Maybe payments are the best use for crypto after all – just not with bitcoin . According to Bernstein, stablecoins are “the monster crypto killer-app” and could be a nearly $3 trillion market over the next five years. “We expect major global financial and consumer platforms to issue co-branded stablecoins to power value exchange on their platforms,” analyst Gautam Chhugani said in a note Wednesday. “Going forward, we expect tokenized stablecoins to be a $2.8 trillion market, led by regulated, onshore stablecoins.” Stablecoins are cryptocurrencies whose prices are pegged to an underlying asset. It’s typically a fiat currency — usually the U.S. dollar — although there are stablecoins whose prices are tied to commodities or other financial assets. Stablecoin business models are “extremely lucrative” due to float income from treasury and money market holdings of stablecoin issuers, Chhugani said. “We expect these revenues to be shared with their consumer partners, making co-branded stablecoins attractive for new platforms,” he wrote. “We expect this profit pool to become increasingly on-shore, regulated and shared between consumer distribution partners.” There’s about $125 billion worth of stablecoins in circulation, although more than $6 trillion are settled annually on public blockchains such as Ethereum. They’re primarily used by the crypto industry and early adopters for business-to-business settlements, exchange transfers, trading pair settlement and person-to-person transfers. Most stablecoins are “generic,” Chhugani said, and have minimal integration with consumer brands, commerce and traditional rails. The market is also dominated by offshore players like Tether. The stablecoin market has dropped sharply this year despite bitcoin being up about 75%. The two normally move together. Tether seems to be bucking the trend, though. It grew its market capitalization 26.5% this year. In July, it hit an all-time high of $83.8 billion and now accounts for 68.5% of the overall stablecoin market. The crypto market currently awaits a vote in Congress on a key stablecoin bill , which has just advanced to the House with three other crypto bills for the first time. In anticipation of that decision, payments giant PayPal this week launched a company branded stablecoin . While there’s little detail on how exactly PayPal’s customers and merchants would utilize stablecoins within the payments giant’s ecosystem, Bernstein said the endeavor seems to be at the forefront of the future of crypto and payments. —CNBC’s Michael Bloom contributed reporting.
Paolo Ardoino, Tether’s chief technology officer, said the company estimates that the excess reserve will increase by $700 million in the current quarter, which is not yet over.
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Cryptocurrency firm Tether estimates it will make $700 million profit in the March quarter, taking its total excess reserves to over $1 billion, the company’s technology chief told CNBC, revealing the latest figures for the first time.
Tether issues the USDT stablecoin, which is pegged one to one with the U.S. dollar. USDT is backed by real-world assets such as fiat currency and U.S. Treasurys so that it is always one to one redeemable with the U.S. dollar.
Stablecoins are used by traders to move in and out of different cryptocurrencies without the need to convert money back into fiat currencies.
Over the years, stablecoin issuers have been criticized for not being transparent enough with the type of assets they hold in their reserve to back their digital currency. Tether held commercial paper, or short-term, unsecured debt that is issued by companies. But Tether didn’t reveal the type of firms or geographical location of companies it had brought the debt from.
Tether eventually sold all of its commercial holdings and moved into U.S. Treasurys, which are considered a more stable and reliable asset. The company produces so-called attestations, which are reports produced by an auditor to attest to the company’s reserves and the assets it holds.
The last report Tether released covering the December quarter showed it had more assets than liabilities.
Tether then revealed in February that it made $700 million in profit in the December quarter. The company’s total assets once liabilities are substracted amount to $960.6 million.
Paolo Ardoino, Tether’s chief technology officer, said the company estimates that the excess reserves will increase by $700 million in the current quarter, which is not yet over. That would take Tether’s excess reserves to $1.66 billion. And it would be the first time Tether crosses the $1 billion mark.
“So this money stays in Tether in the main company in order to further capitalize the stablecoin,” Ardoino said.
Tether makes money from various fees, such as a $1,000 withdrawal fee (with a minimum withdrawal requirement amount of $100,000); from investments in digital tokens and precious metals; and from issuing loans to other institutions.
The value of all the USDT in circulation has grown substantially this month from $70.98 billion on March 1 to $78.14 billion on Thursday, according to CoinMarketCap.
That’s thanks in part to the collapse of Silicon Valley Bank this month. Circle, which issues a rival stablecoin called USD Coin, revealed it had $3.3 billion exposure to SVB. USDC lost its dollar peg as investors got concerned about the coin’s stability. Investors flocked to tether. After the U.S. government stepped in to guarantee depositors, USDC regained its peg after it said the $3.3 billion USDC reserve deposit held at SVB will be fully available to people.
