Stablecoins are a class of cryptocurrencies designed to maintain a stable or constant value relative to fiat currencies such as the U.S. dollar. They’re gaining momentum and fueling debates on how they could replace or upend current payment rails. The emergence of stablecoins has certainly captured the interest of the entire crypto world. Traditional banks and payment companies are noticing as well, leading to discussions if not outright battles over their role in the future of payments. This article explores the increasing adoption of stablecoins, their potential to challenge the dominance of Visa and Mastercard, and the responses from these payment giants.
Understanding the GENIUS Act
Passage of new stablecoin legislation would be a watershed moment for the cryptocurrency industry. This legislation would create a major and needed regulatory framework for tokens that are digitally denominated in dollars. It does so by directly addressing core concerns over stability and security of the crypto market. The GENIUS Act would help provide clarity to and legitimize the stablecoin industry. This is unfortunate as this area has been the subject of massive regulatory whiplash.
The Legislative Path
The GENIUS Act may have one of the most extensive stakeholder consultations and negotiations ever, having been crafted with input from thousands of industry members, lawmakers, and regulators. Its passage through the legislative process has been a journey through several stages that included numerous committee hearings, extensive public consultation, and amendments. The act seeks to strike a balance between fostering innovation in the digital asset space and protecting consumers and the financial system from potential risks. It’s a hopeful sign that it reflects a growing recognition among policymakers of the need to adapt to the developing and accelerating landscape of digital finance.
Significance of the GENIUS Act
The GENIUS Act takes a comprehensive approach making six key provisions crafted specifically to ensure the stability and integrity of stablecoins. Issuers need to always have complete reserve backing for their tokens. They must pass ongoing audits and adhere to anti-money laundering (AML) statutes. Together, these measures will help ensure a high degree of transparency and accountability within the stablecoin marketplace, providing greater confidence to users and investors alike. The bill’s intent is to provide uniform regulatory guidelines for issuers of stablecoins. That will curtail the threat of nefarious behavior while encouraging good faith, responsible innovation.
Next Steps in the Process
After its introduction, the GENIUS Act will continue to be considered and debated further in the legislative process. Even if passed, it will be further considered by the appropriating committees of jurisdiction, which will make their own proposals for amendments and markup. The act will need to receive the approval of the majority of those lawmakers in order to become law. If enacted, the GENIUS Act will have far-reaching effects on the growing stablecoin sector. That is as it would allow for broader adoption and greater integration into the mainstream financial system.
The Promise of Stablecoin Payments
This stablecoin-based approach to payments is a radical departure from the types of transactions we envision seeing in the future. They present a myriad of benefits compared to cash and check payment, including increased speed, accessibility, and lower transaction costs. It is these benefits that are fueling increased consumer, business and financial institutions’ interests in stablecoins.
Additionally, stablecoins provide an opportunity for near-instantaneous transactions, avoiding the multi-day processes of conventional payment systems. They are open around the clock. This kind of accessibility allows users to send payments and receive them 24/7 regardless of time of day or location. This is especially true with stablecoin transactions, which tend to be significantly cheaper than traditional payment methods. This fee cut is a win-win for the payers and payees.
The immutability of the blockchain technology that powers most stablecoins adds an extra layer of security and transparency. Because transactions recorded on the blockchain are tamper-proof and easily independently verified, this greatly decreases the risk of fraud and disputes. This feature especially attracts enterprises and users that prioritize security and traceability in their financial dealings.
Challenges to Traditional Payment Systems
Traditional bank card systems, like those operated by Visa and Mastercard, have long been the dominant players in the payments industry. And yet, they are hampered by restrictions that only stablecoins can effectively overcome. The two biggest points of friction around traditional card networks are high fees and slow settlement speeds.
For many merchants, high costs associated with card acceptance are cutting into already thin profit margins. Usually, these charges amount to a fraction of the transaction value. They can differ according to the type of card used and the merchant’s processing contract. That’s because traditional card payments take a few days to settle. This artificial delay prevents merchants from accessing their money immediately. This delay can pose significant cash flow issues, especially for small businesses.
Moving to a payment system based on blockchain technology or stablecoins would bypass these constraints. By cutting out the middlemen and making the entire transaction process more efficient, stablecoins have the potential to make these transactions cheaper and quicker to settle. A blockchain-based system could avoid the cumbersome single-day clearing cycle. This last-minute provision allows for faster and more convenient payment processing.
