Stablecoin Issuers Eye Revenue Sharing in $144 Billion Market Amid Rising Rates

Key Takeaway

• Stablecoin issuers like Tether (USDT) and Circle (USDC) are highly profitable, holding $112 billion and $32 billion in assets respectively.
• Rising interest rates are prompting calls for revenue sharing from stablecoin profits, with new competitors like Paxos' Lift Dollar offering yield-generating options.
• PayPal's PYUSD focuses on efficient payments rather than yield, leveraging its integration with Solana to enhance transaction speed and cost-effectiveness.

Stablecoins' Role and Profitability

Stablecoins have become indispensable in the cryptocurrency ecosystem, serving as a bridge to move funds seamlessly across the digital economy while avoiding the volatility associated with other cryptocurrencies. They replicate conventional currencies like the U.S. dollar or euro in a blockchain-powered form, making them familiar and user-friendly for consumers. Tether's USDT and Circle's USDC are prime examples, with $112 billion and $32 billion in assets, respectively, according to CoinDesk data.

These stablecoins generate significant profits for their issuers by investing in safe assets like U.S. Treasuries, earning billions in yield. Unlike traditional money-market funds, which share interest earnings with customers, stablecoin issuers have historically kept all the interest. This has been largely due to a lack of competition and low interest rates, as noted by Rob Hadick, general partner at Dragonfly. However, with rising interest rates, the profitability of stablecoin issuers has surged, leading partners and power users to demand a share of the revenue.

Regulations in the U.S. and Europe, such as the upcoming Markets in Crypto-Asset (MiCA) regime, prohibit stablecoin issuers from returning yield to users. Yet, the global nature of blockchains has led to the emergence of yield-sharing stablecoins, like Paxos' UAE-regulated Lift Dollar, promising a more equitable economic model.

PayPal's PYUSD and Payment Efficiency

PayPal's entry into the stablecoin market with its PYUSD token aims to leverage the cost efficiencies of blockchain technology for payments. Integrated with the high-throughput Solana blockchain, PYUSD is designed for faster and cheaper transactions. According to Jose Fernandez da Ponte, PayPal's SVP and head of blockchain, the future may see a decoupling of payment capabilities from yield-generating functions, with corporate treasurers using money-market funds for liquidity and stablecoins for payments.

Despite skepticism from analysts at Bank of America regarding PYUSD's potential to thrive against central bank digital currencies (CBDCs) and yield-sharing tokens, PayPal's extensive reach in fintech and payments through platforms like Xoom and Venmo positions it strongly. Dragonfly's Hadick highlights PayPal's unparalleled distribution network, suggesting that PYUSD could significantly improve PayPal's operational efficiency and margins.

Charles Cascarilla, CEO of Paxos, emphasizes the enduring value of stablecoins as a payment method, noting the vast potential market beyond payment-focused stablecoins, including money-market funds and bank deposits. Hadick concurs, predicting a shift towards tokenized yield-bearing collateral in both traditional finance and crypto, driven by the benefits of earning yield while enhancing capital efficiency and enabling intraday settlement.

Crypto Lending Market Revival

The crypto lending sector is experiencing a resurgence, buoyed by the approval of spot bitcoin ETFs and the return of assets to creditors from bankrupt companies. Mauricio Di Bartolomeo, co-founder of Ledn, notes that the market has rebounded strongly, with Ledn processing over $690 million in loans in Q1 2024, its most successful quarter since inception. The majority of these loans were directed to institutional clients, driven by the positive narrative surrounding bitcoin ETFs.

The sector's recovery is also attributed to users regaining confidence as they receive their assets back from bankrupt firms. Di Bartolomeo explains that many users, whose investment thesis remains intact, are returning to the lending market to leverage their assets for borrowing and lending. Ledn's conservative approach, focusing on qualified institutions and avoiding asset-liability mismatches, has been key to its survival through the crypto winter.

Street Views

• Rob Hadick, Dragonfly (Neutral on stablecoin issuers):

  "But with interest rates rising, the stablecoin issuers have become extremely profitable and it's only natural that those partners, like the exchanges, and the power users will start asking for more of a cut of the revenue."

• Jose Fernandez da Ponte, PayPal (Cautiously Optimistic on PYUSD):

  "I think that in a few years from now you're going to see corporate treasurers keeping liquidity in a money-market fund, and the moment that they need to make a payment, switch that money-market fund to a stablecoin and make the payment, because those are built for purpose."

• Charles Cascarilla, Paxos (Bullish on stablecoins as payment method):

  "Payment assets are always going to be a subset of the broad deposit and dollar base. So there's only so much that's going to be in payment stablecoins since many people are going to want to be in something that's generating a return."