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Mastering stablecoins for business: the complete 2024 guide

8 Mins

July 8, 2024

Introduction

Stablecoins now make up about 10% of the entire digital currency market by market cap. Despite the 2022 digital currency crash that briefly shrunk the stablecoin market, today's market capitalization and trading volumes have nearly rebounded to their previous peaks. Global giants like SAP, PayPal, and Visa are embracing stablecoins as a new method for payment and settlement.

In this guide, we’ll break down the essentials: what stablecoins are, the various types available, the advantages they offer, and how businesses can integrate them seamlessly and securely.

What are Stablecoins?

Stablecoins are a type of digital currency specifically designed to reduce price volatility. They achieve this stability by pegging their value to a more stable asset, often a fiat currency or a tangible commodity like gold. To maintain a steady price, stablecoin operators either hold physical reserves of the underlying asset or use sophisticated algorithms to balance supply and demand fluctuations. These operators are usually private organizations or foundations; for instance, Tether is managed by Tether Limited, while USD Coin is issued by Centre, a consortium founded by Circle.

How Do Stablecoins Work?

Stablecoins function much like other digital currencies, operating on blockchains that are active 24/7, allowing for near-instant trading and exchange. Many stablecoins are designed to be compatible with multiple blockchains, enhancing their versatility. By combining the advantages of digital currencies with the price stability of traditional financial instruments, stablecoins have become a popular choice for settling payments. This is particularly advantageous for cross-border transactions, where traditional banking systems can be fragmented, making payments slow, complicated, and expensive.

Similar to other digital currencies, stablecoins are transferred on blockchains using public addresses (or public keys), which are akin to bank account numbers. The balance associated with each address is maintained in a digital wallet.

Exploring the Various types of Stablecoins

Stablecoins come in four distinct types: fiat-collateralized, crypto-collateralized, algorithmic, and commodity-collateralized. Let’s dive into each category to understand their unique characteristics:

Fiat-Collateralized Stablecoins

Fiat-collateralized stablecoins, also known as off-chain stablecoins, are anchored by reserves of traditional fiat currencies, such as the US dollar, stored in a bank account or custody service. The supply of these stablecoins matches the fiat currency reserves held. Prominent examples include Tether (USDT) and USD Coin (USDC) .

Commodity-Collateralized Stablecoins

Commodity-collateralized stablecoins are tied to reserves of physical assets like gold, silver, or other commodities. Each stablecoin in circulation is backed by a corresponding quantity of the commodity, ensuring the stablecoin’s value reflects that of the underlying asset. Examples include PAX Gold (PAXG) and Tether Gold (xAUT).

Cryptocurrency-Collateralized Stablecoins

Cryptocurrency-collateralized stablecoins, also known as on-chain stablecoins, are secured by reserves of other cryptocurrencies such as Ether (ETH) or Bitcoin (BTC). These stablecoins utilize smart contracts to lock in cryptocurrency reserves. Notable examples are Dai (DAI) and Wrapped Bitcoin (WBTC).

Algorithmic Stablecoins

Algorithmic stablecoins, also referred to as non-collateralized or seigniorage-style stablecoins, rely on algorithms and smart contracts to regulate their supply and maintain their value. When the stablecoin’s price rises above its peg, the algorithm increases supply to bring the price down, and reduces supply when the price falls below the peg. An example of this type is USDD.

“At TransFi, we believe that stablecoins are set to revolutionize cross-border payments and settlements, areas where traditional banking systems often fall short. The efficiency, cost-effectiveness, and speed of stablecoins, whether used as a bridge between fiat currencies or as a standalone solution, position them to become the preferred choice for businesses globally.”

Raj Kamal

CEO TransFi

The Best Stablecoins for Cross Border Payments

In our comprehensive article, 2024’s Elite Stablecoins: Your Cross-Border Payment Solution we delve into the top stablecoins that businesses should prioritize.

