Tether's barriers, Circle's concerns, and the way out for emerging stablecoins

The article reviews the history of the birth of the USDT stablecoin, analyzes the evolution of the ecosystem, and how USDT found and consolidated its product-market fit.

Author: Will Awang , investment and financing lawyer, focusing on Web3 & Digital Asset; independent researcher, focusing on tokenization, RWA, payment, DeSci

On the occasion of Circle's successful listing, Arthur Hayes, the "godfather" of the cryptocurrency field, published a blockbuster blog post warning investors about Circle and the risks of a possible stablecoin bubble. Arthur Hayes has greatly promoted the development of cryptocurrency derivatives trading through BitMEX's innovative products. From his perspective, he pointed out that although Circle is seriously overvalued, its stock price may continue to rise, and this listing is just the beginning of a stablecoin frenzy cycle.

This article compiles it, reviews the history of the birth of the USDT stablecoin, analyzes the evolution of the ecosystem, and how USDT found and consolidated its product-market fit. In contrast, Circle is still in the payment fee promotion stage, and there is a huge gap in market share with USDT. It is almost impossible for new entrants to replicate their success.

However, what Arthur Hayes didn't tell you is that stablecoins are penetrating every corner of the global economy through the form of "payment" rather than "transaction". After the US Stablecoin Genuis Act, "payment stablecoins" will drive the flow of funds in real-world scenarios, and then the flow of value. Then in this future world: Stablecoin Payments + On-Chain Finance, emerging stablecoins can throw away the constraints of encrypted transactions and rush into the blue ocean of scenarios.

01 Product Market Fit of Tether USDT

Professional cryptocurrency traders are unique in the capital markets because they need to both survive and thrive in the crypto space and have a deep understanding of how funds flow in the international fiat banking system. This is very different from stock or forex investors, who do not need to know how funds are settled and transferred behind the scenes because brokers provide this service quietly in the background.

Arthur Hayes is one of those cryptocurrency traders who, because of the risks of transferring fiat currency in the crypto market, must have a detailed understanding of the cash flow operations of their trading partners. He received a crash course in global payments when he moved funds in the banking systems of Hong Kong, mainland China and Taiwan (Arthur Hayes called this region Greater China). It was in this context that the germination and development of Tether USDC was promoted.

Early understanding of the flow of funds in Greater China helped Arthur Hayes understand how major Chinese-operated exchanges and international exchanges (such as Bitfinex) conduct business. This is important because all real crypto market innovation occurs in Greater China. This is even more true for early stablecoins.

1.1 The earliest original path to market entry

In the early days of Bitcoin, it wasn’t easy to buy your first Bitcoin because it wasn’t clear which was the best and safest way to do it. For most people, at least when Arthur Hayes started trading cryptocurrencies in 2013, the first step was to buy Bitcoin from another person, either by sending them a fiat bank wire directly, or paying with cash, and then you would start trading it on an exchange.

But depositing fiat into exchanges is not easy, and many exchanges do not have solid banking relationships or are in a regulatory gray area in their countries, which means you cannot transfer money directly to them. Exchanges will come up with workarounds, such as directing users to transfer fiat directly to local agents who will issue cash vouchers at the exchange; or setting up a subsidiary business that seems to have nothing to do with cryptocurrency to obtain a bank account and direct users to transfer funds there.

This friction allows scammers to thrive and steal fiat through a variety of means. The exchange itself may lie about where the funds are going, and then one day…boom — the website is gone, along with your hard-earned fiat. If you use third-party intermediaries to transfer fiat into and out of the crypto capital markets, these individuals can disappear with your funds at any time.

1.2 Bank restrictions give rise to demand for digital dollars

Therefore, transferring funds through banks is the safest path and the blood transfusion line of the crypto market. Once the capital link is cut off, the business around crypto exchage will be difficult to continue. Unfortunately: due to the bad reputation of cryptocurrencies in the early days, this forced banks to cut off ties with crypto exchage. Similarly, this has also given rise to people's rigid demand for on-chain bank accounts and digital dollars.

The most successful crypto exchage story in the West belongs to Coinbase, which opened its doors in 2012. However, Coinbase’s innovation was in obtaining and maintaining a banking relationship in the United States, the market most hostile to financial innovation. Otherwise, Coinbase is just a very expensive cryptocurrency brokerage account, and that’s all it took to propel its early shareholders into billionaires.