Ardoino revealed Tether’s estimated profit for the current quarter while defending the company’s record. When asked if Tether would be able to withstand an event like the SVB crisis, Ardoino asked why people are still questioning its reserves even after traditional lenders collapsed.
“First of all, seriously after Credit Suisse and all the others, all the banks that are failing you are looking again at Tether?” Ardoino said in reference to the instability at Credit Suisse, which eventually led to a regulator-brokered $3.2 billion deal for UBS to buy the Swiss lender.
“Tether is making money and banks are failing. So if you have to put money somewhere, I guess that Tether is the most safe among all the choices,” Ardoino said.
Paxos has been ordered by New York regulators to stop issuing the Binance USD (BUSD) stablecoin.
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The U.S. Securities and Exchange Commission could be gearing up to take action against Paxos, a company that issues a type of cryptocurrency called stablecoin.
The move will have major implications for the $137 billion market, experts told CNBC.
Stablecoins are a type of cryptocurrency designed to mirror real-world assets such as the U.S. dollar.
These stablecoins are often backed by real assets such as bonds or cash in reserve. They have become the backbone of the crypto market as they allow people to trade in and out of different coins quickly without having to convert in and out of fiat currency.
Paxos issued a digital currency called Binance USD or BUSD. It is a stablecoin associated with Binance, one of the world’s biggest cryptocurrency exchanges. BUSD is pegged one-to-one with the U.S. dollar.
Separately, Paxos said that the SEC had issued it a notice that the regulator is considering recommending an action alleging that BUSD is a security. Paxos said the notice suggests Paxos should have registered the offering of BUSD under federal securities laws.
The SEC hasn’t started official action. But the agency’s actions are being watched closely because if it starts an official procedure, it could have huge implications for all stablecoins including tether and USDC, the two largest which combined are worth $110 billion.
“If the SEC charges Paxos, any other issuer of stablecoins should register or prepare for a court fight with the SEC,” Renato Mariotti, a partner at law firm BCLP, told CNBC.
While the SEC has not yet come out with specific charges, the notice to Paxos focuses on the question of whether stablecoins are securities or not.
For its part, Paxos said it “categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws.”
The SEC uses the Howey test to determine what is deems a security or an “investment contract.” There are four criteria to determine whether something is an investment contract as part of the Howey test, for example, if there is an expectation of profit from the investor.
It’s possible that Paxos aggressively litigates against the SEC, but the cost of doing so would be significant.
Renato Mariotti
partner, BCLP
If BUSD is deemed a security by the SEC then the regulator would have oversight over the stablecoin. Whatever company issues BUSD would need to register with the SEC and accept more stringent regulation.
Another implication is that other stablecoins will also be given the same label.
“The basis for that action will necessarily be fact-specific to the Paxos BUSD structure but will likely have wide ranging implications for other stablecoin issuers selling coins into the U.S.,” Townsend Lansing, head of product at CoinShares, told CNBC.
There are a number of different scenarios that might play out. It will depend on what the SEC alleges against Paxos and how the two sides move forward.
“I believe that it is likely that the SEC reaches a settlement with Paxos in which Paxos concedes that that BUSD is a security, leading other stablecoins to follow suit and register,” Mariotti said.
“It’s possible that Paxos aggressively litigates against the SEC, but the cost of doing so would be significant,” Mariotti said.
“Litigation would take years and the risk of losing to the SEC would be significant. The mere fact that Paxos was fighting against the SEC would create risk and potentially make BUSD less attractive to the marketplace.”
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Another outcome, according to Mariotti, is that the SEC may regulate what assets are used to back stablecoins and the requirements for issues of the digital currency to make disclosures to the market.
CoinShares’ Lansing said that what the SEC considers a security or investment contract actually extends beyond just the Howey test and the agency has “extensive knowledge of how to apply both the law and judicial precedent.”
“Absent a successful fight, it is most likely BUSD will no longer be sold into the U.S. or be available on U.S.-based digital asset exchanges,” Lansing said. “It is very possible that other stablecoins will have follow suit.”
It will depend on what the SEC’s allegations against Paxos and BUSD are.
“We still don’t know the exact basis on which the SEC is alleging the violations, so we don’t know the extent to which those allegations will extend to other industry participants,” Lansing said.
Carol Alexander, professor of finance at Sussex University, said the U.S. regulator’s action is “more a move against Binance than stablecoins.”
Alexander said “Binance is causing increasing concern for regulators around the world” in areas from money laundering to violating securities laws. That could be one reason the SEC has targeted BUSD, she said.