We selected these stablecoins based on their market size, representing a staggering 98% of all stablecoins by market cap. This criterion is crucial, as stablecoins are not without risks. Those with relative maturity, deep liquidity, and scale are more likely to withstand market shocks and navigate evolving regulations.

By this logic, we recommend the two largest stablecoins for cross border businesses: Tether (USDT) and USD Coin (USDC). In our detailed article, Dollars in Digital: A Deep Dive into USDC and USDT for Businesses, we explore their key features, differences, and histories to understand their reliability.

Tether and USD Coin are both 'fiat-collateralized' stablecoins (also known as off-chain stablecoins). They are backed by reserves of traditional fiat currencies, specifically the US dollar. Unlike other stablecoins, Tether and USD Coin have consistently held their value at parity with the US dollar, with any depegging swiftly resolved. These stablecoins are issued by established financial institutions—Tether by Tether Limited and USD Coin by Centre, a consortium founded by Circle. These organizations publish regular attestation reports prepared by independent accounting firms, detailing the composition of their reserves. Both stablecoins operate across multiple blockchains, reducing operational risk, allowing faster transfers, lowering transaction fees, and supporting innovation.

For those seeking alternatives to Tether and USD Coin, there are nearly 100 other stablecoins available. Four notable ones—Binance USD (BUSD), TrueUSD (TUSD), Pax Dollar (USDP), and Gemini Dollar (GUSD)—share the same fiat-collateralized mechanism as Tether and USD Coin. They offer businesses a straightforward way to bridge traditional and digital currency payment and settlement systems, supporting a flexible approach to stablecoin adoption. Our list also includes two stablecoins backed by gold: Pax Gold (PAXG) and Tether Gold (XAUT). Gold has long been regarded as a reliable store of value, with its value being less volatile compared to other assets.

How to Buy, Sell, and Store Stablecoins

The primary business use for stablecoins is to facilitate payments and settlements. However, before we dive into how to use stablecoins for these purposes, let's explore another valuable use case: balance sheet diversification.

Businesses often need to adjust their financial strategies to protect against currency fluctuations and the adverse effects of inflation on cash reserves and depreciating assets. Stablecoins offer an alternative currency market characterized by stable prices, deep liquidity, and efficient trading mechanisms.

For businesses looking to use stablecoins as a long-term store of value, purchasing them is straightforward. You can buy stablecoins directly on digital currency exchanges or engage a third party to manage the trades. Once acquired, these stablecoins can be stored 'in custody' on an exchange platform, which is convenient but carries counterparty risk. Alternatively, businesses can transfer stablecoins to a private wallet, which can be managed internally or through a third-party service provider.

Streamlining Business Payments and Settlements with Stablecoins

For many businesses, stablecoins offer a seamless alternative to the inefficiencies of traditional payment and settlement methods. Much like conventional payment systems, most businesses rely on third-party providers to facilitate stablecoin transactions. These partners offer the necessary infrastructure and regulatory compliance, secure competitive rates through access to liquidity markets, and manage the conversion between fiat currencies and stablecoins, mitigating exposure risks.

TransFi is one such fintech platform that enables businesses to integrate stablecoins into their fiat payment and settlement processes without ever directly handling the stablecoins if they prefer. Here’s how TransFi processes a stablecoin-enabled cross-border payment, a method that can also be used for settling fiat funds between foreign entities within the same organization.

  1. Account Setup: The business opens an account with TransFi, which includes multiple wallets for different fiat currencies and stablecoins.
  1. Payment Initiation: Through the platform, the business initiates a payment to a supplier, choosing to fund the payment with either fiat or stablecoin deposits.
  1. Conversion and Transfer: If using fiat funds, TransFi leverages its liquidity partners to secure a competitive price for a stablecoin, typically Tether (USDT) or USD Coin (USDC), and executes the trade. TransFi holds the stablecoin and pays the supplier in their preferred fiat currency. Alternatively, TransFi can deposit the stablecoins in the payer’s wallet, moving to the next step.
  1. Stablecoin Transfer: If the payer is using existing stablecoin funds, TransFi transfers the stablecoin across the most suitable blockchain directly to the recipient’s digital wallet.