In the beginning, cryptocurrency trading was overlooked. For example, from 2014 to 2017, Bitfinex was the largest non-Chinese global exchange. At the time, Bitfinex was a company operating in Hong Kong, which had multiple local bank accounts. Arthur Hayes' apartment was in Sai Ying Pun, Hong Kong, and almost every local bank was stationed on the opposite street. This was very important for arbitrage traders like Arthur Hayes, who needed to turn over capital once every business day, so that funds could be transferred to exchanges almost instantly to reduce fees and the time required to receive funds.

Meanwhile, in mainland China, the three largest exchanges, OKCoin, Huobi, and BTC China, all have multiple bank accounts at large state-owned banks. With a 45-minute bus ride to Shenzhen, armed with a passport and basic Chinese language skills, one is able to open a variety of local bank accounts. As a trader in China and Hong Kong, having a banking relationship means you have access to global liquidity. These banking relationships gave Arthur Hayes great peace of mind, knowing his fiat currency would not be lost. Instead, he was terrified every time he sent a wire to some Eastern European exchange.

But as the popularity/risk of cryptocurrencies increased, banks began closing accounts. Arthur Hayes had to check the operational status of each bank-exchange relationship every day. This was very bad for traders, the slower the money moved between exchanges, the less money could be made through arbitrage.

But what if you could transfer dollars through a cryptographic blockchain, rather than through traditional banking channels? Then these digital dollars, the lifeblood of the crypto market then and now, could flow between exchanges 24/7 for almost nothing.

USDT was born in this context: people need to bypass the banking system to create a digital dollar that can flow freely, for free, and 24/7. To this day, there are still many crypto exchage around the world that cannot obtain bank accounts.

Therefore, the Tether team worked with the founding team of Bitfinex to create such a product - USDT. In 2015, Bitfinex allowed the use of USDT on its platform. At that time, Tether used the Omni protocol as an additional layer on the Bitcoin blockchain to send USDT between addresses. This is an original smart contract layer built on top of Bitcoin.

Tether will allow certain entities to transfer USD to their bank accounts, and in exchange, Tether will mint USDT. USDT can be sent to Bitfinex and used to buy cryptocurrencies. What's so exciting about this? Just because a random exchange offers this product?

1.3 USDT distribution in Bitfinex & Chinese market

Stablecoins, like all payment systems, only become valuable when a large number of economically meaningful participants become nodes in the network. For USDT, cryptocurrency traders and other large exchanges besides Bitfinex need to use USDT before it can truly solve any real problems.

Everyone in Greater China is in the same predicament, with banks closing accounts of traders and exchanges. Add to that the fact that Asians are desperate for dollars as their national currencies are vulnerable to shock devaluations, high inflation, and low domestic bank deposit rates. For most Chinese, access to dollars and access to U.S. financial markets is difficult.

Therefore, the USDT stablecoin created by Tether is very attractive as a digital version of the US dollar that can be used by anyone with an internet connection.

The Bitfinex/Tether team jumped at the chance, as the largest exchanges at the time were all controlled by Chinese. Bitfinex’s CEO since 2013 was Jean-Louis van der Velde, who had worked for a Chinese automaker, understood Greater China, and worked hard to make USDT the preferred on-chain USD bank account for Chinese using cryptocurrencies. Although Bitfinex never had any Chinese executives, it built tremendous trust between Tether and the Chinese cryptocurrency trading community.

So you can believe that the Chinese trust USDT. And in the Global South, the overseas Chinese control everything. As the citizens of the Empire have discovered in this unfortunate trade war, the Global South is therefore backed by USDT.

However, just because USDT had a large exchange as its founding distributor, it did not ensure success. The market structure changed to the point where trading Altcoin against USD was only possible by using USDT. Let’s fast forward to 2017, when the ICO craze was at its peak, and USDT really solidified its product-market fit.

1.4 Demand for USD trading pairs during the ICO boom

August 2015 was a very important month as the People’s Bank of China (PBOC) shocked the market by devaluing the RMB against the US dollar and Ethereum’s native currency, Ether, began trading. The macro and micro levels aligned at this time. This became legendary and fueled the bull run from then until December 2017. Bitcoin soared from $135 to $20,000; Ether soared from $0.33 to $1,410.