The Justice Department is investigating Binance for suspected money laundering and sanctions violations, Reuters reported last year. Bloomberg reported in 2021 that U.S. officials were looking into whether Binance employees engaged in insider trading.
Binance did not immediately respond to CNBC’s request for comment.
A Binance spokesperson said at the time that the firm has a “zero-tolerance” policy for insider trading and a “strict ethical code” to prevent any misconduct, according to Bloomberg.
The near $1.4 trillion collapse of the crypto market in 2022 didn’t make a dent to traditional assets like stocks or to the real economy.
But one academic has warned that the failure of a major stablecoin could have an impact on the U.S. bond market, marking a potential new area that investors need to keep an eye on as contagion continues to spread across the industry.
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Stablecoins are a type of digital currency that is supposed to be pegged one-to-one with a fiat currency such as the U.S. dollar or the euro. Examples include tether (USDT), USD coin (USDC) and Binance USD (BUSD), which are the three biggest stablecoins.
Those kinds of coins have become the backbone of the crypto economy, allowing people to trade in and out of different cryptocurrencies without needing to convert their money to fiat.
Issuers of those stablecoins say they are backed by real assets such as fiat currency or bonds so that users can redeem their token one-for-one with a real asset.
Tether says that more than 58% of its reserves are held in U.S. Treasury Bills, accounting for around $39.7 billion. Circle, the company behind USDC, has around $12.7 billion worth of Treasurys in its reserve. Paxos, which issues BUSD, said it has around $6 billion of U.S. Treasury bills. All those figures are from the companies’ latest reports which were issued in November.
But while there are no signs of major stablecoins collapsing, Eswar Prasad, an economics professor at Cornell University, said it’s something regulators he’s spoken to are worried about because of the impact it could have on traditional financial markets. That’s because a potential run on a stablecoin — where large swathes of users look to redeem their digital currency for fiat — would mean the issuer has to sell off the assets in their reserve. That could mean dumping large amounts of U.S. Treasurys.
“And I think [the] concern of regulators is if there were to be a loss of confidence in stablecoins … then you could have a wave of redemptions, which will in turn mean that the stablecoin issuers have to redeem their holdings of Treasury securities,” Prasad told CNBC at the Crypto Finance Conference in St. Moritz, Switzerland, this week.
“And a large volume of redemptions even in a fairly liquid market can create turmoil in the underlying securities market. And given how important the Treasury securities market is to the broader financial system in the U.S. … I think regulators are rightly concerned.”
A growing number of voices have warned about the impact that a “run” on stablecoins could have on traditional financial markets.
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Prasad advises regulators around the world on policy related to cryptocurrencies.
The academic warned that if such a run were to occur when bond market sentiment was “very fragile as it is in the U.S. right now,” there could be a “multiplier effect” thanks to large selling pressure on Treasurys.
“If you have a large wave of redemptions that can really hurt liquidity in that market,” Prasad said.
The Federal Reserve hiked interest rates several times in 2022 and is expected to continue to do so this year as it looks to tame rampant inflation. The U.S bond market had its worst year on record in 2022.
Stablecoins account for about $145 billion of value out of the $881 billion that the entire cryptocurrency market is worth, so they are significant. And there have been failures already.
Last year, a coin called terraUSD collapsed. It was dubbed an algorithmic stablecoin, so called because it maintained its one-to-one peg with the U.S. dollar via an algorithm. It was not backed in full by real assets such as bonds as USDC, BUSD and USDT are. The algorithm failed and terraUSD crashed, sending shock waves across the crypto market.
The U.S. Federal Reserve also warned in a report in May 2022 that “stablecoins remain prone to runs, and many bond and bank loan mutual funds continue to be vulnerable to redemption risks.”
Bill Tai, a well-known venture capitalist and crypto industry veteran, said he doesn’t think there will be a collapse of any of the major stablecoins, but said that scrutiny on this type of cryptocurrency “has gone up for good reason.”
“I think just like in our traditional finance industry, where people got caught off guard by hidden contagion inside the subprime market during the great financial crisis, there could be a pocket or two of leverage on some of the assets that purport to support stablecoin,” Tai told CNBC in an interview Thursday.
Tai likened a potential stablecoin blowup to a surprise event like the subprime mortgage crisis, which began in 2007. Lenders offered mortgages to borrowers with poor credit, leading to defaults and contributing to the financial crisis. It came as somewhat of a surprise.
“And if one of those (stablecoins) goes down, there will be another downdraft,” Tai added.
