Stripe’s acquisition in October of stablecoin orchestration startup Bridge sent shockwaves through the crypto world. For the first time, a major payments company committed over a billion dollars to accelerate its use of this technology. Though this isn’t Stripe’s first attempt at crypto, the timing feels different. Enthusiasm for stablecoins is at an all-time high.
Bridge might be worth $1.1 billion to Stripe, but on its own, it most likely wouldn’t have hit that mark. This isn’t due to any lack of talent, but rather because making money with stablecoins is extremely challenging. Whether through issuing, orchestrating (i.e. converting between stablecoins) or integrating them with legacy banking rails, achieving long-term profitability will be a significant challenge.
The reality is that network effects in the stablecoin market are likely to be much weaker than most anticipate, and it’s far from a winner-take-all environment. In fact, stablecoins may function as loss leaders and, without essential complementary assets, could even become a losing venture. While industry insiders often cite liquidity as the primary reason only a few stablecoins will dominate, the truth is far more complex. Here are three common misconceptions about stablecoins.
1. Stablecoins need a complementary business model.
When we designed Libra, it was clear that stablecoins require a complementary business model to thrive. The Libra ecosystem was structured around a non-profit association that brought together wallets, merchants and digital platforms to support both stablecoin issuance and the payment rails on which these assets would move.
Relying solely on reserve interest isn’t a sustainable way to monetise a stablecoin. We learned this early on, as we were planning to issue stablecoins backed by currencies with minimal (euro) or even negative (yen) interest rates at the time. Stablecoin issuers like Circle and Tether seem to overlook that today’s high-interest environment is an anomaly, and a sustainable business can’t be built on a foundation that’s likely to crumble when market conditions shift.
Of course, it’s not just the ‘stock’ of stablecoins that can be monetised; their ‘flow’ can be too. Circle’s increase in redemption fees suggests they’re starting to realise this. However, this approach violates a fundamental principle in payments: to build user trust and retention, entry and exit must be seamless. Exit fees undermine the basic expectation that money should feel unrestricted and readily available. This leaves transaction fees as a potential revenue source – but enforcing them on a blockchain is challenging without strict control over the protocol. Even then, it’s impossible to impose fees on transactions occurring between users within the same wallet provider. These are all scenarios we explored exhaustively with Libra, highlighting just how complex and uncertain the business model was for the non-profit association.
So what options do stablecoin issuers have? Unless they’re relying on temporary regulatory loopholes – which are unlikely to hold long term – they’ll need to start competing with their own customers.
Circle’s initiatives – including programmable wallets, a cross-chain protocol and the Mint programme – reveal exactly where the company is going. And that’s unwelcome news for many of its closest partners. But for Circle to survive, it must transition into a payments company, even if that means encroaching on its allies’ territory.
Stripe doesn’t face this dilemma. As one of the world’s most successful payments companies, it has mastered the art of deploying and monetising a streamlined software layer on top of global money movement – a model that scales efficiently through network effects without being slowed down by the need for country-specific banking licences. Stablecoins accelerate this approach by acting as a bridge between Stripe and domestic banking and payment rails. What was once a network constrained by legacy institutions – including card companies – can now overcome its last-mile problem, delivering significantly more value to merchants and consumers.
2. Dollarisation is not a product
Many assume that stablecoins will seamlessly operate as low-cost, global dollar accounts for consumers and businesses. The reality is far more complex.
Countries that value monetary policy independence, fear capital flight in a crisis and worry about destabilising their domestic banks will strongly oppose the large-scale adoption of frictionless dollar-based stablecoin accounts. They’ll use every tool available to block or limit these accounts, just as they’ve resisted other forms of dollarisation. And while it may be impossible to stop crypto transactions entirely, governments have numerous ways to restrict access and curb mainstream adoption.
Does this mean stablecoins are doomed in emerging economies with capital controls or concerns over capital flight? Not at all – the rise of domestic stablecoins that adhere to local banking and regulatory frameworks is inevitable.
While the US dollar has traditionally dominated the stablecoin market, things could change rapidly. In Europe, following the implementation of the Markets in Crypto-Assets regulation, banks, fintech companies and new entrants are rushing to issue euro-denominated stablecoins. This approach has the benefit of preserving the stability of the local banking system and will be even more important in regions like Latin America, Africa and Asia.
3. There will not be a single stablecoin winner
The reality is that a stablecoin’s most important feature – its peg to a currency like the dollar or euro – is also its greatest weakness. Today, these assets are seen as distinct, but once regulation standardises stablecoins and makes each equally safe, individuals and businesses will view them simply as dollars or euros.
When that happens, the economics of stablecoins will favour entities with either a complementary business model or those that control the interface between stablecoins and the assets backing them – be it bank deposits, US treasuries or money market funds.
That is bad news for pure-play issuers like Circle, whose current banking system interfaces depend on entities such as BlackRock and BNY. These financial giants are well-positioned to become direct competitors.
Tech companies with banking licences, like Revolut, Monzo and Nubank, are well-positioned to lead in their markets, and other players are likely to accelerate their licensing efforts to gain similar advantages. However, many players in the stablecoin market will struggle to compete with established banks and may face acquisition or failure.
Banks and credit card companies will resist a market dominated by one or two stablecoins. Instead, they’ll advocate for a landscape with multiple interoperable and interchangeable issuers. When that happens, liquidity and availability will be driven by existing distribution channels to consumers and merchants – an advantage already held by neobanks and payment companies like Stripe or Adyen.
Fully-backed stablecoins like USDC and USDT will need high-velocity use cases to remain viable – such as enabling cross-border money movement – or they’ll need to attract a decentralised finance ecosystem that can introduce transparent fractionalisation to subsidise their narrow-bank model. Meanwhile, deposit tokens issued by banks or tokenised funds will benefit from stronger underlying economics, which will drive their adoption across both consumer and institutional use cases.
In every region, national champions—from banks to crypto firms—will position themselves as the essential entry point into the local market. However, they’ll need to carefully consider how stablecoins, by linking domestic rails to blockchain networks, could also lower barriers for foreign competitors to enter and compete. After all, the core transformation here from a business perspective is that these systems will run on open protocols.
So what does this all mean?
The future is bright for payments, fintech and neobank players, who can leverage stablecoins to streamline operations and accelerate global expansion. It also opens new opportunities for domestic stablecoin issuers to position themselves and ready their payment systems for global interoperability—an area where stablecoins are poised to succeed where the bureaucratic Bank for International Settlements’ Finternet vision will quickly fall short.
Leading crypto exchanges will also leverage stablecoins to enter the consumer and merchant payments space more aggressively, positioning themselves as credible challengers to major fintech and payment companies.
While questions remain about how stablecoins will scale anti-money laundering and compliance controls as they go mainstream, there’s no doubt they offer an opportunity to rapidly modernise our financial services and shake up industry leadership.
Christian Catalini is Co-founder of Lightspark and the Massachusetts Institute of Technology Cryptoeconomics Lab.
This is an edited and abridged version of an article published by Forbes.
