Stablecoins
Stablecoin Insights: Evaluating USDT, USDC, and DAI in Light of PayPal’s Entry
Stablecoins, now a $124.57 billion asset class, are anchoring the chaotic world of cryptocurrency to more solid ground. These digital assets maintain value by tying themselves predominantly to the US dollar.
It plays a key role in bridging traditional payment systems with the digital-asset economy, facilitating trading, transactions, and crypto-fiat conversion.
According to Kaiko's research from last month, today, 74% of all cryptocurrency transactions on centralized crypto exchanges (CEXs) incorporate a stablecoin. While this is an increase of 10% since the start of 2020, it is well below its ATH of 87% in March. The firm found the reason for this rapid increase in stablecoin market share in Binance's zero-fee trading promotion. Meanwhile, fiat currencies only have a 23% market share.
Kaiko's research further found that Tether (USDT), USDC, Binance USD (BUSD), TrueUSD (TUSD), and DAI collectively have traded around $10-15bn since the start of Q2 and up until about a month ago with the cumulative stablecoin trade volume in 2023 greater than $3 trillion. Stablecoins are primarily used for trading on CEXs, where USDT rules with only 5% of stablecoin trades executed on DEXs which briefly spiked to 45% during the March banking crisis.
Stablecoins, however, aren't only popular in the crypto sphere but are also gaining adoption in the traditional finance world. They are used by millions of people around the world to send remittances and as a safe haven to store wealth.
Mainstream Giant Enters Stablecoin Market
Earlier last week, payments giant PayPal (PYPL) launched its own stablecoin called PayPal USD or PYUSD in collaboration with the trust company Paxos, which received a Wells Notice from the US Securities and Exchange Commission (SEC) in Feb. Paxos, which has a limited purpose trust charter from the New York Department of Financial Services (NYDFS), however, doesn't think the stablecoins it has issued are securities. The New York regulator ordered Paxos to stop minting Binance's BUSD stablecoins because of “unresolved issues.”
PayPal's new stablecoin, meanwhile, will be backed by US dollar deposits, short-term US Treasury notes, and cash equivalents. PYUSD will be used in transactions between both merchants and customers. However, it will need to be converted to fiat currency before settling because stablecoins aren't widely used by merchants.
Launched less than ten days ago, the stablecoin is fully compatible with Ethereum and compliant with US regulations. The traditional finance payments provider actually aims to integrate its Ethereum-based stablecoin with the decentralized finance (DeFi) ecosystem.
“I think DeFi will be part of the first wave in the sense that we want to go where crypto users are using stablecoins today, and DeFi is a use case for that,” said Jose Fernandez da Ponte, PayPal's Senior Vice President of Crypto, in an interview.
With this move, PayPal is targeting widespread use of PYUSD across different crypto use cases and positioning itself as a competitive alternative to stablecoin giants USDT and USDC.
The stablecoin will be initially available via the PayPal wallet, but the company's priority is to ensure its availability on CEXs as soon as possible, as it will allow users to leverage PYUSD for various purposes within the ecosystem.
PayPal's PYUSD: A Watershed Moment?
In its Global Digital Asset Strategy report, Bank of America (BoA) noted that PayPal, with its 435 million users globally, is the first global company “to launch a stablecoin with regulatory approval.” The stablecoin, as per the report, will make payments efficient over time and improve customer experience.
However, due to stablecoin's lack of wallet compatibility, exchange trading pairs, or new functionality, the BoA is expecting its adoption unlikely to be significant in the near term, though over the longer term, PYUSD is expected to experience adoption headwinds as competition from central bank digital currencies increases.
The bank then went on to say that while “investors may have been fine holding non-yield-bearing stablecoins, such as USDT and USDC, when rates were close to zero,” as yield-bearing stablecoins become increasingly available, they will become far more attractive with rates above 5%.
As for PYUSD's launch leading to accelerated regulatory clarity, BoA doesn't think so because the stablecoin's issuance does not change systemic risk for traditional markets. But it said that if non-banks are barred from stablecoin issuance, the stablecoin may face regulatory headwinds.
Besides Paypal's PYUSD, the US central bank also launched its own instant payment system known as Fednow in July. Fednow, which uses traditional payment rails, enables financial institutions to facilitate bank account-to-bank account transfers of customer funds in real time.
Besides PYUSD, Bank of America's report also commented on Fednow, calling it “a needed and innovative solution” to the inefficient domestic payments and transfers problem.
However, the report noted, “As the digital asset ecosystem evolves, we see the potential for stablecoins” to provide better solutions than Fednow, which would be faster and cheaper, especially for cross-border payments and transfers.
USDT Continues at the Top
PayPal's stablecoin move is seen as bullish for the crypto space given the company's status of being an early crypto adopter relative to their peers and also for helping initiate the last bull cycle when it allowed millions of its users to buy crypto in Sept. 2020.
According to Chad Cascarilla, the CEO of Paxos, traditional companies were afraid to be first, “now they're afraid to be left behind.” PYUSD is seen as a watershed moment for the industry that could add legitimacy to stablecoins and pave the way for its mainstream adoption.
US Representative Patrick McHenry, the House Financial Services Committee Chairman, also called this a sign for stablecoins to show “promise as a pillar of our 21st-century payments system” when issued under a transparent regulation.
This step will also help PayPal secure another revenue stream, and stablecoins are a lucrative business opportunity, as showcased by stablecoin issuers. For instance, Tether made $850 million in profit in the last quarter, and Circle reported $779 million in revenue in the first half of the year.
Tether is the issuer of the largest stablecoin USDT, which boasts of $83 million market cap and a market dominance of almost 69%. Commenting on the PYUSD launch, Tether's CTO Paolo Ardoino said it does not impact USDT as they don't even serve the US market.