When the printing presses are on, the macro environment is always favorable. Since Chinese traders are marginal buyers of all cryptocurrencies (only Bitcoin at the time). If they get nervous about the RMB, Bitcoin will soar. At least that was the narrative at the time. The shocking devaluation of the PBOC exacerbated capital outflows. The RMB was abandoned, and the US dollar, cryptocurrencies, gold, overseas real estate, etc. were rigidly needed.

The micro level is always where the fun begins. After the Ethereum mainnet and its native currency, Ether, went live on July 30, 2015, a large number of Altcoin began to flood the market. Poloniex was the first exchange to allow Ether trading, and it was this foresight that made them a major player in 2017. Interestingly, Circle almost went bankrupt at the height of the ICO market because they acquired Poloniex. Years later, they sold the exchange to Justin Sun at a huge loss.

Poloniex and other Chinese exchanges have capitalized on the nascent Altcoin market by launching crypto-only trading platforms. Unlike Bitfinex, they don’t have to interface with the fiat banking system. You can only deposit and withdraw crypto, and then trade it for other cryptocurrencies. But this isn’t ideal, as traders instinctively want to trade Altcoin/USD pairs. How can exchanges like Poloniex and Yunbi (China’s largest ICO platform until it was blocked by the PBOC in the fall of 2017) offer these trading pairs without being able to accept fiat deposits and withdrawals?

Tether’s USDT is now officially launched!

After the Ethereum mainnet is launched, USDT can be transferred through the ERC-20 standard smart contract on the Ethereum network. Any exchange that supports Ethereum can easily support USDT. Therefore, pure cryptocurrency trading platforms can provide Altcoin/USDT trading pairs to meet market demand. This also means that digital US dollars USDT can flow seamlessly between major exchanges such as Bitfinex, OKCoin, Huobi, BTC China, etc., which are the entrances for funds to enter the ecosystem, and in more interesting and speculative places such as Poloniex and Yunbi, speculators can have a carnival.

The ICO craze gave birth to the behemoth that would become Binance. CZ (CZ) angrily resigned from his position as OKCoin CTO a few years ago due to a personal dispute with OKCoin CEO Star Xu. After CZ left, he founded Binance with the goal of becoming the world's largest Altcoin exchange. Binance has no bank account, and to this day it is not known whether fiat can be deposited directly into Binance without going through some kind of payment service provider. Binance uses USDT as its on-chain banking channel and quickly became the preferred place to trade Altcoin.

1.5 USDT consolidates its product market fit

From 2015 to 2017, USDT achieved product market fit and built a moat against future competitors. Due to the trust of the Chinese trading community in USDT, USDT was accepted by all major trading venues. At this time, it was not used for payment, but the most efficient way to move digital dollars in, out, and within the crypto market.

Exchanges had a hard time maintaining bank accounts until 2020. Taiwan was once the crypto banking hub for all of the largest non-Western exchanges, which controlled much of the liquidity in global crypto trading. This was because some Taiwanese banks allowed exchanges to open USD accounts and were somehow able to maintain correspondent banking relationships with large US money center banks like Wells Fargo.

However, this arrangement began to break down as correspondent banks demanded that these Taiwanese banks expel all cryptocurrency customers or lose access to global dollar markets. As a result, by the end of the decade, USDT became the only way to transfer dollars on a large scale in the cryptocurrency capital markets. This solidified its position as the dominant stablecoin.

Western players, many of whom raised money under the crypto payments narrative, have tried to create competitors to USDT. The only one that has survived on a large scale is Circle’s USDC. However, Circle is at a distinct disadvantage because it is a US company based in Boston and has no ties to the cryptocurrency trading and usage centers in Greater China. Circle’s unspoken message is: China = Scary; America = Safe. This message is interesting because Tether has never had a Chinese executive, but it has always been associated with the Northeast Asian market and now the Global South.

02 Sexy Stablecoin Narrative

We can see that Tether’s current status is not achieved overnight through the accumulation of capital and the promotion of political will. Apart from issuance, the distribution of stablecoins is of utmost importance. If there were no restrictions on bank accounts at that time that gave birth to digital dollars, no macroeconomic support, and no ICO boom that drove the demand for US dollar trading pairs, USDT at that time would have been difficult to maintain.

Given the difficulties faced in large-scale distribution of stablecoins, there are still many emerging stablecoin issuers rushing to try this impossible thing. The reason is: the profits of stablecoin issuers are really too high.

