The stablecoin opportunity and how to make it a reality
Stablecoins have a very obvious utility to corporate treasurers. However, before we get to that, it’s important to clarify that there are different ‘flavors’ of stablecoins, and some are higher quality than others.
When we think about a future for stablecoin settlements, we need to be very specific about which stablecoins are the high-quality ones. They tend to be issued by reputable companies, and assurances that they really are backed 1:1 by the named currency or asset will be very reliable and transparent. Specifically, these high-quality coins tend to be backed 1:1 by fiat and, as such, represent a digital, tokenized means of settling payments at fiat value using blockchain infrastructure.
This enables immediate settlement, 24 hours a day, seven days a week.
This is important and exciting because there is currently something of an 'arms race' among tech companies and ecommerce companies — and indeed any business for whom liquidity and working capital are vitally important — to achieve faster settlements and 24/7 settlement capabilities.
That's something that remains unachievable in many fiat transactions. For example, the dominant dollar space remains slowed by the defined settlement time windows and complexities of the existing clearing and settlement and correspondent banking system — which is all off-chain and depends upon several intermediaries.
Clearing liquidity bottlenecks
This current system also leads to centralized bottlenecks, which trap liquidity and take away pockets of liquidity from where they are needed.
In a globalized economy, this is an old and suboptimal way of operating and is over-ripe for improvement. Stablecoins provide a solution to this problem of timezone and location-dependent availability of liquidity.
If a corporate in Malaysia wishes to transact with a corporate in Thailand, a stablecoin will allow them to settle in USD — using a stablecoin such as USDC — in their time zone rather than having to wait a day or so for the settlement to be conducted through US intermediaries and working within US time zones.
Certain banks are already using these stablecoin capabilities to settle internal transactions at any given hour of the week. Of course, any payment provider must ensure that US and international AML and sanction regimes must be fully adhered to.
Scaling stablecoin adoption for B2B payments
The value to businesses of immediate settlements is not in question. Nevertheless, barriers and questions do remain.
A key issue that needs to be addressed is the scalability of stablecoin adoption for B2B payments. It's all very well being able to settle at speed, but the utility starts to stall if the stablecoin cannot be monetized easily. That is to say, if a business cannot pay its suppliers in stablecoins, then they will need to go through the process of converting back to fiat before they can make any use of their money, which means they will be bound by the constraints of the fiat currency infrastructure. The full utility of stablecoins for corporate treasury depends upon a widespread adoption at the wholesale level.
It sounds a little like a 'chicken and egg' situation, but it need not represent an impasse. There are specific and clear steps that can be taken to build the necessary trust and confidence among corporate treasurers.
Understandably, treasurers are cautious. We've looked at how consumers are tentatively experimenting with retail payments in blockchain-based payments. But imagine moving billions of dollars' worth of money around. Corporate treasurers will inevitably have a higher bar for adoption and acceptance than consumers or SMBsat scale. They must consider credit, regulatory and system risk before implementing new infrastructures.
Any change in the payment system and infrastructure at the corporate level will be an operational upheaval, and businesses need to be confident that the new system will be not only pervasive but also long-lasting. For the system to be durable, it will need to be accepted by regulators. And corporates will need to be clear on the regulatory framework which underpins the payment system and its mediums.
Accounting for stablecoins on the balance sheet
Another key aspect that needs a clear sustainable framework is the treatment of stablecoins from an accounting and tax perspective. In what circumstances could stablecoins be accounted for as cash or otherwise be categorized as a highly-liquid asset instead of being potentially classified as an intangible asset.
This matters hugely concerning liquidity ratios, whether internal or regulatory and how rating agencies and creditors view the quality of the balance sheet of firms that hold stablecoins. Another accounting consideration, with its respective tax implications, is whether one needs to fair value and account for realized gains and losses of the stablecoins as some stablecoins do not trade exactly at 1:1 vs. the underlying fiat but only very close to that.
Treasurers' demand will forge
In my view, the questions above are entirely resolvable — and it will only be a matter of time given the many benefits offered. Corporate treasurers don't want to work with non-transparent versions of stablecoins. They will be driving very clearly towards high-quality, robust and transparent stablecoins, and if anything, the corporate treasurer's demand will be helping to forge ever-better, more reliable stablecoins.
I predict that the treasury community is likely to help us get to a point where the regulators can say confidently and comfortably: 'this is really something we can live with' especially with an open and honest dialogue about the benefits and how risks and regulatory requirements for transparency and adherence with AML/sanction regimes are managed. Once they do so, corporates will feel that they have a solid and reliable system that regulators have accepted, can be trusted at scale and is built to last.