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Stablecoin. It may just sound like another crypto buzzword, but some of the biggest names in finance are betting that it could become one of the most important innovations in payments in recent years. Visa and Mastercard are among dozens of major firms backing a new stablecoin pegged to the US dollar, called open USD. Just last summer, Congress passed the Genius Act, creating a regulatory framework for the industry, and some analysts estimate the stablecoin market could grow from roughly $300 billion to as much as $1.45 trillion by 2035. But just what is a stablecoin to begin with?
Stablecoins are a form of cryptocurrency that is designed to sort of overcome one of the fundamental weaknesses of cryptocurrency, which is that it's far too volatile to be used as a medium of exchange. They're pegged typically one for one by the US dollar, so they have a very stable value, hence the name stablecoins. Other types of crypto like Bitcoin, are more of an investment vehicle versus stablecoins really are intended to be a payment utility. Think of them as digital dollars that live on a network that securely records all transactions. Today, moving through the financial system can take several business days, and often involves banks and payment companies that charge hefty fees.
Stablecoins, however, offer some clear advantages over traditional payment systems. Stablecoins can be transacted at a very low cost. You can move funds from New York City to Melbourne, Australia, in 3 to 5 seconds at a fraction of a penny. That has banks, payment companies and retailers paying attention. For now, stablecoins are most commonly used within crypto markets. If an investor wants to sell their Bitcoin without converting it back into dollars immediately, they might park that money in a stablecoin. This makes it faster and more convenient to trade or buy other cryptocurrencies later on, without the delays that can come with moving funds between the bank and the crypto exchange.
I mean, that was and still is like the primary use case for stablecoins is to essentially trade in crypto markets. You know, the analogy that's been used in the past is that essentially stablecoins are like the casino chips at the crypto casino. But experts say that stablecoins could become more prevalent very soon. So there's a lot of build out that's occurring, a lot of infrastructure being put in place. But I think consumers will start to see more exposure to stablecoins as a payment alternative starting in 2027. So what could that look like? Consumers could soon be holding digital stablecoin wallets to make purchases online and in person.
Major companies could also start issuing coins of their own. I think you'll see potentially some of the very large retailers, such as Amazon and Walmart. Large companies like that, that today pay presumably billions of dollars in interchange fees, could really shave significant expense off of their operations. They also would hold the reserve deposits backing these stablecoins so they could generate yield for those companies. And where I see Amazon and Walmart potentially going, if they go down this path, is then enabling the
consumer to receive a discount if you check out at the Amazon website and use Amazon Coin. I'm kind of making that up. And again, I think the belief is that some of the savings then will be passed along to the consumer to create incentives or rewards for shopping at Amazon or shopping at Walmart. That's where I think you'll start to see more mainstream usage and adoption of stablecoins. And as AI becomes more deeply integrated into commerce, the need for stablecoins could also grow. Jeremy Allaire, CEO of stablecoin issuer Circle, has argued that an economy increasingly powered by AI agents will require digital money that can move at "machine speed".
But despite all the excitement surrounding the technology, experts also warn that consumers shouldn't view them as safe investments or a replacement for traditional savings accounts. If you're in the US, there's really not a lot of compelling reasons why stablecoins are better than other similar alternatives, right? For starters, stablecoins aren't FDIC-insured, meaning if something were to go wrong, consumers won't have the same protection as they would typically have when holding money in an FDIC-insured bank. You think that when you give a dollar to a financial services firm, and they hold that dollar on your behalf, that money ought to be insured by the government up to $250,000 per account.
That is not the case with stablecoins. They offer zero insurance. Holding on to stablecoins also does not generate interest in the traditional sense, despite the fact that they are backed by assets like treasury bills that generate income over time. The Genius Act prohibits stablecoin issuers from paying interest or yield. What the industry has done is sort of figured out a clever workaround to that. So you and I could go to a cryptocurrency exchange like Coinbase, for instance, buy USDC on Coinbase, hold it with Coinbase, and Coinbase would pay us what they call a reward, which is functionally equivalent to interest or yield. As you might imagine, the banking industry is not too happy about that arrangement because it's, of course, competition.
And they're concerned that stablecoins that offer customers interest or yield would siphon deposits out of the banking system. And, of course, deposits are what banks use to make loans to the real economy that generates economic growth. So the banks are trying to sort of close that what they call a loophole in that and the crypto industry is resisting. There also isn't a guarantee that stablecoin will maintain its peg to the dollar. So despite the name, there's actually not a single stablecoin that has, over its entire history, maintain its peg. So the largest stablecoin for instance, tether, which is headquartered overseas, they're roughly, you know, 60, 70% of the stablecoin market.
There have been doubts and questions swirling around the validity of their reserves for quite some time, and that has led to, at various points, the price of tether dipping below a dollar. Not by a lot, but it has gone below a few times. But I think that is sort of one of the concerns from a policy standpoint that remains, which is we could have a run, just like we've seen bank runs, if folks start to doubt that they're going to be able to get a dollar back for their stablecoin, that could trigger them to panic and sell into the market, which would only make the situation worse.
Stablecoins may not change the financial system overnight, but with lawmakers, Wall Street and Silicon Valley all paying attention, they're certainly becoming increasingly difficult to ignore. The real question isn't whether stablecoins are generating buzz, it's whether they can deliver on their promise of revolutionizing payment systems as we know them.