2.1 Huge Profitability

The profitability of stablecoin issuers depends on the amount of their Net Interest Income (NIM). The cost basis of the issuer is the fees paid to holders, and the income comes from the cash investment returns of Treasury bonds (such as Tether and Circle) or arbitrage activities in some cryptocurrency markets (such as Ethena). As the most profitable issuer, Tether does not pay any fees to USDT holders or depositors, but earns all NIM based on the yield level of Treasury bills (T-bill).

Tether is able to keep all NIM because it has the strongest network effect and its customers have no choice but to open an on-chain USD bank account. Potential customers will not choose other USD stablecoins, but USDT because USDT is accepted throughout the southern hemisphere.

Here’s an example of how Arthur Hayes paid for his ski season in Argentina:

I spend a few weeks every year skiing in the Argentine countryside. When I first went to Argentina in 2018, paying was a hassle if the merchant didn’t accept foreign credit cards. But in 2023, USDT has taken over as my guide, driver, and chef all accept USDT payments. This is awesome because even if I wanted to pay in pesos, I couldn’t; bank ATMs would only take out a maximum of $30 in pesos per transaction and charge a 30% fee. What a criminal — long live Tether! It’s awesome for my employees to be able to receive digital dollars stored on a crypto exchage or mobile wallet and easily purchase goods and services at home and abroad.

Tether’s profitability is the best advertisement for social media companies and banks to create stablecoins. Neither of these two giants needs to pay deposit fees because they already have a solid distribution network, which means they can capture all the Net Interest Yields (NIM). Therefore, this could become a huge source of profit for them.

Tether's earnings per year far exceed what this chart estimates. This chart assumes that all stablecoins are invested in 12-month Treasury bills, and its purpose is to show that Tether's earnings are highly correlated with US interest rates. You can see that Tether's earnings jumped significantly between 2021 and 2022 as the Federal Reserve raised rates at the fastest pace since the early 1980s.

Below is a table published by Arthur Hayes in the article Dust on Crust Part Deux, which uses data from 2023 to prove that Tether is the bank with the highest per capita profit in the world.

2.2 Political forces behind the scenes

Let’s take a deeper look at why investors’ judgment is blinded by the huge profit potential of stablecoins.

In addition to simply holding Bitcoin and other Altcoin, there are currently three business models that can create cryptocurrency wealth. They are mining, exchange operations, and stablecoin issuance. Take Arthur Hayes, for example, his wealth comes from ownership of BitMEX (a derivatives exchange), Maelstrom (his family office) The largest position, and the largest source of absolute returns is Ethena, the stablecoin issuer of the USDE. In less than a year in 2024, Ethena has gone from nothing to the third largest stablecoin.

Stablecoins are unique in that they have the largest and most obvious target market for outsiders in traditional finance. USDT has proven that an on-chain bank that only holds user funds and allows them to be transferred freely can become the most profitable financial institution per capita in history.

USDT has been successful in the face of legal battles launched by various levels of the US government. What if the US authorities were at least not hostile to stablecoins and allowed them to operate freely to a certain extent and compete with traditional banks for deposits? The profit potential is simply incredible.

Now let’s consider the current situation: US Treasury staff believe that the total stablecoin supply could grow to $2 trillion. They also believe that USD stablecoins could be a pioneer in advancing/maintaining USD hegemony and could serve as buyers that are insensitive to Treasury prices. This is a major macro positive.

As an added bonus, don’t forget that Trump has a deep grudge against big banks for kicking him and his family off the platform after his first term as president. He’s in no mood to stop the free market from providing a better, faster, and safer way to hold and transfer digital dollars. Even his sons have jumped into the stablecoin game.

These are all reasons why investors are salivating over investable stablecoin projects.

03 Circle The hidden worries behind the sexy story

3.1 The Difficult Mountain of Distribution

Unless your stablecoin has a huge use case, such as being exclusively for exchanges, large internet companies, or traditional banks, the cost of issuing a stablecoin can be very high. Bitfinex and Tether were founded by the same people, and Bitfinex has millions of customers, so Tether has millions of customers from the beginning, and all Altcoin are traded with USDT. Tether does not have to pay issuance fees because it is partially owned by Bitfinex.

Circle, and any other stablecoin that comes after it, must somehow pay distribution fees to crypto exchage, where stablecoins are currently used most widely. Large internet companies and banks will never work with third parties to build and operate their stablecoins, so crypto exchage are the only option.

