Stablecoins are essentially banking as a service, and their uses have yet to be truly explored

Author: Jack Chong

Compiled by: Shenchao TechFlow

Stablecoins are a form of internet-native monetary liabilities, representing a new generation of Banking as a Service (BaaS).

The form of stablecoins (assets) will not change; we are just beginning to explore their utility. Here are some predictive models for the future development of stablecoins:

Stablecoins are the new generation of Banking as a Service (BaaS)

In Web2 fintech, a wave of startups provided Banking as a Service (BaaS) to build new applications on top of it.

These BaaS companies act as middleware, simplifying the complexities of interacting with traditional banks. For example, companies like @Venmo, @wise, @CashApp, and @Affirm have benefited from BaaS and launched new types of products, such as new P2P payments, Buy Now Pay Later (BNPL), and cross-border payments.

All account holders deposit their funds into fractional reserve banks, bearing the risk that the bank may fail. However, the collapse of Silicon Valley Bank tells us that nothing is absolutely certain.

Unfortunately, one of the leaders, Synapse, has gone bankrupt, causing significant distress to its customers and partners.

Moreover, one of the major sponsoring banks, Evolve Bank, also experienced a massive data breach due to a Russian hacker attack.

So, what is the alternative to Banking as a Service? If BaaS has driven the development of fintech 2.0, then stablecoins are empowering fintech 3.0.

Fiat-backed stablecoins (e.g., @circle, @Tether_to, @Paxos) represent on-chain debts, with these tokens backed by some form of fiat collateral held off-chain.

Assets

Issuers do not provide loans; they are narrow banks.

Liabilities

Tokens are now distributed on the blockchain. Anyone with a wallet and internet access can purchase and hold these tokens from the secondary market.

Functionally, the services provided by stablecoins to consumers are the same as those of Banking as a Service (BaaS).

Holding $USDC as a non-U.S. user is equivalent to having a dollar account through @Wise.

If you hold $USDC, you face the risk of Circle as the issuer, BlackRock as the securities broker, and the risks associated with Circle's banking partners.

If you have a dollar account through @Wise, you face the risks of Wise's BaaS partners and the sponsoring banks behind them (fractional reserves).

So, why have stablecoins achieved such significant growth in such a short time?

It all comes down to the distribution of liabilities (deposits in Web2 vs stablecoins in Web3).

In Web2, deposits are trapped in closed networks (e.g., domestic payment networks and SWIFT).

In Web3, stablecoins have been recorded on public blockchains from the very beginning; they are open networks.

This also explains why public blockchains may achieve the Lindy effect, as they are the focal point for coordination among all market participants.

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This leads me to the next point:

1.

#### The form of stablecoins (i.e., the asset side) will not change in the future

Because stablecoins must focus on distribution (i.e., liabilities), issuers will naturally tend toward the same asset composition.

Regarding regulation

Regulators (such as those in the U.S., EU, Hong Kong, etc.) are narrowly focusing stablecoin regulation on the asset side, making it relatively simple to specify asset types and how to manage them.

If you want to protect consumers, regulating assets makes sense (see the algorithmic support of Terra/Luna).

2.

#### While the form of stablecoins will not change much, the utility of stablecoins (i.e., how liabilities are used) has yet to be fully explored

Imagine that the essence of payment is transferring $x from one place to $y, following certain conditions along the way.

This is my mental model.

The payment process is divided into three steps:

1. Payment entry

2. Conversion

3. Payment exit

In this workflow, you need to consider, for example, what this payment is for? After the transaction is completed, you need to record it in the ledger, and upon receiving the transaction, you need to combine it with the invoice.

Currently, stablecoins have a very clear utility: deconstructing the traditional agent banking network through a new set of service providers. No longer relying on a single SWIFT transaction, you can now break it down into: Deposit -> BaaS -> LPs Conversion -> BaaS -> Withdrawal. This way, you can combine the best services at each stage to provide a better user experience.

In fact, this is also the way described by @mgiampapa1, @will_beeson, and @bkohli in @rebankpodcast.

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But is cross-border payment the only use case for stablecoins?

I don't think so.

There is a vast untapped potential surrounding programmable money.

What if the logic of "If X, then Y" could be applied to the entire payment workflow? What about the mutual transfer of value between machines?

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How can companies like @sentient_agi monetize the data sources of large language models (LLMs) with each inference call?

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Regarding regulation

How do regulators view the utility of stablecoins? In my opinion, the only important thing is Know Your Customer (KYC).

The most obvious regulatory conflict I see is:

1. If stablecoins are indeed similar to Banking as a Service (BaaS), should regulators regulate stablecoins like they regulate BaaS? This is a question of functional equivalence.

2. Should stablecoins allow anonymity like cash?

If the first scenario occurs, the entire stablecoin industry will collapse, and both market capitalization and trading volume will be halved. This would result in the U.S. losing a significant source of demand for U.S. Treasury securities (UST).

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The second scenario is possible, but I expect existing businesses and offshore banks benefiting from the status quo to strongly oppose it.

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