Business models, regulation and the future of digital finance

Stablecoins have become a key component in the digital asset ecosystem, providing a bridge between traditional fiat currencies and cryptocurrencies. They offer the stability of fiat currencies while retaining the benefits of digital assets, such as: B. fast transaction speeds and global accessibility. The main players in this area include: Circle, Connection, Binanceand recently, PayPalwhich has expanded from traditional fiat-based payment processing into the stablecoin space.

Circle recently introduced a Euro-pegged stablecoin (EURC)thereby expanding the reach of stablecoins beyond USD-pegged options. This article examines the business models of these stablecoin issuers, examines the regulatory landscape in the EU and US, and discusses the potential role of stablecoins in the future of cyberfinance.

Business models of stablecoin issuers

1. CIRCLE (USD COIN – USDC AND EURO COIN – EURC)

Circle is the issuer of USD Coin (USDC) and Euro Coin (EURC), stablecoins pegged to the US dollar and the euro, respectively. These stablecoins are fully backed by foreign reserves, which include cash and short-term government bonds corresponding to their respective currencies. CircleThe business model is built on multiple revenue streams:

• Interest income: Circle earns interest by holding large reserves of cash and cash-like assets, such as U.S. Treasury bonds and Eurozone government bonds. This interest income can be significant, particularly in an environment of rising interest rates.
• Transaction fees: Circle charges fees for converting fiat currencies to USDC and EURC and vice versa, as well as for transactions made with these stablecoins on their platform.
• Partnerships and integrations: Circle works with various financial institutions, cryptocurrency exchanges and fintech companies and generates revenue through service fees and shared transaction costs. The launch of EURC allows Circle to enter the European market and further diversify its revenue streams.

2. TETHER (USDT)

Tether issues USDT, the largest stablecoin by market capitalization. USDT is also pegged to the US dollar and is said to be backed by a mix of reserves including traditional currencies, cash equivalents and other assets. Tether’s business model includes:

• Interest from reserves: Tether earns interest on its reserves, which consist of various financial instruments. Given the scale of USDT issuance, the interest income generated from these reserves is significant.
• Issue and redemption fees: Tether charges fees for issuing new USDT and redeeming USDT for fiat, providing a steady stream of income.
• Investment in assets: Tether invests in a mix of assets, including potentially riskier ones, that could generate higher returns but also require close scrutiny regarding the transparency and risk profile of its reserves.

3. BINANCE (BINANCE USD – BUSD)

Binance, one of the largest cryptocurrency exchanges in the world, issues Binance USD (BUSD), a stablecoin pegged to the US dollar. BUSD is unique in its issuance and management:

• Regulatory approval and partnership with Paxos: BUSD is issued in collaboration with Paxos, a regulated financial institution that provides blockchain infrastructure. Paxos is responsible for ensuring that each BUSD is backed 1:1 by USD held at FDIC-insured US banks or invested in US Treasury bills. This regulatory oversight is a key difference from other stablecoins.
• Interest income: Although reserves for BUSD are fully backed by cash or cash equivalents, any interest earned from these reserves could contribute to Paxos and Binance’s revenue.
• Ecosystem integration: BUSD is heavily integrated into the Binance ecosystem. Binance encourages usage on its exchange platform by offering discounts on trading fees and encouraging usage in various DeFi applications and Binance Smart Chain (BSC) projects.

3. PAYPAL (PAYPAL USD – PYUSD)

PayPal’s entry into the stablecoin market with PayPal USD (PYUSD) represents a significant shift, leveraging its established reputation and infrastructure as a leading online payment processor. PYUSD is pegged to the US dollar and is fully backed by currency reserves similar to those of USDC. PayPal’s stablecoin model differs from those of pure crypto companies in several ways:

• Established user base and trust: PayPal brings a global customer base and a high level of trust in fiat transactions, which is critical to user adoption of its stablecoin.
• Integrated ecosystem: PYUSD is integrated directly into the existing PayPal platform, allowing for seamless use for purchases, transfers and potentially interest-bearing accounts. This integration could facilitate the widespread adoption and use of PYUSD in everyday transactions.
• Income from transactions and reserves: PayPal may generate revenue through transaction fees within its ecosystem and interest from reserve holdings. The large user base means more frequent transactions and potentially higher fee income.