Crypto exchage can also build their own stablecoins, just like Binance tried to launch BUSD, but ultimately many exchanges believe that building a payment network is too difficult and distracts them from their core business. Therefore, exchanges require issuers to hold their equity or a portion of the issuer's net proceeds (NIM) in order to trade their stablecoins. Even so, all Altcoin/USD trading pairs will most likely be pegged to USDT, which means Tether will still dominate.

This is Tether's original accumulation, which continues to accumulate and contributes to Tether's huge moat.

You have to know that stablecoins are transmitted through the Internet, and the Internet has network effects.

Because of this, Circle had to woo Coinbase to compete. Coinbase is the only major exchange not in Tether's orbit, as Coinbase's customers are mainly American and Western European. Tether had been slammed by Western media as some kind of foreign-made scam before U.S. Commerce Secretary Howard Lutnik took a fancy to Tether and provided financial support to it through his law firm Cantor Fitzgerald. Coinbase's existence depends on its favor in the U.S. political circles, so it has to find another way.

So Jeremy Allaire took over the condition and accepted Brian Armstrong's "deed of sale". The transaction is: Circle will pay 50% of its net interest income to Coinbase, and Coinbase will distribute it through the Coinbase network.

Seeing this, I believe everyone understands why Arthur Hayes said that investors will lose everything on almost all publicly listed stablecoin issuers or technology providers at the end of the cycle, but this cannot stop the carnival.

3.2 Risk Warning for Circle

The issuer that kicked off the party with the most dazzling IPO is Circle. It is a US company and the second largest stablecoin issuer by trading volume. Circle’s valuation is ridiculously high right now. Remember, Circle will give 50% of its interest income to Coinbase. However, Circle’s market value is 59% of Coinbase (as of June 20). Coinbase is a one-stop crypto financial services company with multiple profitable business lines and tens of millions of customers worldwide. Circle is good at PR, and while this is a very valuable skill, they still need to improve their skills and take care of those unappreciated businesses.

If you short Circle, absolutely not! If you think the ratio of Circle to Coinbase is wrong, you should buy Coinbase. Although Circle is overvalued, when we look back on the stablecoin craze in a few years, many investors will wish they had held Circle instead of some "copycat" stablecoin issuer. At least they will have some money left.

The next wave of IPOs will be Circle copycats. These stocks will be more overvalued than Circle in terms of price/float ratios, relatively speaking. They will never surpass Circle in terms of revenues, in absolute terms. The promoters will tout some meaningless traditional financial credentials, trying to convince investors that they have the connections and the ability to disrupt traditional banks in the global dollar payments space by partnering with them or leveraging their distribution channels.

The scam will work; the issuers will raise huge amounts of money. For those of us who have been in the business for a while, it will be hilarious to see how those idiots in suits can trick the investing public into investing in their junk companies.

After the first wave, the scale of fraud depends entirely on the extent of US regulation of stablecoins: the more freedom stablecoin issuers have in terms of the assets that underpin the stablecoin and whether they can pay returns to holders, the more financial engineering and leverage they can use to cover up the scam. If we assume that stablecoin regulation is lax or even nonexistent, then a situation like Terra/Luna could occur, where the issuer issues some kind of fake algorithmic stablecoin Ponzi scheme. The issuer can pay holders high returns, and these returns come from leveraged positions in certain assets.

As you can tell, I have nothing to say about the future. There is no real future because the distribution channels for new entrants have closed.

But don't short. These new stocks will make short look bad.

The macro and micro situations are consistent. As former Citigroup CEO Chuck Prince said when asked about Citigroup’s involvement in subprime mortgages: “When the music stops, things get complicated in terms of liquidity. But as long as the music is playing, you have to stand up and dance. We are still dancing.”

04Dilemmas faced by emerging stablecoins

As we have discussed before, even Circle USDC, which ranks second in market share, needs to rely heavily on a single Coinbase crypto exchage, so the situation of emerging stablecoin issuers is even more severe, and there is no visible open distribution channel.

All major crypto exchage are either embracing existing Tether, Circle and Ethena or working with them, while large Internet companies and banks will build their own solutions. Even if new issuers want to transfer their large amounts of net interest income (NIM) to depositors to pull them out of other stablecoins with higher adoption rates, they will inevitably encounter regulatory restrictions.

