Payments are to Commerce as Messages are to Communications and Content: We are Digitizing Them All
PAYMENTS ARE TO COMMERCE AS MESSAGES ARE TO COMMUNICATIONS AND CONTENT:
WE ARE DIGITIZING THEM ALL
2025 is turning out to be the year in which everyone is talking about US backed stablecoins.
Indeed, most countries around the world are seeing rapidly accelerating usage, with combined stablecoin transaction volume exceeding VISA and MasterCard, and perhaps 500 million active users taking advantage of the speed and efficiency gains of digital monies for international and domestic remittances. Here in the US, the new administration has put stablecoin legislation top of the list, and drafts are passing through congress as we write.
However, for many, stablecoins continue to confuse.
In today's newsletter we outline what stablecoins are and why they matter to the digital financial future that we have been investing into for over a decade here at Blockchain Coinvestors.
EXCLUDING STABLECOINS, ARE THERE ANY PRACTICAL USES FOR BLOCKCHAIN?
Recently we were presenting to a large group of sophisticated investors and at the end someone asked the following question:
"Excluding stablecoins, are there any practical uses for blockchain?"
Shocked, we explained that the very nature of the question missed the entire point. To ask this question is the equivalent of asking in 1998 whether there were any practical applications of the Internet beyond digital communications and content. The whole point is after 50 years of hard work digitizing communications and content, we are now getting around to digitizing monies, commodities and assets, and the place to start is with payments. The reason for this is that the worlds of commerce and finance are built upon payments. You can't buy or sell something, borrow or lend, invest in, hold or sell an asset, or insure something without making a payment.
"Payments are to commerce, as messages are to communications and content."
To digitize payments, you have to begin by digitizing monies in ways that can natively work over the Internet, which is why stablecoins have become the first at scale global use case for blockchain.
And this is why Stablecoins matter - especially the US dollar backed variety.
A COMPLEX PAYMENTS ECOSYSTEM IS BEING DISRUPTED
To begin, it's worth reviewing how we make payments today. Take a look at Exhibit 1 which is a greatly simplified ecosystem map of payments status quo. You will recognise some of the names. But if we showed you the spaghetti code that connects them together, even the most sophisticated computer developers among you would be lost in a nanosecond. Today's payment ecosystem is the result of decades of evolution, and provides a patchwork so complex it can't support the future digital economy that is being built today.
It is literally coming to the end of its life.
Exhibit 1: THE PAYMENTS ECOSYSTEM
The goal of today's newsletter is not to embarrass anyone, but every dimension of consumer benefit is badly delivered by today's payments ecosystem. It is costly, slow and unsafe, and unable to support simple use cases, like transferring small amounts of money required in many parts of the world, and increasingly as we connect computer to computer - implicit in our migration to an Internet of Things, and a world in which computer intelligence works with computer intelligence directly and without human intervention.
Today's payment ecosystem is expensive, slow, unsafe, and increasingly unfit for purpose given the types of payments the world increasingly wants to make.
QUICKER, CHEAPER, SAFER
In this context, the killer app would be a payment infrastructure that was designed to work seamlessly over the Internet. A natively designed payment system if you will. It would be characterized by:
Built to work over the Internet technology stack.
Engineered to provide close to real time payment settlements.
Able to complete transactions at very low cost - fractions of cents, not tens of dollars.
Safe to withstand the massive breaches and fraudulent scams that are accelerating in today's payment ecosystem.
Developed to higher standards of identity and trust so that bad payments between bad actors are no longer enabled as they are within today's payments and banking infrastructure.
Scalable to handle the entire world's transaction volumes. Both today's and in the future when micropayments are conducted in vast numbers of hundreds of trillions per year.
And so on.
It happens that this future requirement list has already been incorporated into the first generation of US backed stablecoins from providers like Tether, Circle and others. Built to support third world micropayments, and high velocity trading applications, each of the leading stablecoin providers built standards that existing payment processes can't match.
Today's stablecoins are quicker, cheaper and safer than their legacy competitors, and this has enabled them to open up use cases that are unreachable for even Visa and MasterCard. As an example, stablecoins enable hundreds of millions of unbanked people in Africa, Asia, and South America to make peer to peer payments over their telecommunications infrastructure at very low cost.
How big is this, and do we need to pay attention yet?
It's massive and growing incredibly quickly. As Exhibit 2 shows, stablecoin volume is already exceeding 650 billion transactions per month.
Exhibit 2: STABLECOIN TRANSACTION VOLUME RAPIDLY GROWING
To put that into context, the transaction volumes are expected to exceed VISA and MasterCard in 2025, and while many of these transactions are very low value, the profitability of the small number of stablecoin issuers is already more than most US banks combined.
STABLECOINS RIDE ON BLOCKCHAIN RAILS
Blockchain, or distributed ledger technology (DLT), was created by Satoshi Nakamoto to enable peer to peer movements of value over the Internet. We have written elsewhere about this, but it is important to appreciate that without DLT, the Internet is not fit for purpose for the movement of value. It is the combination of DLT and the Internet technology stack that results in a complete solution for the worldwide movement of value.
Satoshi invented blockchain to enable Bitcoin to operate as a peer to peer cash over the Internet. We know today, and for some very important reasons, Bitcoin is better as a store of value, than as a money. However, that does not mean that Bitcoin can't evolve into serving as money too. However, in the interim, Bitcoin served as a proof of concept for the development of monies better engineered for low cost, high value applications.
