The Stripe Inc. headquarters in South San Francisco, California, US, on Tuesday, April 16, 2024. … [+]© 2024 Bloomberg Finance LP

Stripe’s recent acquisition of stablecoin orchestration startup Bridge sent shockwaves through the crypto world. For the first time, a major payments company committed over a billion dollars to accelerate its use of this technology. Though this isn’t Stripe’s first attempt at crypto, the timing feels different. Enthusiasm for stablecoins is at an all-time high, and Bridge’s co-founder, Zach Abrams, positioned the company masterfully: by branding it as the ‘Stripe of crypto,’ he ensured it would catch the attention of the Collison brothers.

What most miss: Bridge might be worth $1.1 billion to Stripe, but on its own, it likely wouldn’t have hit that mark. This isn’t due to any lack of talent—Zach and his team assembled a top group of engineers—but rather because making money with stablecoins is extremely challenging. Whether through issuing, orchestrating (i.e., converting between stablecoins), or integrating them with legacy banking rails, achieving long-term profitability will be a significant challenge.

But how can that be? After all, Circle and Tether have been raking in substantial profits following the interest rate hikes of the last two years, and with ongoing anticipation around a Circle IPO, the market appears primed for further growth and consolidation.

The reality is that network effects in the stablecoin market are likely much weaker than most anticipate, and it’s far from a winner-take-all environment. In fact, stablecoins may well function as loss leaders, and without essential complementary assets, could even become a losing venture. While industry insiders often cite liquidity as the primary reason only a few stablecoins will dominate, the truth is far more complex.

So what are the biggest misconceptions about stablecoins? Let’s take a closer look.

Paolo Ardoino, chief executive officer of Tether Holdings Ltd. Photographer: Nathan Laine/Bloomberg© 2023 Bloomberg Finance LP

1. Stablecoins need a complementary business model.

When we designed Libra, it was clear to us that stablecoins require a complementary business model to thrive. The Libra ecosystem was structured around a non-profit association that brought together wallets, merchants, and digital platforms to support both stablecoin issuance and the payment rails on which these assets would move.

Relying solely on reserve interest isn’t a sustainable way to monetize a stablecoin. We learned this early on, as we were planning to issue stablecoins backed by currencies with minimal (Euro) or even negative (Yen) interest rates at the time. Stablecoin issuers like Circle and Tether seem to overlook that today’s high-interest environment is an anomaly, and a sustainable business can’t be built on a foundation that’s likely to crumble when market conditions shift.

Of course, it’s not just the ‘stock’ of stablecoins that can be monetized; their ‘flow’ can be too. Circle’s recent increase in redemption fees suggests they’re starting to realize this. However, this approach violates a fundamental principle in payments: to build user trust and retention, entry and exit must be seamless. While exit fees may be acceptable in gaming, they’re a poor fit for mainstream payments, as they undermine the basic expectation that money should feel unrestricted and readily available. This leaves transaction fees as a potential revenue source—but enforcing them on a blockchain is challenging without strict control over the protocol. Even then, it’s impossible to impose fees on transactions occurring between users within the same wallet provider. These are all scenarios we explored exhaustively with Libra, highlighting just how complex and uncertain the business model was for the non-profit association.

So what options do stablecoin issuers have? Unless they’re relying on temporary regulatory loopholes—which are unlikely to hold long-term (more on that in the next section)—they’ll need to start competing with their own customers.

Circle’s recent initiatives—including programmable wallets, a cross-chain protocol, and the Mint program—reveal exactly where the company is going. And that’s unwelcome news for many of its closest partners. This is nothing new in platform strategy: never allow a partner to come between you and your customers. Yet, many exchanges and payments companies are doing just that by letting Circle into their ecosystem. For Circle to survive, it must transition into a payments company, even if that means encroaching on its allies’ territory. It’s a familiar pattern—think of Amazon with third-party sellers, travel platforms with hotel chains, or Facebook with news publishers. As platforms succeed, they frequently bring in-house the functions they initially depended on partners to bootstrap and refine, adopting and monetizing what works. Developers within Apple’s and Google’s ecosystems are all too familiar with this.