4.1 Internet giants’ attempts at stablecoins

Stablecoin mania is not new. In 2019, Facebook (now renamed Meta) decided to launch its own stablecoin, Libra. The appeal is that Facebook can provide on-chain US dollar bank accounts to the world (except China) through Instagram and WhatsApp.

Arthur Hayes wrote about Libra in June 2019:

The event horizon has passed. With Libra, Facebook is entering the digital asset industry. Before I begin my analysis, let’s be clear about one thing: Libra is not decentralized, nor is it censorship-resistant. Libra is not a cryptocurrency, and Libra will destroy all stablecoins, but no one cares. I have no sympathy for anyone who inexplicably believes that there is any value in a project by an unknown issuer to create a fiat money market fund on a blockchain.

Libra’s existence could put commercial banks and central banks in a difficult position, as Libra could reduce their role to a regulated digital fiat custodian, which is how they should be treated in the digital age. Libra and other stablecoins offered by other large Internet companies could have stolen the show, as they have the most customers and almost complete information about their preferences and behaviors.

Eventually, the US political establishment launched a protective mechanism to protect traditional banks from the threat of real competition in the payment and foreign exchange sectors. Arthur Hayes commented at the time:

I have no regard for the foolish comments and actions of Representative Maxine Waters of the U.S. House Financial Services Committee. But her and other government officials’ concerns are not motivated by goodwill toward the public, but by fear of disruption to the financial services industry that finances them and keeps them re-elected. The speed with which government officials have condemned Libra suggests that the project does have some potential positive value for human society.

That was in the past, but now the Trump administration will allow competition in the financial markets. Trump’s second term has no good feelings towards the banks that removed his entire family from the platform during the Biden administration. Therefore, large Internet companies are reviving stablecoin projects or embedding stablecoin technology natively into the platform, as reported in the news now, such as Meta, Uber, Amazon, Walmart, and various large Internet companies that are preparing stablecoins.

This is good news for shareholders of social media companies, which can completely cannibalize traditional banking systems, payment and foreign exchange revenue streams. However, it is bad news for any emerging stablecoin issuer trying to create a new one from scratch, because the large Internet companies will build everything they need to drive their stablecoin business forward.

Therefore, investors must be wary of emerging stablecoin issuers!

Other tech companies are also jumping on the stablecoin bandwagon. Social media platform X, Airbnb, and Google are all in preliminary discussions about integrating stablecoins into their business operations. In May, Fortune reported that Mark Zuckerberg’s Meta, which has unsuccessfully experimented with blockchain technology in the past, has held discussions with crypto companies to introduce stablecoins for payments.

——Fortune

4.2 Traditional banking will be on the verge of extinction

Whether banks like it or not, they will no longer be able to earn billions of dollars a year by holding and transferring digital fiat currencies, nor will they be able to earn the same fees by conducting foreign exchange transactions. Arthur Hayes recently talked to the board members of a large bank about stablecoins: they said "we are screwed". They believe that stablecoins are unstoppable and use the situation in Nigeria as an example. Arthur Hayes is not sure about the penetration of USDT in Nigeria, but they told him that even after the Nigerian central bank tried very seriously to ban cryptocurrencies, one-third of Nigeria's GDP was still settled in USDT.

They go on to point out that because cryptocurrency adoption is bottom-up, not top-down, regulators are powerless to stop it. By the time regulators take notice and try to take action, it is already too late because adoption is already widespread among the local population.

Even though every large traditional bank has people like them in the C-suite, the banking system doesn’t want to change because it means many employees leaving. Tether has no more than 100 employees, but can scale to perform key functions for the entire global banking system by leveraging blockchain technology. In comparison, JP Morgan, the world’s best-run commercial bank, has a little over 300,000 employees.

Stablecoins will eventually be adopted in limited forms within the traditional banking system. They will run two systems at once: the old slow and expensive system and the new fast and cheap system. The extent to which they are actually allowed to adopt stablecoins will be determined by the prudential regulators in each office. Remember, JPMorgan is not a single institution, but rather its branches in various countries are regulated differently. Data and personnel are often not shared across branches, making company-wide technology-driven rationalization difficult to achieve.

Good luck to you, bankers, regulations protect you from Web2 but will stifle you from Web3.

