Thursday, April 13, 2023

Payments stablecoins vs trading stablecoins

Circle's Gordon Liao recently sketched out a new distinction between 'payment stablecoins' and 'trading stablecoins,' and then places Circle's stablecoin, USD Coin, in the former category, while confining competitors Tether, Dai, and Binance USD to the trading bucket.

I don't know about you, but I'm not convinced. 

According to the article, a payments stablecoin is defined as a stablecoin that has a low ratio of daily trading volume to circulation and has little correlation to the price of Ethereum. The suggestion is that any stablecoin that sports these statistics isn't being used for cryptocurrency speculation, and so by default it must be getting used for payments. By contrast, any stablecoin that has a high trading-volume-to-circulation ratio and is more closely correlated to Ethereum's price is defined as a trading stablecoin; its primary function is speculation, not payments.

You can sorta see where this is going. Speculation is unsavory whereas payments (the article cites cross border remittances in particular, but you can also put retail point-of-sale payments in that category) are wholesome & useful. As a stablecoin issuer, it's probably better to be slotted in the payments bucket, since that's the bin that regulators, politicians, critics, and economists will take more kindly to. Who knows, it might even merit a more beneficial regulatory touch.

And so no surprise that the article finds that USD Coin, or USDC, qualifies as a payments stablecoin, one that has "minimal speculative exposure."

Having watched stablecoins markets for a while now, my internal library of anecdotal evidence tells me that USDC isn't used much in payments, but mostly for trading. It's just that one of the big roles USDC plays in trading is a relatively sedentary one, as a form of collateral in decentralized finance (or DeFi), and so its turnover is relatively low. By contrast, stablecoins like Tether and Binance USD are less popular as DeFi collateral and more popular as trading chips for centralized exchanges (like Binance), and that's why they have such high turnovers.

My anecdotal database also tells me that the most payments-ish of the stablecoins is probably Tether. Don't get me wrong, Tether is still mostly used for trading, specifically as a proto-dollar on exchanges like Binance and Bitfinex to support crypto gamblers. But when you do hear stories about stablecoins being used for cross-border payments, it tends to be Tether that's involved, not USDC.

For the time being, I think that a payments stablecoin is a fable. Everyone wants to be in that category, but an actual payments stablecoin, one who's main use-case is remittances and POS payments, doesn't exist. Stablecoins remain primarily used for trading, gambling, and speculation.

1 comment:

  1. Arguably, a “payment stablecoin” even benefits from being actively traded across multiple pairs (especially off-chain stablecoin-to-fiat pairs) to let users off-ramp into their local currency (especially for remittances…).