The Strengths of Incumbent Networks
Stablecoins have immense promise. At the same time, we need to be realistic about their competition and the strengths of established payment networks like Visa and Mastercard. These firms have developed innovative and secure systems that in total handle trillions of transactions each day. These features are what existing stablecoins are missing. These advantages range from superior reliability, predictability, an extensive distribution network, and robust anti-fraud features.
Visa and Mastercard have made substantial, highly complex investments in their infrastructure. Beyond adding smart features, they have adopted leading security standards to ensure the safest payment transactions happen seamlessly. Together, they have the most solidified relationships with banks and merchants to create a global network that allows for smooth, frictionless transactions. They provide highly advanced fraud detection and prevention capabilities, which help protect consumers and businesses from financial losses.
Most people do not appreciate how great these strengths are, and how great a competitive advantage they provide to incumbent payment networks. Even though stablecoins hold the promise of disruption and innovation, they face these challenges before they can become widely adopted.
How Traditional Card Payments Work
To really grasp what stablecoins could accomplish, it’s worth taking a look at how card payments are processed today. The moment a consumer swipes their credit or debit card for a purchase, a transaction initiates a complex chain of events. Many different actors enter the equation to handle that one transaction.
That’s the first step, with the merchant’s payment terminal reading the card’s information and sending it on to their acquiring bank. The acquiring bank passes the transaction to the relevant card network, Visa or Mastercard. The card network routes the transaction to the cardholder's issuing bank, which verifies the cardholder's account balance and approves or declines the transaction.
If the transaction is approved, the issuing bank sends an authorization code back through the card network to the acquiring bank and the merchant. The merchant subsequently accepts the sale and delivers the goods/services from which the consumer benefits. At the end of the day, the merchant submits all of their authorized transactions to their acquiring bank for settlement.
Unlike traditional bank card payments that usually batch up all daily transactions and clear once a day, the Tapp payments would be cleared instantly. Clearing often adds another full day or two, and settlement takes additional time — 1-5 days. It means that for that time lag of sometimes days, merchants do not have access to their funds even after the transaction has occurred.
The Role of Shopify and Coinbase
The use of stablecoins is increasing exponentially. That’s the expectation — companies like Shopify and Coinbase are already integrating them into their platforms. Each of these initiatives seeks to drive adoption among consumers and businesses, making it more convenient and practical to use stablecoins to power everyday transactions.
Shopify, which powers around 10 percent of all e-commerce, is apparently looking at ways for its merchants to accept stablecoin payments. This would give merchants access to a secure new payment option with lower fees and faster settlement times. Coinbase—one of the largest cryptocurrency exchanges and companies in the world—is similarly aiming to increase the use of stablecoins for payments.
Shopify and Coinbase intended to aggregate that day’s USDC transaction data and settle it all on the Base network in a batch. This would greatly help simplify the payment process and move away from dependence on traditional payment rails. Collectively, these efforts would go a long way to making sure Americans can adopt stablecoins quickly and use them safely and effectively throughout the mainstream economy.
Market Reactions to Stablecoin Adoption
The increasing adoption and demand for stablecoins certainly hasn’t escaped the attention of investors. As those risks multiply, so too do fears that stablecoins will undermine established payment networks. Consequently, Visa and Mastercard stocks have experienced significant drops.
Potential investors are likely worried that stablecoins would steal the market share and therefore profits of these well known payment giants. Compared to cross-border payments today, stablecoins can provide lower cost and faster bilateral settlement. This primary benefit has the potential to siphon merchants and consumers from established card-based payment mechanisms. This drastic change in market dynamics would take a big bite out of Visa and Mastercard’s financial results.
The stock market’s reaction shows how little people know about what is happening to payments. It remains to be seen whether stablecoins will be able to supplant established payment networks. Investors are casting a very serious eye toward their potential to disrupt.
Two Paths for Stablecoin Integration
The application of stablecoins in payment systems is progressing along two distinct paths: integrating stablecoin functionality centered around card organizations and attempting to completely bypass card organizations and issuing banks. Each method offers distinct benefits and hurdles.
The first route is through established card networks to get stablecoins integrated into their infrastructure. In doing so, this approach would build on Visa and Mastercard’s industry connections and payment system infrastructure to potentially offer stablecoin payments. It would have the happy consequence of making stablecoins benefit from the security and fraud prevention measures that’s already been built in.
The second path requires much deeper thinking that aims at developing a new payment system altogether. This method sidesteps established card networks and issuing banks. It offers a deeper, smarter, more flexible and decentralized payment solution that can be more efficient. It would hinge on designing a new technological infrastructure and building new social trust among users.