In parallel, it also became apparent, that the preferred money of most of the world today is, and remains, the US dollar. So those new digital monies that could provide the benefits laid out above, but in a form that gave the consumer a money backed by US dollars, were able to quickly gain traction. Today, most of the world's leading stablecoins are fully backed one to one by US dollars - or at least by short term instruments that are US dollar denominated.
So it is no surprise that the latest version of digital money - stablecoins - are US backed and built to run on blockchain infrastructure.
Exhibit 3: STABLECOIN CUMULATIVE METRICS BY BLOCKCHAIN
Exhibit 3 shows stablecoin cumulative metrics by stablecoin and blockchain. The USD volume is unadjusted, but makes the point that there are multiple blockchains that have already supported stablecoin transactions in the trillions today.
WHO LEADS IN THE SUBSTITUTION OF OLD PAYMENT RAILS BY BLOCKCHAIN STABLECOIN RAILS?
The clear leader in the race to substitute the old payment rails with new blockchain stablecoin rails is Tether. We are exceptionally fortunate to be investors in Tether through our partnership with BCAP. Some metrics for Tether's current scale are shown in Exhibit 4.
Today, Tether has issued more than $140 billion of US Dollar denominated stablecoins, as well as Tethers backed by other fiat currencies. Approximately 400 million people around the world have made use of one or other type of Tether to conduct a payment transaction. A large proportion of those are 'unbanked' which is to say they do not have access to the legacy payment ecosystem at any cost.
Exhibit 4: TETHER METRICS
Early on in its life, Tether was accused by traditional players of being not fully backed by dollars. It took Howard Lutnick, then CEO of Cantor Fitzgerald and the holder of much of the Tether balance sheet, to debunk that claim. Today, as Secretary of Commerce, Howard is helping the US transition to a more efficient payment future.
Exhibit 5: TETHER ASSETS AND LIABILITIES
Meanwhile, Tether now publishes its assets and liabilities and shows enormous and rapidly increasing net equity of some $7 billion as shown in Exhibit 5. Others have shown that when profit per employee is taken as the metric, Tether is probably the most profitable business on earth.
WHAT COMES NEXT
So stablecoins are de facto playing the role of enabling natively digital money to be shared peer to peer across the Internet infrastructure. As noted, they are able to do this in ways that are better for consumers - quicker, cheaper and more safely than the legacy payment ecosystem. Trillions of transactions are being undertaken today, and the growth rate is increasing - we are at an apparent inflection point as more and more of the world's 8 billion humans, and all the computer devices, realize that digital payments are now possible even for very small increments of value.
This does not mean that the race for stablecoin leadership is defined, or won.
We expect to see:
Some of today's leading stablecoin issuers transition into public entities, with Circle already announcing its S1.
The US government finishing its new stablecoin legislation in 2025, defining what a US based stablecoin needs to do in order to operate onshore.
Meanwhile, without global harmonization of stablecoin legislation we will see different versions required in different jurisdictions. Expect, for example, that Tether might issue a US version of Tether operating onshore in the US, while the current offshore version of Tether operates in the Southern hemisphere designed to other jurisdictional standards.
Conversely, expect that the EU's MICA standards may make effective US backed stablecoins untenable within its jurisdiction, preserving digital money for the EU backed CBDC announced by EU leadership.
Everywhere, legacy banks and payment companies will be rushing to get into the game - understanding now that the current payment ecosystem is being replaced by a proven and superior solution.
So expect a proliferation of stablecoins issued, with rapidly escalating transaction volumes across them, but some failing as others pull ahead.
We also expect innovation in design, with digital monies crafted for specific use cases - whether those are defined by jurisdiction, consumer type, product features and so on. We doubt one stablecoin will win every application, Instead, we are likely to see a proliferation of designs, and a benefit to those that can seamlessly interoperate across use cases.
It is early days, with much more innovation yet to come.
IMPLICATIONS FOR INVESTORS
So what does this mean for Blockchain Coinvestors and for our investors?
Our investment thesis continues to be on point and inevitable. We are in the process of digitizing all the world's monies, commodities and assets.
We will now see an acceleration of momentum towards the future we outlined a decade ago.
Don't be surprised at where the traction is appearing first - digital payments is the holy grail of commerce and finance and the foundation upon which other innovations can be built.
We are already invested in many of the stablecoin leaders, and are constantly looking for attractive new digital money solutions, as well as those surfacing across commodities and security assets.
It is still early days. Most of the value of this phase of innovation has yet to be captured.
Here at Blockchain Coinvestors we have just made new commitments from our latest investment strategy, into several blockchain venture funds including 1kx, 1Confirmation, Blockchain Capital, Blufolio, Castle Island, Fabric, Greenfield, LIF, and Protocol Labs with more to follow.
If you want to learn more about our investment strategies, please just contact us at IR@BlockchainCoinvestors.com.
Please do consider allocating capital with us ahead of, and now behind, this new acceleration.
Thank you for reading,
The Blockchain Coinvestors Partners
About Blockchain Coinvestors
Blockchain Coinvestors invests in blockchain businesses. Our vision is that digital monies, commodities, and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of early stage blockchain investments and access to emerging blockchain unicorns. Blockchain Coinvestors’ investment strategies are now in their 12th year and to date we have invested in a combined portfolio of 1,250 blockchain companies and projects including more than 110 blockchain unicorns. Visit us at www.BlockchainCoinvestors.com to learn more.
“We invest in blockchain businesses”