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Stablecoins: The New Bank Account

Updated: Feb 10, 2019

While still a nascent class of digital assets, stablecoins have quickly developed into a meaningful competitor to traditional bank accounts. Stablecoins are digital tokens that represent national currencies and are issued using a variety of bitcoin-based technologies. Stablecoins are held and transferred using digital wallet applications. Issuers are either regulated banking institutions themselves, or supported by regulated banking institutions. The digital asset class is less mature than its peer bitcoin though still ahead of the securities token group of assets. Calculations suggest the total market opportunity of stablecoins exceeds $18 trillion, or the value of funds currently held in instantly callable bank accounts around the globe.

Exhibit 1: Bitcoin Technology Market Opportunity

Source: Satoshi Capital Research, Trading Economics, World Gold Council

The functional differences between stablecoins and traditional bank accounts are in accessibility, costs, and speed. Traditional bank accounts for both individuals and businesses are only accessible to customers of each respective bank and are associated with high transfer costs as well as arduous transfer processing times. Stablecoins offer remedies across the board as their open system architectures ensure anyone around the globe with a smartphone and internet connection can now send and receive national currencies instantly at no cost.

Exhibit 2: Bank Account Transfers Vs. Stablecoin Transfers

Source: Satoshi Capital Research, Tether, Smart Asset

2018 saw many new entrants to the stablecoin market as well as issuance growth, with total issued value of USD stablecoins increasing 92% to $2.7 billion at the end of the year from a January 1 start of $1.4 billion. Although the oldest stablecoin Tether has maintained sector dominance since its launch in 2014, TrueUSD, Paxos Pax, and Gemini dollars are among the entrants to develop a notable market, with total value of stablecoins issued in 2018 by new market participants across all currencies totaling over $700mm. Total trading volume of these new market participants totaled over $11.5 billion for the year amid the broader stablecoin market’s $1.1 trillion in 2018 trading volume.

Exhibit 3: Comparison of USD Stablecoins

Source: Satoshi Capital Research, Coinmarketcap

Exhibit 4: Comparison of CNY and EUR Stablecoins

Source: Satoshi Capital Research, Coinmarketcap

Although trading volumes have developed at a meteoric pace, transfer volume growth of stablecoins has been impressive as well. Total transfer volume of tether sent in 2018 was $109 billion, representing a 624% increase from 2017’s transfer volume of $15 billion. While cooling in the latter part of the year, a meaningful growth rate has been maintained throughout the past year. Transfer volume of stablecoins may pale in comparison to the $600 trillion USD sent in 2018 via domestic bank transfers but it is increasingly competitive with alternative financial services transfer options such as Western Union, which sends around $200 billion annually.

Exhibit 5: Transfer Volume of Tether in 2018

Source: Satoshi Capital Research, Blockspur

Particularly noteworthy is the efficiency of the stablecoin market relative to traditional parallel currency markets. The spread between official rates and market rates for most parallel currencies has historically often seen double digit percentages, though has remained largely contained among stablecoins. This places stablecoins among the most efficient parallel currency markets in history, largely due to their digital nature. To people operating within parallel currency economies today, such as Venezuela, stablecoins offer meaningful competition to traditional bank accounts as there are no limitations on currency denominations or transfer amounts and frequency. In the case of complete bank account lockdowns, such as the 2013 bail-in crisis of Cyprus, stablecoins and bitcoin itself offer arguably the only viable alternative to traditional bank accounts.

Exhibit 6: Comparison of Parallel Currency Exchange Rate Spreads

Source: Satoshi Capital Research, Coinmarketcap, Harvard University

Exhibit 7: Comparison of Parallel Stablecoin Exchange Rate Spreads

Source: Satoshi Capital Research, Coinmarketcap

There is admittedly considerable progress required ahead for stablecoins to meaningfully compete with traditional bank accounts in developed markets, such as services providers that offer functionality in addition to sending and receiving, however they have proven to be viable solutions for those operating within developing economies maintaining parallel currency markets or aggressive capital control policies, today.

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