Stablecoins: opportunity
or curiosity?

What are stablecoins?

Stablecoins are essentially tokenised cash – digital assets built on blockchain technology, designed to offer a more stable alternative to volatile cryptocurrencies like bitcoin or Ethereum. Each token is typically pegged to a currency like the US dollar and backed by reserves such as bank deposits, US Treasuries or other high-quality assets.

In practice, you give the issuer US$1, and they create a token. When you redeem the token, it’s destroyed, and your dollar is returned. The largest issuers – Tether (USDT) and Circle (USDC) – account for the majority of stablecoins in circulation and are widely used across crypto exchanges and payment platforms.

The use of stablecoins has surged, with circulation now topping US$250 billion. McKinsey notes that volumes have doubled in the past 18 months, with about US$30 billion transacted daily – still less than 1% of global daily money flows, but significant enough to raise eyebrows.

Gold to fiat to crypto

Before looking at how stablecoins are used – and weighing up their investment case – it would help to consider how we got here. The history of money is, at its core, a story of trust. Whether physical or digital, money has always needed to function as a medium of exchange, a store of value and a unit of account. And it has constantly evolved to reflect the technology, politics and economics of its time:

• Gold standard (19th-20th century): Trust was anchored in something tangible. Banknotes could be exchanged for a fixed amount of gold, and currencies were stable because they were backed by a scarce, physical commodity.
• Fiat money (post-1971): After the US abandoned the gold standard, trust shifted from metal to monetary policy. Currencies were no longer tied to commodities, but to the credibility of governments and central banks.
• Cryptocurrencies (since 2009): Bitcoin introduced a radical concept – money without government – secured by code and decentralised networks. But its price volatility made it a poor substitute for traditional money in everyday transactions.
• Stablecoins: These aim to close the gap – pegged to a stable asset but running on blockchain rails – offering the speed and accessibility of crypto without the wild price swings.

How are stablecoins used?

Advocates say stablecoins offer a faster, cheaper and more accessible alternative to traditional payment systems – operating 24/7 and bypassing borders and banking hours. The promise includes speed, lower costs, transparency and greater financial inclusion.

In practice, however, most demand still comes from crypto traders. Roughly 88% of stablecoin transactions are tied to buying and selling other digital assets – a workaround for platforms lacking full access to traditional banking.

That said, use cases are starting to expand:

• Cross-border transfers: Faster and cheaper than legacy systems like SWIFT.
• Retail payments: Some merchants accept them, but volumes remain small.
• Remittances: Gaining ground in corridors like the US-Mexico corridor.

These niches show promise, but traditional networks like Visa, Mastercard and banks still dominate. For stablecoins to become truly disruptive, they’ll need broader adoption beyond crypto markets.

Still, their real significance may lie not in what they are today, but in what they expose. As Cornell economist Eswar Prasad puts it, stablecoins shine a ‘harsh light’ on inefficiencies in the global financial system. If moving money internationally takes days and costs US$30 – while a stablecoin does it in seconds for pennies – the gap is impossible to ignore.

This pressure is already pushing incumbents to innovate. Banks are testing tokenised deposits, central banks are exploring digital currencies, and companies like Visa are investing in stablecoin infrastructure. In the end, stablecoins may not replace the financial system – but they might just force it to evolve.

Risks and limits

Like the early days of paper money, new forms of currency rely heavily on design and trust. Without intrinsic value, fiat money only gained acceptance once central banks established credibility. The same challenge faces stablecoins today.

When trust breaks, the fallout is swift. In 2022, the collapse of Terra’s algorithmic stablecoin wiped out billions. Even major players aren’t immune – in 2023, USDC briefly lost its US dollar peg after some reserves were caught in the Silicon Valley Bank collapse. Confidence wavered, and the token traded below US$1 until markets calmed.

Key limitations and risks include:

• No interest: Stablecoins don’t earn yield for holders – though issuers profit from the reserves.
• Regulation: Oversight is evolving. The US is making progress, but many countries remain cautious, especially about US dollar-backed tokens.
• Limited real-world use: Outside crypto trading, adoption remains niche. Payment systems and consumer habits change slowly, and incumbents have little incentive to give up fees.

It should be noted that large banks like JPMorgan and Citibank are developing their own tokenised deposits – digital dollars inside the regulated banking system. These could offer a safer, more trusted alternative to privately issued stablecoins.

Are stablecoins investable?

While you can invest in stablecoins via a crypto exchange, they are, in our view, not a compelling investment. They’re designed to maintain value, not grow it. Holding US$10 000 in USDT today will likely still be US$10 000 next year – with no yield and some risk if the issuer’s reserves come under pressure.

From an investment standpoint, stablecoins function more like digital cash balances than true assets. They’re useful for transferring funds efficiently or parking capital between trades, but not for building wealth. As such, many analysts see them less as an opportunity and more as a catalyst, pushing banks and payment systems to modernise.

A last word

The story of money is one of constant evolution. Stablecoins are the latest chapter, offering real utility for trading and faster payments, but not necessarily long-term investment value.

A move towards cheaper, quicker and more inclusive payments is undeniably positive for society. However, stablecoins do not yet pose an existential threat to traditional systems. They should be viewed as an intriguing development in the ongoing evolution of money, worth monitoring, but not yet a ‘must-own’ investment theme.

That said, blockchain-driven financial innovation is set to create new paths for value creation – from tokenised deposits to next-generation payment rails – and we will remain attentive in identifying how these shifts can benefit our clients.