As a seasoned crypto investor with a keen interest in the latest developments in the industry, I find the growing trend of stablecoins that offer yields to customers an intriguing development. The potential for these digital assets to disrupt traditional money-market funds and dollar deposits is immense, especially with companies like PayPal recognizing their value as decoupled payment and yield-generating tools.

In the realm of cryptocurrencies, stablecoins have served an essential function for quite some time. They facilitate the transfer of value within the digital economy, allowing users to bypass price fluctuations without the need to convert their holdings into traditional currencies or provide collateral for trading activities.

In simpler terms, they function similarly to traditional currencies such as the US dollar or Euro, but exist digitally on a blockchain platform. These digital counterparts provide consumers with a familiar and convenient way of making transactions.

Large sums of money are kept in stablecoins, leading to substantial earnings for the issuers. However, typically, the issuers do not distribute these profits to the token holders.

According to data from CoinDesk, USDT issued by Tether holds the third-largest position among all cryptocurrencies with a market size of approximately $112 billion. In comparison, USDC from Circle ranks sixth with a market capitalization of around $32 billion.

Companies are putting large sums of money into extremely secure assets, such as U.S. Treasuries, which generate billions of dollars annually in returns. In essence, these firms serve as modern equivalents of money-market funds from the conventional financial sector. The primary distinction lies in the distribution of interest earned on investments: while money-market fund issuers pass this income on to their clients, companies retain all the yield for themselves during the crypto era.

As a crypto investor, I’ve noticed that in the past, when interest rates were low and competition was scarce, stablecoin issuers had the upper hand in keeping all the interest earned on collateral without much pressure from users or distribution partners. Rob Hadick, general partner at venture capital firm Dragonfly, echoes this observation.

With rising interest rates, stablecoin issuers are now making significant profits. It’s only expected that partners such as exchanges and power users would demand a larger share of these revenues, according to Hadick.

In a fair manner, US regulators don’t allow stablecoin issuers to distribute yields to their users. Similarly, the upcoming MiCA regulatory framework in Europe will adopt a similar stance.

As a analyst, I’d rephrase it as follows: I. The global reach of blockchains is undeniable, and the emergence of stablecoins that function as digital equivalents of cash adds to this trend. II. However, competition in this space is intensifying, with companies like Ondo, Mountain, and Agora promising more equitable economic models. III. Just recently, Paxos unveiled a regulated yield-generating stablecoin called the Lift Dollar in the UAE, further fueling the race.

Payments play

As a researcher studying the stablecoin market, I’ve observed that issuers offering yields on their stablecoins can be an effective strategy to attract users. However, this approach could pose a challenge for traditional dollar-pegged tokens such as Circle and Tether, which hold significant collateral in trading markets. These tokens primarily rely on the trust that their peg to the US dollar will be maintained, so the introduction of yield-bearing alternatives may erode some of their market share.

“There are various methods for extending goodwill towards users beyond just cost savings from employing a payments-centric stablecoin. This is the objective behind PayPal’s entrance into the stablecoin market with their PYUSD token, enabling large-scale transactions.”

In the upcoming period, the ability of stablecoins to process payments may diverge from money-market funds’ capacity to generate returns, as suggested by Jose Fernandez da Ponte, PayPal’s Senior Vice President and Head of Blockchain.

As a crypto investor, I believe that in the near future, corporate treasurers will hold their liquidity in money-market funds. When it’s time for them to make a payment, they will effortlessly transfer that funds into stablecoins and complete the transaction. Stablecoins are designed specifically for this purpose.

A payment-centric stablecoin such as PYUSD may not guaranteed prosper in today’s financial marketplace with the emergence of central bank digital currencies (CBDCs) and yield-bearing tokens, according to a recent assessment from Bank of America analysts.

Although PayPal’s digital currency business, PYUSD, is relatively smaller than that of Tether and Circle, it would be hasty to underestimate PayPal due to its extensive influence in the fintech and payments sectors through services such as Xoom and Venmo.

As a crypto investor, I have to admit that when it comes to distribution in the world of cryptocurrency, few companies can match PayPal’s reach. Dragonfly Capital’s Hadick made this point clear in his recent statement. While it’s possible that PYUSD (PayPal’s stablecoin) could contribute to DeFi or other non-PayPal applications, I personally find it unlikely.

Dollar base

Charles Cascarilla, CEO of Paxos, emphasized the significance and resilience of stablecoins as a payment method. However, it’s crucial to note that the value represented by stablecoins currently pales in comparison to other financial instruments. He pointed out that there exists approximately $6 trillion in money-market funds and bank deposits, with potentially even more in international money-market funds and dollar deposits.

In an interview, Cascarilla explained that payment assets will consistently make up a smaller portion of the overall deposit and dollar pool. Therefore, the amount held in payment stablecoins will be limited due to the preference of many individuals for investments that yield returns.

As a researcher studying the trends in trading, I concur with Hadick’s perspective that the shift towards tokenized yield-bearing collateral is an inevitable development in both traditional finance and crypto markets. The allure of earning returns on investments while enhancing capital efficiency and facilitating intraday settlement is too compelling for major institutions to overlook.