Stripe doesn’t face this dilemma. As one of the world’s most successful payments companies, they’ve mastered the art of deploying and monetizing a streamlined software layer on top of global money movement—a model that scales efficiently through network effects without being slowed down by the need for country-specific banking licenses. Stablecoins accelerate this approach by acting as a bridge between Stripe and domestic banking and payment rails. What was once a network constrained by legacy institutions—including card companies—can now overcome its last-mile problem, delivering significantly more value to merchants and consumers.

This is also why PayPal launched its own stablecoin, with other fintech giants like Revolut and Robinhood soon joining the fray. Competing on open protocols is a shift from their usual playbook, but they can fine-tune their stablecoin strategy to complement their core offerings. In doing so, they’ll make stablecoins exceptionally affordable and convenient for consumers and businesses alike.

Argentine peso banknotes equivalent to 1,000 US dollars arranged in Buenos Aires, Argentina, on … [+]© 2023 Bloomberg Finance LP

2. Dollarization is not a product

Crypto has a history of greatly underestimating the influence of regulation on its future. We learned this the hard way with the release of the first Libra whitepaper, which led to two grueling years of intense regulatory interactions to align the project with the expectations of policymakers and regulators.

The same is true for stablecoins today. Many assume that stablecoins will seamlessly operate as low-cost, global dollar accounts for consumers and businesses. After all, in a crisis, everyone in the world would prefer to hold dollars in a too-big-to-fail U.S. financial institution. Moreover, one might think the U.S. government would support this, as it strengthens the dollar’s position as the world’s reserve currency.

The reality is far more complex. While the United States risks losing a great deal if its financial and sanctions infrastructure is no longer the global standard—and would face even greater consequences if the dollar’s ‘exorbitant privilege’ erodes, as it has for every reserve currency before it—this doesn’t mean the U.S. Treasury will always favor accelerating dollarization. In fact, its Office of International Affairs would view this as a significant challenge to both diplomacy and global financial stability.

Countries that value monetary policy independence, fear capital flight in a crisis, and worry about destabilizing their domestic banks will strongly oppose the large-scale adoption of frictionless USD stablecoin accounts. They’ll use every tool available to block or limit these accounts, just as they’ve resisted other forms of dollarization. And while it may be impossible to stop crypto transactions entirely, as the Internet has shown, governments have numerous ways to restrict access and curb mainstream adoption.

Does this mean stablecoins are doomed in emerging economies with capital controls or concerns over capital flight? Not at all—the rise of domestic stablecoins that adhere to local banking and regulatory frameworks is inevitable. While the U.S. dollar has traditionally dominated the stablecoin market, things could change rapidly. In Europe, following the implementation of the Markets in Crypto-Assets (MiCA) regulation, banks, fintech companies, and new entrants are rushing to issue euro-denominated stablecoins. This approach has the benefit of preserving the stability of the local banking system, and will be even more important in regions like Latin America, Africa, and Asia.

Clear regulation also enables banks to finally enter and compete on an equal footing, something that hasn’t yet occurred in the United States. Banks can issue deposit tokens in addition to fully-backed stablecoins, allowing them to boost revenue through money creation. This puts pure-play stablecoin issuers—who lack banking licenses, access to the discount window, or government deposit insurance—at a significant competitive disadvantage.

Icons for various payment services are displayed in Hong Kong, China. Photographer: Anthony … [+]© 2016 Bloomberg Finance LP

3. There will not be a single stablecoin winner

Yes, an issuer can build network effects around global liquidity and availability for its stablecoin, but as DEX protocols know all too well, liquidity is as easily lost as found. Similarly, economies of scale in branding and marketing may help issuers capture mindshare, but they don’t always translate into a truly defensible position.