Overblown Worries About Incumbent Networks
Given their design, stablecoins can be a significant threat to existing payment networks. Some analysts believe that fears of a future without our current systems are overblown. In their response to this proposal, they note that Visa and Mastercard are very dependent upon global consumer credit and regulated U.S. debit. These areas have been historically fraught with challenges for stablecoins.
Consumer credit cards are loaded with features including rewards programs and purchase protection. These benefits, combined with strong anti-fraud protections, are difficult for stablecoins to compete against. Highly-regulated U.S. debit cards are operating under stringent regulatory requirements that stablecoins would be unlikely able to replicate. These considerations may constrain how far stablecoins can reach into these layers of the payment market.
Stablecoins may play a positive role in future disrupting existing closed payment networks. They have significant promise—in particular for remittances and business-to-business cross-border payments. These kinds of transactions are typically characterized by high transaction fees and slow settlement times which makes them vulnerable to disruption by stablecoins.
Use Cases for Stablecoins in Payments
Stablecoins offer a variety of use cases in the payments industry, including:
- Remittances: Stablecoins can provide a faster and cheaper way to send money across borders, reducing the fees and delays associated with traditional remittance services.
- Cross-border payments: Stablecoins can streamline international business transactions, eliminating the need for intermediaries and reducing currency exchange fees.
- E-commerce: Stablecoins can offer merchants a new payment option that is cheaper and faster than traditional card payments.
- Everyday transactions: Stablecoins can be used for everyday purchases, such as groceries, transportation, and entertainment.
In payments, the possible uses of stablecoins are numerous and ever-growing as the technology advances.
Card Services vs. Stablecoins
The best payment method for a particular transaction will depend on the specific needs and priorities of the parties involved.
- Reliability: Card networks have a proven track record of reliability and security.
- Predictability: Card transactions are typically processed quickly and predictably.
- Wide distribution network: Card networks have established relationships with banks and merchants around the world.
- Anti-fraud capabilities: Card networks offer sophisticated fraud detection and prevention tools.
The future of payments is likely to involve a mix of traditional payment methods and new technologies such as stablecoins. We should probably assume that stablecoins won’t fully supplant legacy payment networks. Though they are still relatively new, that may change soon due to their growing significance in particular fields.
- Lower fees: Stablecoin transactions can be cheaper than card payments.
- Faster settlement times: Stablecoin transactions can settle much faster than card payments.
- 24/7 availability: Stablecoins can be used to send and receive payments at any time.
- Immutability: Stablecoin transactions are recorded on the blockchain and cannot be altered.
The stablecoin technology is likewise maturing very quickly. Once regulatory frameworks are more established, we’ll see wider adoption of stablecoins for payments. Together, these efforts could produce a much more efficient and competitive payment landscape, one that delivers far greater benefits to consumers and businesses alike.
The Future of Payments
As the use of stablecoins continues to grow, they provide new opportunities and increased competition for our current payments industry. Stablecoins open up new opportunities to provide lower fees, faster settlement times, and increased accessibility. They have real obstacles to their use in regulation, security, and scalability that need to be solved. The GENIUS Act proposes an audacious starting point to address all of these hurdles. This solution would be to provide a clear, baseline regulatory framework for stablecoins.
The implications of stablecoin adoption for the future of payments are profound. If stablecoins were to be broadly adopted, it might challenge existing payment networks, resulting in reduced costs and increased efficiency. They could empower individuals and businesses in developing countries by providing access to financial services that are currently unavailable.
Final Thoughts
The increased adoption of stablecoins might represent serious risks to the financial system. What’s key is that regulators continue to watch the landscape of the stablecoin market and move to reduce any harmful risks that could arise. Among them are making sure stablecoin issuers hold enough reserves, subject them to anti-money laundering rules, and keep consumers free from fraud.
Implications for the Future
Readers are encouraged to:
Together, we can ensure that stablecoins are deployed effectively and safely. With your input, we can work together to make our payment system faster, more efficient, and more inclusive!
Call to Action for Readers
As the payments landscape continues to evolve, it is important for consumers, businesses, and policymakers to stay informed about the latest developments in stablecoin technology. Readers are encouraged to:
- Research and understand the potential benefits and risks of stablecoins.
- Experiment with using stablecoins for payments to gain firsthand experience.
- Engage in discussions with policymakers and regulators about the future of stablecoins.
- Support efforts to develop clear and consistent regulatory frameworks for stablecoins.
By working together, we can ensure that stablecoins are used responsibly and effectively to create a more efficient and inclusive payment system.