These banks certainly won’t work with third parties on the technical development or distribution of stablecoins. They’ll do all of this in-house. In fact, regulators may explicitly prohibit this. Therefore, this distribution channel is closed to entrepreneurs who build their own stablecoin technology.

Arthur Hayes doesn’t care how many proofs of concept an issuer claims to have run for a traditional bank, they will never lead to bank-wide adoption. So if you are an investor, if a stablecoin issuer claims to be working with a traditional bank to bring a product to market, run away.

05The way out for emerging stablecoins

The above is what Arthur Hayes told you about the development path of the crypto-native market that led to the large-scale adoption of USDT, but it is difficult to emulate. Even Circle, which was pushed to the climax by capital, still had to bow to Coinbase according to the "indenture". From the development path of Tether, they are not at the same starting line. Tether is already far ahead, while Circle is still paying dividends everywhere to promote more continuous adoption of USDC.

However, what Arthur Hayes did not tell you is that stablecoins are and will penetrate every corner of the global economy in the form of "payments".

5.1 What will the US Stablecoin Act change?

As the US stablecoin bill Geunis Act is likely to be passed this year, we will see several obvious trends:

1. The Geunis Act’s definition of “payment stablecoin” will exclude most stablecoin projects established through DeFi because they will find it difficult to meet compliance requirements.
2. The compliant stablecoins that remain will reopen the doors of banks.
3. The opening of the bank’s door means that “payment stablecoins” can be connected to real-world payment and settlement scenarios.
4. Stablecoins will start with payments and then gradually build a new financial system based on blockchain.

The combination of these trends actually creates a huge scenario for introducing compliant stablecoins into the Web2 traditional financial payment system.

Essentially: Stablecoin Payments + On-Chain Finance .

5.2 A Tale of Two Cities of Stablecoins in the Payment Context

From the perspective of facilitating the flow of funds, USDC and USDT are not real competitors, but rather each dominates two completely different financial realities.

In this world in the northern hemisphere, the US dollar stablecoin is compliant, programmable, and ready to enter the institutional field. It is the future of banking and financial services. Large institutions (such as JP Morgan, Worldpay, Fiserv, Revolut) are preparing to launch custody, wallet, payment and peer-to-peer fund flow services. All of this is built on the blockchain, aiming to improve efficiency, programmability and optimize returns, and maximize cost reduction and efficiency, rather than achieving financial inclusion and financial equality.

This is the next generation of technology transformation of finance, which is full of huge structural opportunities. Blockchain will serve as a new financial infrastructure, starting with payment and gradually building a financial market on the chain.

Circle has taken the lead and has established the Circle Payment Network, and is trying to gain incremental growth beyond cryptocurrency trading. Circle Payments Network is a platform that Circle uses its strong compliance background to bring together financial institutions (USDC services) in a compliant, seamless and programmable framework to coordinate global payments of fiat currencies, USDC and other payment stablecoins. As a result, fiat currencies no longer need to circulate through the old traditional SWIFT system, and digital dollars using blockchain as the settlement layer will be its new channel.

( Circle Stablecoin Payment Network White Paper )

Similarly, Shopify Checkout, jointly launched by Circle, Stripe, and Coinbase, enables e-commerce websites to support the entire payment chain of stablecoins for the first time. Shopify supports millions of online stores around the world - 2.6 million merchants in more than 150 countries, from individual entrepreneurs to Fortune 500 companies.

This is not a simple marketing promotion, but unlocks many possibilities of e-commerce. For example, a merchant in Argentina sells products to American buyers on Shopify:

• When buyers choose to pay with USDC, Privy creates a temporary or permanent embedded wallet for them that can be linked to their email or phone without requiring them to download MetaMask or manage keys.
• Buyers use USDC to complete payments on the Base platform, and merchants receive payments in local currency (Bridge/CPN) without having to touch cryptocurrencies. The entire process has zero foreign exchange fees, does not rely on credit card networks, and can achieve almost instant and final settlement.
• Not only that, merchants can now program discounts, loyalty rewards or dynamic pricing features into payment logic.

This is where the real value lies - a real-time, programmable global e-commerce infrastructure. Coinbase built the protocol track, Stripe provided support as a payment channel, and Shopify was responsible for distribution, all of which were built on the value layer of USDC. Most importantly, most users will never know that all of this is actually running on the blockchain, just like users use 5G to surf the Internet and don’t need to know the communication logic behind it.

