS ($7.2B), DAI ($3.2B), and sUSDS ($2.5B).

Source: Bloomberg

Despite USDT’s lead, the presence of PayPal USD (PYUSD) on this list (albeit at a modest $856.8M) signals that traditional FinTech firms are increasingly looking to carve out a piece of this market.

Here, Paypal just announced a new partnership with Coinbase for fee-free purchases and 1:1 redemption of its PYUSD stablecoin as well as a 3.7% yield for anyone holding it. Although USDT’s dominance remains a challenge, the partnership is a clear move to make it competitive with traditional savings products and staking yields and also falls in line with the broader yield-bearing stablecoin trend.

Further, the ability to tap into Coinbase’s yield infrastructure and marrying it with PayPal’s trusted UX makes sense and appeals to both retail and institutional investors seeking low-risk returns in crypto.

Traditional payment networks embrace crypto

Mastercard’s recent initiatives highlight another significant trend: traditional payment networks are actively pursuing business development in the crypto space. Through two distinct partnerships, Mastercard is attempting to position itself as a leader in bridging TradFi and crypto, and it isn't difficult to see why.

2024 marked the very first time stablecoins surpassed all of the traditional payment networks in transaction value terms, hitting $15.6 trillion from approximately $7 trillion in the year prior.

Source: Ark Invest

Mastercard is actively integrating into the crypto space through two key partnerships. Firstly, its collaboration with OKX and Nuvei enables seamless stablecoin transactions, like USDC, for consumers and merchants at over 150 million Mastercard locations globally, addressing a major adoption hurdle by allowing direct stablecoin payments and creating new revenue streams.

Secondly, Mastercard is backing a MetaMask, CompoSecure, and Baanx venture to launch a self-custody crypto card in Q2 2025, facilitating direct crypto spending from user wallets without preloading or fiat conversion.

For investors, Mastercard’s dual approach underscores the growing acceptance of crypto within traditional financial infrastructure. It also highlights the potential for payment networks to capture a share of the crypto transaction market, which could lead to significant revenue growth as adoption scales.

Finally, from a user experience (UX) and utility standpoint, these developments reflect the gradual lowering of the complexity barrier regarding managing and spending digital assets which has acted as a major barrier to mainstream adoption where wallets, private keys, gas fees, and the need to convert crypto to fiat have created friction for users.

Stablecoins are becoming the new financial rails

Stablecoin's reputation as blockchain's killer app stems from their emerging role in the global financial system of providing a bridge to TradFi. Now it's clear that the baseline is shifting as traditional payment networks as well as Fintechs are building for scale not just engaging in paying lip service to blockchain technology. It's also clear that gone are the days in which stablecoins are considered merely onramps or trading tools.

To summarise:

1. The stablecoin market is institutionalising

TradFi firms entering the space bring not only credibility but also distribution. PayPal may not ever catch USDT, but it brings an entirely new user base into the stablecoin economy and that’s what drives long-term demand.

2. UX is finally being treated as infrastructure

We’ve known for years that crypto’s Achilles heel was clunky UX. These partnerships signal that spending, earning, and transacting with stablecoins is becoming as smooth as using a debit card (i.e. critical for onboarding the next wave of users).

3. Tokenization isn't just RWA, it's payments

Stablecoins are tokenized fiat. As users grow comfortable with digital dollars, the leap to tokenized RWAs (bonds, equities, real estate) becomes a natural next step. 

The key takeaway here is that, as the stablecoin market matures, more Fintech and TradFi firms will enter the space and driving innovation and competition which is a bullish signal. These developments portend a future where crypto is seamlessly integrated into everyday life, driven by the broader trends of tokenization and DeFi –TradFi convergence.

Finally, it is important to note that, ultimately, stablecoins isn't just about payments. Governments have taken many different stances on them, with some considering them a threat to monetary sovereignty while others see them as a shadow banking risk. 

The Trump administration has made clear that they see stablecoins' potential to expand the US dollar's digital footprint beyond its borders for settlements, remittances, and investments. US crypto Tzar, David Sacks, has gone on record saying he sees their utility to strengthen the US dollar’s dominance rather than eroding it.

In other words, if stablecoins become the primary way a currency moves globally, it will serve to reinforce the power of the currency to which they are pegged, rather than diminish it. This is a key macro-level point to bear in mind alongside all the developments in infrastructure, adoption, and regulation within the stablecoin ecosystem itself.

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