The reality is that a stablecoin’s most important feature—its peg to a currency like USD or EUR—is also its greatest weakness. Today, these assets are seen as distinct, but once regulation standardizes stablecoins and makes each equally safe, individuals and businesses will view them simply as dollars or euros. While legal distinctions do exist—as highlighted during the Silicon Valley Bank run—most people don’t differentiate between dollars held at Bank of America and those at Chase. That’s the magic of those dollars functioning as money—a feat orchestrated behind the scenes by the Federal Reserve.

The same will be true for stablecoins. While there may be dozens in each major market, this complexity will be abstracted away for users. When that happens, the economics of stablecoins will favor entities with either a complementary business model, as described above, or those that control the interface between stablecoins and the assets backing them—be it bank deposits, U.S. treasuries, or money market funds.

That is bad news for pure-play issuers like Circle, whose current banking system interfaces depend on entities such as BlackRock and BNY Mellon. These financial giants are well-positioned to become direct competitors. For instance, BlackRock already operates the largest tokenized U.S. Treasury bills and repos fund (BUIDL).

A common misconception in the history of technological disruption is how frequently incumbents manage to push back. Even Clayton Christensen’s key example of disruptive innovation—the rise of smaller disk drive producers in the hard disk industry—is wrong: Seagate not only survived disruption but remains the world’s largest manufacturer to this day. In heavily regulated industries like financial services, the odds are even more heavily stacked against new entrants.

BERLIN, GERMANY - DECEMBER 05: Revolut Founder CEO Nikolay Storonsky, N26 Founder & CEO Valetin … [+]Getty Images for TechCrunch,

Tech companies with banking licenses, like Revolut, Monzo, and Nubank, are well-positioned to lead in their markets, and other players are likely to accelerate their licensing efforts to gain similar advantages. However, many players in the stablecoin market will struggle to compete with established banks and may face acquisition or failure. Banks and credit card companies will resist a market dominated by one or two stablecoins. Instead, they’ll advocate for a landscape with multiple interoperable and interchangeable issuers. When that happens, liquidity and availability will be driven by existing distribution channels to consumers and merchants—an advantage already held by neobanks and payment companies like Stripe or Adyen.

Fully-backed stablecoins like USDC and USDT will need high-velocity use cases to remain viable—such as enabling cross-border money movement—or they’ll need to attract a DeFi ecosystem that can introduce transparent fractionalization to subsidize their narrow-bank model. Meanwhile, deposit tokens issued by banks or tokenized funds will benefit from stronger underlying economics, which will drive their adoption across both consumer and institutional use cases. Institutional users, in particular, are used to managing diverse assets like money market funds and pay close attention to the opportunity cost of their capital. The race to the bottom in sharing stablecoin yields is already well underway in that segment.

In every region, national champions—from banks to crypto firms—will position themselves as the essential entry point into the local market. However, they’ll need to carefully consider how stablecoins, by linking domestic rails to blockchain networks, could also lower barriers for foreign competitors to enter and compete. After all, the core transformation here from a business perspective is that these systems will run on open protocols.

Agustin Carstens, the General Manager of the Bank for International Settlements. (Photo by Vernon … [+]NurPhoto via Getty Images

So what does this all mean?

The future is bright for leading payments, fintech, and neobank players, who can leverage stablecoins to streamline operations and accelerate global expansion. It also opens new opportunities for domestic stablecoin issuers to position themselves and ready their payment systems for global interoperability—an area where stablecoins are poised to succeed where the bureaucratic BIS’s ‘Finternet’ vision will quickly fall short.

Leading crypto exchanges will also leverage stablecoins to enter the consumer and merchant payments space more aggressively, positioning themselves as credible challengers to major fintech and payment companies.

While questions remain about how stablecoins will scale AML and compliance controls as they go mainstream, there’s no doubt they offer an opportunity to rapidly modernize our financial services stack and shake up industry leadership.

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