Regulation of stablecoins in the EU and the USA

Stablecoins occupy a unique position in financial regulation because they combine elements of currency, commodity and security. Regulatory approaches in the EU and the US differ significantly, reflecting different priorities and financial systems.

EU REGULATION

The European Union has taken proactive steps to create a comprehensive regulatory framework for digital assets, including stablecoins. The Markets in Crypto-Assets Regulation (MiCA), which is expected to be fully implemented by 2024, is intended to provide clarity and protect consumers. MiCA requires stablecoin issuers to maintain sufficient reserves, ensure transparency in reserve management, and adhere to strict operational standards. Stablecoins such as EUROC are treated similarly to electronic money under MiCA, requiring issuers to obtain approval as electronic money institutions (EMIs).

US REGULATION

In the United States, regulation is more fragmented, with multiple authorities overseeing different aspects of stablecoin issuance and use. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are considering whether stablecoins should be classified as securities or commodities. Meanwhile, the Office of the Comptroller of the Currency (OCC) has issued guidelines for banks wishing to issue or hold stablecoins. U.S. regulators are particularly focused on ensuring that stablecoin reserves are adequately funded and that there is transparency and accountability in reserve management.

How do stablecoin issuers make money?

Stablecoin issuers generate revenue primarily through various mechanisms:

1. Interest income: By holding reserves in interest-bearing assets, issuers like Circle and Tether earn significant returns, especially when these reserves are invested in government bonds or other safe assets.
2. Transaction and exchange fees: Issuers charge fees for converting fiat currencies into stablecoins and vice versa, as well as for transactions carried out on their platforms.
3. Ecosystem integration and services: Companies like PayPal use their existing infrastructure to offer additional services and earn fees from payments, transfers and other financial services that use their stablecoin.

Stablecoins: private currencies or financial instruments?

The debate over whether stablecoins are private currencies or another form of financial instrument continues to evolve. Stablecoins function similarly to private currencies in that private companies issue them and can be used for transactions like traditional currencies. However, their value is derived from an underlying asset (typically fiat currency), making them more similar to derivatives or financial instruments.

Regulators tend to treat stablecoins as financial instruments subject to certain requirements, such as: B. reserve protection and transparency, and not as independent currencies. This classification aims to ensure consumer protection and maintain financial stability, especially given the systemic risks that could arise from the widespread adoption of stablecoins without adequate oversight.

Market capitalization of the most important stablecoins

According to the latest data:

• connection (USDT): Over $82 billion
• USD coin (USDC): About $25 billion
• Euro coin (EURC): Still in the market with a smaller but growing market share as it targets European users.
• Binance USD (BUSD): Around $3 billion
• Dai (DAI): About $5 billion
• PayPal USD (PYUSD): around $1 billion

These numbers highlight the dominance of USDT in the stablecoin market, followed by USDC, and the potential growth of new entrants such as EURC and PYUSD as they serve different regional and use case needs.

The future role of stablecoins in cyberfinance

Looking ahead, stablecoins could become fundamental elements of the cyberfinance ecosystem. As digital finance continues to evolve, stablecoins provide a practical solution for seamless, low-cost transactions across borders and within decentralized finance (DeFi) applications, providing liquidity and stability in a volatile market.

However, the future of stablecoins will largely depend on regulatory developments. If integrated into existing financial frameworks with robust safeguards, stablecoins could improve financial inclusion, reduce transaction costs and provide a reliable digital alternative to traditional currencies. Conversely, regulations that are too restrictive could hinder innovation in this area.

In summary, stablecoins represent a crucial interface between technology, finance and regulation. As they evolve, their impact on the global financial system will depend on balancing the benefits of innovation with the need for financial stability and consumer protection. The introduction of stablecoins like EURC demonstrates the growing geographic reach and application of these digital assets, further cementing their role in the future of global finance.