Stablecoins: Next generation payments

What are stablecoins? Put simply, stablecoins are cryptocurrencies that are tied or pegged to an underlying Fiat currency. Unlike other types of cryptocurrencies, such as Bitcoin or Ether, the price of a stablecoin does not fluctuate against fiat. This means that stablecoins can be used as a means of value transfer unlike, say Bitcoin, whose price against the Dollar or Pound fluctuates continually making it very difficult to use for value transfer or payments.

Stablecoins have been around for a few but are gaining popularity as more and more people catch on to their use. They have been used in the crypto industry for a while to overcome the challenge of on and off ramp banking. Many crypto exchanges and crypto firms struggle with getting every day banking and payments are often blocked or slowed down. Hence, many crypto exchanges now offer trading pairs of a particular cryptocurrency, such as Bitcoin, to a stablecoin such as Tether (USDT) or Circle (USDC). 

Tether is the original stablecoin and largest by market cap. It is the most commonly used stablecoin trading pair and is increasingly used beyond the crypto trading world for every day payments.

Since Bitcoin arrived on the scene, the goal of making payments over the internet has been one that many projects, including Bitcoin, have been striving for. Bitcoin was originally created for making peer to peer digital cash payments. Unfortunately given its price volatility it has never cemented itself as a means of digital payment. For Bitcoin to take on this role products and services and society as a whole would have to price in Bitcoin versus the currency of the country where payments are being made. 

As the crypto and blockchain industry has grown, so too has the proliferation and usage of stablecoins. Companies such as Circle and Tether lead the way, and have grown to be huge companies given their model of holding significant USD reserves backing the stablecoins in supply. These reserves interest for the companies, something that during a time of high interest rates has seen increased growth and hence increased usage of their stablecoins. 

The dawn of the internet brought about a way for us to digitally move information from A to B. This period is now referred to as Web 1.0. The advent of blockchain in the form of Bitcoin and now several other blockchains, has heralded an era of digital value transfer. Unlike information, which can be copied from one place to another digitally, value be it cash, gold or any other asset, has to be physically moved in digital terms from A to B. Blockchain technology allows us to do this as it uses cryptography to digitally sign the movement of data from A to B creating a record of this movement on a digital chain. This era is now referred to as Web 3.0 and in the Web 3.0 world we finally have a way to use the internet as our “rails” for payments rather than using the traditional banking “rails”. These rails have been in place for many years and whilst solid and reliable are prone to reliability issues (as banks block or hold payments), can be slow and can also be expensive for certain types of payments.

Payments over the internet on the other hand are instant, cheaper and not subject to third parties blocking or slowing down payments. 

Stablecoins, as a form of cryptocurrency that is effectively a digital cryptographic version of a Dollar or Pound or Euro, therefore can be used to move Dollars, Pounds, Euros between parties with the Internet being the rails over which this value travels.

Today many companies are choosing to pay suppliers or settle trade agreements using stablecoins. It’s faster, cheaper and saves a lot of money on banking fees. 

But how do you go about setting up and making payments using stablecoins? 

The first step in the process is to obtain and setup a wallet or digital account in which you can hold or store your stablecoins. Think of this as your own bank account which you control and run and this stores your digital dollars, pounds, euros to be used for payments. Your wallet will have a wallet address and this address is used as the source and destination (much like a bank sort code / account number, IBAN or checking account number) for receiving and sending your digital dollars, pounds or euros. 

The second step is to obtain your stablecoins and these can be purchased from a crypto exchanges, broker or OTC provider. For any of these routes you will need to setup an account with the respective company and go through a KYB and account opening process before you can purchase and sell your stablecoins. Once your account is setup you will need to be able to send your dollars, pounds, euros to the company to fund your purchase of your stablecoins. 

The third step is to transfer your stablecoins to your wallet that you wish to use for sending stablecoins to a third party (in the case of making payments). Care has to be taken when doing this and the advice is always to make a small test payment / movement whenever you are moving funds from one wallet to another. If you get the wallet address wrong there is no way to reverse the transaction and your funds could be lost. It’s important to note there is no insurance or support in the world of payments with stablecoins. 

The fourth step, in the case of paying a third party, is to obtain the wallet address of the company you are making the payment to. The wallet you are paying from will allow you to transfer from your wallet to another wallet and you use this feature to enter the destination wallet address and the amount and stablecoins will be transferred from your wallet to the destination wallet. 

For help in understanding more about stablecoin payments or for help in choosing and setting up a wallet or custodian solution and setting up a process for making stablecoin payments or for help in selecting a company to help you buy and sell stablecoins, please get in touch and our team can provide you with more help and guidance. 

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