The Competition to Control Stablecoins

Stablecoins, an innovative type of interoperable and programmable currency, hold the potential to reshape the global financial landscape. In doing so, they may enable software to disrupt the banking and financial services industries—areas that have largely remained unaffected by the rise of the Internet.

Stablecoins could replace traditional payment systems and credit card networks like SWIFT, Visa, and Mastercard, drive the fragmentation of financial institutions, and broaden access to U.S. dollars in countries where it is severely limited, such as those facing sanctions.

Moreover, stablecoins are poised to shift the power dynamics within these sectors. Companies that dominate the stablecoin market will have significant control over the future of money.

Where Money Is Coming From and Where It’s Headed (Stablecoins)

Regulators seem to grasp the significance of stablecoins and the high stakes involved. Without stablecoins, blockchains lose their competitive edge. However, in their current form, stablecoins pose challenges to traditional banks, are often used to bypass capital controls and anti-money laundering regulations, and have the potential to trigger or worsen a banking crisis.

The collapse of Silicon Valley Bank provided a glimpse into these dangers: Circle’s USDC, which had around 8% of its reserves at risk, quickly lost its peg and withdrew $3 billion from the failing bank. Although such scenarios can be avoided with well-structured reserves, the associated risks are undeniable.

Stablecoins: Reform or Preservation?

Stablecoins offer a unique opportunity to overhaul the financial system. However, their ability to bring about this change hinges on the outcome of the stablecoin wars and whether regulators choose to support or stifle innovation. By strictly defining design parameters, regulators could restrict viable business models, leaving entry into the market open only to established banks. Should this occur, the competitive advantages of the technology would be lost again. Although this might benefit traditional institutions, it would come at a significant cost to both consumers and businesses.

Irrespective of how unpredictable regulatory intervention may be in the stablecoin competition, the key question remains whether the market will be dominated by one or two major global players or by numerous commodity issuers. The technology has the flexibility to support either scenario, and the outcome will depend on how effectively different stakeholders implement their strategies.

The first major competitors in the stablecoin race are crypto-native companies, Tether and Circle. Tether pioneered the first stablecoin for trading a decade ago and currently leads the market with $114 billion in USDT circulating. USDT is issued offshore, and while concerns have been raised about its reserves, Tether’s biggest hurdle is transforming into a fully regulated entity. Despite claims of promptly responding to law enforcement requests, reports from both the UN and JPMorgan have questioned the company’s regulatory compliance, indicating that more effort is required.

Circle, with $33 billion in USDC, stands as Tether’s closest rival. Like PayPal, Circle operates under the U.S. state money transmitter licensing system. However, the federal government has signaled that stablecoins should fall under federal oversight, as managing stablecoin reserves involves risks more akin to banking than simply running a digital wallet. This leaves Circle with a significant challenge: as the company has been attempting to go public for several years, its main obstacle is transitioning to a federal charter—especially since it does not enforce know-your-customer (KYC) rules on USDC holders.

For both Tether and Circle, the strategy seems clear: adapt to stricter compliance and consumer protection regulations without sacrificing the ability to profit from the stablecoin ecosystem. This is a challenging task, as increased regulation will undoubtedly constrain how issuers can generate and capture value.

A Need for Disruption

Much like the competition in the home video industry, the stablecoin wars won’t be won by superior technology or market dominance, but by practical applications. While regulators may create significant barriers for innovators, they won’t be able to hold them back indefinitely. Ultimately, the most probable outcome is a market with multiple stablecoins that operate in the background, offering faster and cheaper payments globally. This scenario would benefit both consumers and businesses, though it may not favor current stablecoin issuers, who could eventually be absorbed by traditional banks.

When that moment arrives, the fight for control over our digital wallets will be far from over. The same companies will continue to fiercely compete for dominance in the “pay with” experience. Credit card companies like Visa and Mastercard will battle to keep their payment flow intact, which could align with the interests of traditional banks. However, the true disruption may come from leading neobanks and crypto exchanges, who will need to introduce genuinely innovative solutions—potentially positioning them as the real game-changers in the payment space.