Key Takeaways
- Tether Holdings recently made waves after confirming it was seeking a deal that would value the company at roughly $500 billion, comparable to the private valuations of firms pursuing artificial intelligence and space exploration.
- The two largest stablecoin issuers, Tether and recently public Circle, altogether account for 85% of the roughly $300 billion market.
How much is the bridge between the real world and blockchains worth?
Investors have shown interest in the business of stablecoins, the digital money some believe could one day displace cash. They’re not generally seen as investments themselves—those pegged to the buck should cost a buck and be worth a buck, more or less—but the business of dealing in them is drawing in money.
Take Tether Holdings and Circle Internet Group (CRCL), the world’s largest stablecoin issuers. The former recently sought a private-market deal that would value the company at $500 billion, in line with the market capitalizations of Visa (V) and Mastercard (MA) and rivaling the private value of OpenAI’s. Circle has a stock more than 350% above its IPO price and a market cap of roughly $35 billion.
Stablecoins are mainly used for crypto trading, a base currency for buying into bitcoin and other assets. But proponents say their other uses—like paying employees, buying coffee, or holding value in company treasuries—can do what banking services and credit cards can do, only faster, presenting trillions of dollars in opportunity.
Why This Is Significant
Stablecoins are a form of digital currency, typically pegged to a real-world currency like the dollar, that proponents believe are the future of money. While that sorts out, some companies have made inroads in establishing their coins, which has led to multibillion-dollar valuations for their businesses. Competition and legislation, however, will go a long way toward determining who wins in this business.
Tether and Circle, which together have 85% market share of the roughly $300 billion-and-growing pie, according to rwa.xyz, look like the likeliest disruptors of the payments market. Their business models have been made legitimate with U.S. legislation, and have won over some central bankers.
Big Banks Are ‘Going to Be Involved’ in the Stablecoin Sector
Now investors have the tricky task of determining whether the biggest stablecoin issuers can fight off banks and e-commerce giants to take share in payments and other markets that aren’t explicitly crypto, supporting their valuations. “We’re going to be involved,” JPMorgan Chase (JPM) CEO Jamie Dimon said on a recent conference call.
Tether and Circle have similar business models: they make money from interest earned on the reserves they hold. The acquire more when users buy the stablecoins, and sell when they’re redeemed. Lower interest rates could mean a hit to revenue, but it could also spur trading that could boost business: Demand for crypto can lift demand for stablecoins used to facilitate trading, data show.
Circle generated $658 million in the second quarter, of which 96% was reserve income, and a net loss of $482 million due to non-cash related IPO expenses.Its reserves are managed by BlackRock (BLK) and its reserve rate for the quarter was 4.1%. Tether, a private company, doesn’t disclose its financials as Securities and Exchange Commission-regulated companies do, but its most recent quarterly unaudited attestation report shows a net profit of $4.9 billion in the second quarter.
While the U.S. in July passed the Guiding and Establishing National Innovation for U.S. Stablecoins, also known as GENIUS Act, stablecoin issuers are still locked in battle with the banking industry. The law forbids issuers themselves from passing on yield to stablecoin holders, but it doesn’t explicitly disallow crypto exchanges like Coinbase (COIN) from giving Circle’s usdc holders a 4.1% reward, just a percentage point below the best saving accounts rates in the country.
Therein lies one of the key issues: Banks are concerned that stablecoin yields will entice the masses to pull deposits from savings accounts to chase yields as good as or better than those they offer. Now, the Treasury Department has gotten involved, asking for public input on things like taxes and how anti-money laundering rules apply.
And it’s not just banks that want in: Companies like Amazon.com (AMZN) and Walmart (WMT) are considering issuing their own stablecoins.