Ever since PYUSD's launch announcement on August 7, the market cap of USDT has seen a decline of about $900 million. However, its market cap has increased from $66.2 billion at the beginning of this year. In fact, it touched its all-time high of $83.89 billion in July this year, as per CoinGecko.
Recently, Tether shared its Q2 2023 results, reporting an earning of more than $1 billion in “operational” profit in Q2, a gain of 30% from the previous quarter, in which Tether reported $1.48 billion in “net” profit. Meanwhile, the company's excess reserves increased by $850 million in Q2, bringing them to $3.3 billion. According to its latest attestation, Tether had $86.5 billion in assets and $83.2 billion in liabilities as of June 30.
Click here to learn all about investing in Tether (USDT).
USDC Continues to Struggle
Among stablecoins, barring USDT, none of the top three recorded a surge in its market cap over the past year or in 2023.
The 2nd largest stablecoin USDC by market cap of $26 billion, accounts for 21.57% of the stablecoin market share, down from $44.5 bln at the beginning of this year and $53.56 bln a year ago. USDC's market cap hit its peak at almost $56.16 bln on July 1, 2022.
According to on-chain data, the largest cryptocurrency exchange in the world, Binance, has been redeeming its USDC for USD recently.
After the New York Department of Financial Services (NYDFS) ordered Paxos to cease issuing the BUSD stablecoin, Binance, in response, shifted its focus to TrueUSD (TUSD). However, TUSD subsequently decoupled its peg from the US dollar, and by June 10, its issuance had been brought to a halt. Since then, Binance has turned to another relatively unknown stablecoin FDUSD, which is issued by a Hong Kong-based company and has been gaining traction over the past few weeks after Binance introduced zero trading fee offers.
Tether CTO also noted that USDT was pressured down, and USDC was being heavily redeemed. During Coinbase's second-quarter earning call earlier this month, its CEO Brian Armstrong talked about Binance moving some of its funds from USDC into another stablecoin, but despite that, USDC's market cap has held up.
USDC is created by Centre, an organization founded by Circle and crypto exchange Coinbase, where it is the preferred choice of stablecoin.
Recently, Circle denounced crypto firms that counterfeit USD and called for tighter regulatory oversight to protect customers. According to Circle's Chief Strategy Officer Dante Disparte, bank failures have pushed investors into “unsafe, opaque” cryptocurrencies overseas, which he said highlights the need for the industry to adopt strict compliance measures.
The company has over $1 billion in cash, that'll help it weather fresh competition from non-crypto companies such as PayPal as it works to overcome the issue of its declining market share. According to Jeremy Allaire, chief executive officer of Circle, this fall has been in part driven by Binance pulling back from using USDC about a year ago to drive usage of its own token.
According to Allaire, 70% of USDC's adoption comes from outside the US “despite the hype that we're all about the US.” He further said that some of these non-US regions are emerging and developing markets, such as Asia, LatAm, and Africa, which are seeing “strong progress.”
“Demand for safe, transparent digital dollars is strong,” said Allaire, who has been lobbying US lawmakers to build trust in stablecoins.
Click here to learn all about investing in USD Coin (USDC).
DAI Gains Traction Amidst Rising Regulatory Scrutiny
While the top two stablecoins, USDT and USDC, as well as the new entrant PYUSD, operate on centralized models, DAI stands out as the third-largest stablecoin with a decentralized approach. Despite this distinction, DAI, governed by MakerDAO, has experienced a significant market contraction. Beginning the year with a market cap of $5 billion, DAI reached a peak of $9.95 billion in mid-February 2022 but has since been on a declining trajectory.
DAI recently saw a jump in its supply after the DeFi protocol temporarily increased DAI's interest rate from 3.19% to 8% to attract more users. On August 6, MakerDAO founder Rune Christensen introduced this scheme that saw the number of stablecoins in the DAI Savings Rate (DSR) contract rising from 339.4 million to 1.35 billion.
Tron founder Justin Sun and OlympusDAO have been the biggest contributors to this growth, having deposited $148.5 million and $124.8 million in DAI, respectively.
As a result, DAI's supply rose from 4.44 billion on August 5 to 5.35 billion on August 16, as per the Makerburn dashboard.
With the supply of DAI stablecoin rising to its highest level in five months, the protocol's annualized revenue reached a two-year high of 165.4 million. The spike in short-term US Treasury yield to a five-month high of 4.91% has also contributed to this increase in revenue as the protocol has a sizable exposure to US government bonds.
So, as we saw, stablecoin has been gaining a lot of popularity and adoption. However, this has led to them garnering regulatory scrutiny around the world. The US House Financial Services Committee actually advanced a bill to establish a federal regulatory framework for stablecoins last month.
This week, the Monetary Authority of Singapore (MAS), too, released a regulatory framework for stablecoins that aims to boost the stability of issuers of single-currency stablecoins where their circulation surpasses S$5 million.
Singapore's new stablecoin law mandates that regulated stablecoins hold a reserve portfolio composed of very low-risk assets. These reserves must be at least equal to 100% of the outstanding single-currency stablecoins currently in circulation.
Beyond that, the law sets firm capital requirements for issuers: they must maintain a minimum base capital higher than S$1 million or equivalent to half of their annual operating expenses, whichever is greater. And to ensure consumer protection, the legislation further stipulates that issuers must fulfill any redemption request within a tight timeframe of just five business days.
“When well-regulated to preserve such value stability, stablecoins can serve as a trusted medium of exchange to support innovation, including the ‘on-chain' purchase and sale of digital assets,” said Singapore's central bank in a statement.