By utilizing TransFi, businesses can efficiently manage their payment and settlement processes, leveraging stablecoins for speed, cost savings, and reliability.

The Key Benefits of Stablecoins for Business

Enhanced Cash Flow

Cash flow is a major challenge for businesses, often hampered by slow settlements, especially across multiple territories. Cross-border payments usually take complex routes, passing through several intermediary banks before clearing, with foreign exchange adding further delays. Stablecoins, free from these blockages and operating 24/7, offer fast settlements. The relative cost and speed of stablecoin settlements ensure that working capital is available when needed, facilitating smoother financial planning.

Market Accessibility

Stablecoins provide an alternative payment and settlement solution for businesses in regions with limited banking infrastructure. This not only benefits businesses entering new markets but also recipient businesses that gain access to a broader range of goods and services.

Cost Efficiency

Leading stablecoins operate on decentralized blockchains, allowing businesses to bypass the fees and costs associated with traditional intermediaries, currency conversions, and compliance requirements. A study showed that remittance costs in the foreign exchange market could be slashed by as much as 80%. Even when using stablecoins to bridge fiat currency trades (a process known as 'on- and off-ramping') with a third party, significant savings can be achieved. For example, moving funds from Southeast Asia to Europe can be 3-4 times cheaper using stablecoins compared to the Swift network, while transfers from Africa to Europe can be up to 5-10 times cheaper. Businesses with high volumes and lower risk profiles typically access better rates from providers, mirroring traditional payment systems.

Balance Sheet Diversification

Stablecoins play a crucial role in optimizing a business's asset portfolio by offering an alternative to fiat currencies affected by high inflation or volatility. In countries with restricted access to the US dollar and other major currencies, stablecoins provide a reliable store of value.

Automation and Smart Contracts

Stablecoins often utilize smart contracts, which can automate payment terms and conditions. By streamlining payment and settlement processes through smart contracts, businesses can reduce operating costs while benefiting from faster and more accurate transactions.

Understanding the Risks of Stablecoins

Counterparty Risk

Most leading stablecoins are issued and managed by a central entity, introducing counterparty risk similar to traditional banks and financial institutions. This includes risks of mismanagement, operational vulnerabilities, and cyber attacks. For fiat-collateralized stablecoins, the primary concern is the mismanagement of the reserves backing the stablecoin.

Businesses should seek stablecoin issuers that publish independent audits of their reserves, such as the transparency pages for Tether and USD Coin. Mitigating counterparty risk can be achieved by processing stablecoin payments and settlements through a reliable, regulated third party, which can assume the stablecoin exposure and handle operational and regulatory burdens.

Depegging Concerns

In recent years, some stablecoins have temporarily lost their peg. In March 2023, USD Coin (USDC) dropped to 87 cents due to $3.3 billion of reserves held at the failed Silicon Valley Bank (SVB). Tether (USDT), the largest stablecoin by circulation, briefly lost parity with the dollar in May 2022, falling as low as $0.9959. While these fluctuations may seem minor, they can significantly impact businesses using stablecoins for payments or as assets. However, in each case, stability was quickly restored, with the peg reinstated within days.

By leveraging stablecoins, businesses can achieve cost savings, improve cash flow, access new markets, and automate transactions while being mindful of the associated risks.

How to Start Using Stablecoins for Cross Border Payments

Much like traditional and modern payment methods, the quickest and safest way for businesses to enable stablecoin payments and settlements is to outsource. Fintech platforms like TransFi simplify the process for their clients while mitigating risks.

By partnering with a fintech like TransFi, businesses can quickly register and create an account with a stablecoin wallet, enabling them to initiate and settle payments immediately. These platforms often offer multiple accounts, allowing businesses to manage various stablecoin funds alongside fiat deposits from a single interface. This streamlined approach makes it easier and more cost-effective to trade currencies and transfer funds between entities.