We can see that for the northern hemisphere, stablecoins built on blockchain can construct a new business model for each scenario, focusing on: cost reduction, efficiency improvement and programmability. In the southern hemisphere, however, there is a completely different story. Here, stablecoins help people get rid of currency collapse, capital controls and political instability.

The digital dollar is permissionless and often antagonistic to politics, it is replacing banks that have failed. A 4% yield is not as important as avoiding a 50% loss of purchasing power. USDT is not the "future", it is the "now" for those whose currencies have collapsed and have no other options. No KYC requirements, no yields, and no trust in financial institutions. Just a dollar that works, permissionless, to power a variety of ethical use cases.

“In Africa, it’s not a choice between stablecoins and other financial instruments. It’s stablecoins, or nothing.”

——Samora Kariuki, Frontier Fintech

Across Africa, stablecoins are solving real problems. From preserving assets to facilitating trade, stablecoin adoption is out of necessity, not out of trading and speculation. For users facing foreign exchange rationing and 30% inflation, the most important thing is that it works. Stablecoins help users preserve the value of assets in marginal areas and save in stable currencies. According to the World Bank, as of 2021, only 49% of people in Africa have bank accounts, but 400 million people use mobile payments. Stablecoins can meet user needs in places where banks cannot cover.

( Stablecoins in Africa, 2025 )

And in South America, Tether has just acquired a 70% controlling stake in Adecoagro SA. (NYSE: AGRO), a leading sustainable production company in South America, an agribusiness group operating in Argentina, Brazil and Uruguay. For Tether, this is an opportunity to realize its ambitions: to back its tokens with real assets (such as crops or land) and support a productive economy while expanding the use of blockchain to the real world.

Why Latin America? Tether makes no secret of its geographical goals. Latin America is both a testing ground for cryptocurrencies, especially in countries affected by inflation or currency instability (such as Argentina and Venezuela), and a cradle for global agriculture and energy, but traditional markets still do not provide enough funding. By establishing profitable vertically integrated businesses in these countries, Tether is able to support stablecoin payment settlements under bulk trade in agricultural products, while expanding its alternative financial services (such as trade financing, supply chain finance, etc.), accelerating the tokenization of physical assets (which can be used for transaction settlement of tokenized assets), and providing green energy for future projects.

These two worlds have completely different logics. One world desires better infrastructure and relies on policies and partnerships; the other world simply desires access to financial services, relies on chaos, and wins when the system breaks down. However, most builders are chasing these two aspects without thinking about why stablecoins are important.

If you don’t choose the logic you serve, you can’t scale to global scale. Do you choose regulated programmability or permissionless necessity? Two systems, two leaders, one determines your strategic direction.

5.3 The next stage of stablecoins

Regulatory clarity is opening the door for players in traditional finance. The next phase of stablecoins is not only about who has scale, but also about the business models of all players in the stablecoin supply chain, including issuers, distributors, and holders. In the next 12-24 months, we will definitely see changes and challenges in the value chain and value capture.

As more and more issuers with similar capabilities enter the market, the issuer itself becomes less important. What matters is what users can do with stablecoins. Therefore, the dominance of stablecoins is shifting from issuers to distributors.

Distributors integrate stablecoins into their own real-world use cases, such as e-wallets or Web2 applications. They now have both influence and leverage. They control user relationships, shape the user experience, and increasingly determine which stablecoins get traction.

Stablecoins will be the future of the future through the penetration of Web2 scenarios. Moving from virtual to real to reshape the user experience.

( Artemis: First-line data from stablecoin payment adoption )

Artemis provides the adoption data of first-tier stablecoin payment companies in its article Stablecoin Payments from the Ground Up. It should be made clear that these data are all from data outside of crypto exchage and from data on real-world capital flows. Among them:

B2B payments ($36 billion on an annualized basis) were the most active, followed by P2P ($18 billion run rate), card-linked payments ($13.2 billion), and B2C ($3.3 billion).

This data is just the tip of the iceberg that has not yet been fully unveiled. Once stablecoins gradually come to the fore, more scenarios will be able to be constructed and the efficiency of capital/asset circulation will be higher.

How to import stablecoins into the massive scenarios of Web2, whose scenarios to import, who will import them, and whose stablecoins to use. These are the questions that every stablecoin issuer needs to think about urgently.

Of course, you must remember what I said, the future is:

Stablecoin Payments + On-Chain Finance.

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