How Do Stablecoin Issuers Make Money?

Call it a case of making money while minting money.

Literally. That’s the goal, anyway. Within financial services, a slew of companies have come to market in a bid to disrupt money itself — the way it’s created, the way it’s issued and even the way it’s used.

Along the way, a few concrete business models have emerged.

Cryptocurrencies, of course, have captured the public imagination and gained favor among retail investors and institutions — or disfavor, depending on the day. Bitcoin waxes and wanes by several percentage points each day, as mercurial as its holders.

But within crypto lies the stablecoin niche, with its own business models that have diverged depending on whether issuers opt for the centralized, or decentralized, model.

Stablecoins are cryptos that are “pegged” to another unit of value — a currency, commodity or other asset — so that the pricing of the coin itself is (ostensibly) stable. The standouts, arguably, are the firms that peg their offerings to the U.S. dollar.

But drill down a bit, and the differences between the centralized and decentralized models become stark.

The centralized coins, and companies behind them, are the ones that hew a bit more closely to traditional structures within the financial services industry.  In this model, the stablecoins are collateralized off-chain, which means that the “backing” asset is held on the balance sheet, or through third-party firms like banks.

In other words, it is the cash, the Treasuries, the commercial paper that underpins the crypto — so in essence, the issuer has one foot in the purely digital world, one foot within traditional finance. The decentralized model uses smart contracts, the cryptos themselves or algorithms to keep that “peg” in place, where a 1:1 relationship relies not on the traditional custodians, but on constant rebalancing of supply and demand.

We’ve seen some friction in the drive to create price stability. As detailed here, as one high profile example, TerraUSD, the “algorithmic stablecoin,” de-pegged from its dollar peg. A huge surge in supply on various platforms brought the crypto below $1.

Overall, the stablecoin segment has had its share of triumph and challenge, with the most visible firms in the space garnering a collective market cap of more than $150 billion as measured in just the past few months.

See also: Why Stablecoins Are Surging

To get a sense of scale, consider the fact that Tether’s USDT has a market cap of about $79 billion as of this writing, Circle’s USD Coin has a market value of about $54 billion and Binance USD sports an $18 billion market cap.

The decentralized players are not alone when it comes to bumpiness in trading and in overall sentiment. For example, as recently covered in this space, amid investor-driven volatility, Tether also “broke the buck.”

Related: Tether Breaks Buck as Stablecoin Panic Spreads

But we note that, for the time being, at least, it is centralized players that stand to gain some real tailwind, at least in earnings power, from rising rates. After all, the money that they keep on the balance sheets and custodied, and the holdings they have, bring in more money in terms of interest income as rates rise.

There exist only occasional examples of how and where these companies make money, as detailed in public filings.

We can turn to Circle as a centralized example. In its investor presentation denoting a 2022 to 2023 outlook, the firm estimates $28 million in USDC interest income in 2021, growing to a projected $438 million this year and as much as $2.1 billion in 2023.

Transaction and Treasury Services (TTS) follow at a respective $48 million, $113 million and $366 million across 2021 to 2023 (estimated). Circle’s site notes that in tandem with those services, Treasury departments can leverage traditional payment rails and “use USDC to make and accept near-instantaneous, borderless digital dollar payments to and from counterparties across the globe.”

Elsewhere, Tether’s latest attestation report showed that as of the end of March, of its roughly $82 billion in assets, 24% was tied to commercial paper and certificates of deposit; $4.1 billion (or about 5%) was held in cash and bank deposits.

A significant 47.4% was held in Treasuries. Tether makes fees per fiat withdrawal, defined on its site as the greater of $1,000 or 0.1% of deposits.

These centralized models stand to bring in more money amid rising rates, where what’s held in custody brings in more interest income. For Circle, to illustrate that point, in the company’s Securities and Exchange Commission filings, interest income came in at $28 million.

The Opportunity  

The stablecoin exists as a “bridge” of sorts to facilitate the trading of cryptocurrencies like bitcoin and ether. But beyond that use case, we’re seeing a movement toward using stablecoins in commerce, generally.

BitPay CEO Stephen Pair told PYMNTS’ Karen Webster earlier in the year that stablecoins like USDT and USDC now account for 13% of the direct-to-merchant payments made using its services. Additionally, according to recent PYMNTS’ research, 58% of firms use at least one crypto and 29% of that tally use stablecoins.

Read more: Study: 58% of Multinational Firms Use Cryptocurrencies

The recent roller coaster ride of stablecoins — and the emergence of any number of regulatory frameworks — may give investors and enterprises pause,  at least for now. But it is the centralized construct that gives at least relative transparency, and a range of disparate revenue streams, that may gain favor.

In at least one nod to evolving decentralized models, Tron, with its USDD algorithmic stablecoin, has been adding more collateral (with reserves in other cryptos). Bumps loom ahead, but they may be more easily navigated by the companies that have some firm footing with almost universally-accepted “backstops” that have been around for, well, centuries.