Working with a trusted third party also minimizes risk. Businesses can use stablecoins as an intermediary to bridge trades and settlements between fiat currencies, offloading exposure to the fintech partner. This approach ensures that the stablecoin never directly impacts the business's balance sheet, mitigating the risk of depegging, mismanagement by the issuer, or unfavorable regulatory actions.

TransFi is a cutting-edge, fully-regulated payments platform trusted by hundreds of businesses worldwide to process billions of dollars in payments annually. We bridge the gap between traditional and digital finance, helping merchants experience the benefits of stablecoin payments with minimal risk and technical setup. Our clients include other fintechs and payment processors seeking expert support with stablecoins through our Payouts solution.

The Future of Stablecoins: What's Next?

Stablecoins have cleared the first major hurdle of any new payment and settlement method: reaching critical mass. Currently, stablecoins make up about 10% of the entire digital currency market by market cap. With market capitalization and trading volumes nearly back to their 2022 peaks, about 75% of digital asset owners now hold stablecoins. Daily stablecoin transactions reach billions of dollars, and in 2022, settlements hit around $8 trillion—surpassing the volumes of major card networks like Mastercard and American Express. By the end of 2023, on-chain stablecoin volumes are expected to exceed those of Visa, the world's largest card network.

Around the globe, regulations are evolving to support merchants in adopting stablecoins. In the United States, a new draft bill proposes that the Federal Reserve approve any non-bank stablecoin issuers, including those abroad offering stablecoins on US exchanges. The approval criteria include maintaining and proving reserves backing stablecoins, demonstrating technical expertise, established governance, and promoting financial inclusion and innovation. In the EU, the new MiCA framework (Markets in Crypto-Assets) introduces obligations around transparency and consumer protection for stablecoins.

In the UK, the new Financial Services and Markets Bill (FSMB) places similar regulatory oversight on stablecoins. Enthusiasts of stablecoins should be encouraged by this trend. Governments are signaling their intent to bring stablecoins into the mainstream financial ecosystem, paving the way for them to become a legitimate and widely accepted form of payment and settlement.

Conclusion

Stablecoins have become game-changers in accessing markets, settling payments, and protecting assets against inflation and currency fluctuations. Fiat-collateralized stablecoins, in particular, have stood the test of time, reliably maintaining their value with minimal fluctuations.

Six out of the top ten stablecoins by market cap are fiat-collateralized, highlighting their suitability for robust payment and settlement support. Regulatory trends are paving the way for stablecoins to become mainstream financial instruments, ensuring a bright future ahead.

At TransFi, we see stablecoin adoption skyrocketing, especially for cross-border payments and settlements—areas where traditional banking systems often fall short. The unmatched cost-efficiency and speed of stablecoins for cross-border transactions, whether as a bridge between fiat currencies or as a standalone solution, are set to make them the go-to choice for businesses.

However, it's crucial for businesses to understand the potential risks associated with stablecoins, such as depegging, counterparty mismanagement, and the resources needed for in-house infrastructure. By partnering with experts like TransFi, businesses can offload these risks and leverage our existing solutions and extensive experience in stablecoin management.

TransFi offers a comprehensive suite of products to help businesses seamlessly integrate stablecoins into their operations. Our Payouts service ensures swift and secure cross-border payments, eliminating the inefficiencies of traditional banking. With Collections, businesses can easily receive payments in stablecoins, enhancing cash flow and expanding market accessibility. Our Ramp product simplifies the process of converting between fiat and stablecoins, ensuring smooth transactions and financial flexibility.

Join the stablecoin revolution with TransFi and unlock new potentials for your business. We currently operate in 100+ countries, processing millions in payments. Embrace the future of finance with TransFi and experience the benefits of stablecoin payments with minimal risk and maximum efficiency.

TransFi Team

Unlocking the Future of Finance

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Make global payments at the speed of a click

Collections

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Ramp

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