• Notwithstanding regulatory uncertainty, stablecoins that kick out cash to customers are here and vying for the many trillions held in money-market funds and dollar deposits globally.
• With the potential to make payments on the internet more cost effective, PayPal sees a decoupling of the payment capability of stablecoins from the yield-generating capability of money-market funds.

Stablecoins have long played a vital role in the cryptocurrency industry, a vehicle to shuttle money around the digital economy, sidestep volatility without having to liquidate portfolios into fiat currencies or post as collateral for trading.

Their usefulness in payments is fairly obvious: They seek to replicate a conventional currency like the U.S. dollar or euro in a blockchain-powered form, serving as digital stand-ins for something consumers are already comfortable with.

But huge amounts of money are stashed in them, generating gigantic profits for stablecoin issuers – who traditionally share none of that bounty with token holders.

Tether's USDT is the third-largest cryptocurrency in the world with $112 billion in assets, according to CoinDesk data; Circle's USDC is No. 6 at $32 billion.

That money is invested in assets considered supremely safe like U.S. Treasuries, earning billions of dollars a year in yield for those companies. This makes them crypto-era versions of an old product in traditional finance: money-market funds. The difference: Money-market issuers share the interest they earn from their investments in bonds and other fixed-income instruments with their customers.

Until recently the lack of competition in a low interest rate environment meant that stablecoin issuers not only could keep all the interest they earned on the collateral because the users and distribution partners didn't really care, said Rob Hadick, general partner at venture capital firm Dragonfly.

"But with interest rates rising, the stablecoin issuers have become extremely profitable and it's only natural that those partners, like the exchanges, and the power users will start asking for more of a cut of the revenue," Hadick said.

To be fair, regulations prohibit stablecoin issuers from returning yield to users in the U.S., and the soon-to-arrive Markets in Crypto-Asset (MiCA) regime will do the same in Europe.

But blockchains span the planet and stablecoins that kick out cash to customers are here. Competition has already started to heat up with firms like Ondo, Mountain, Agora and others promising a more equitable economic model. Just last week, Paxos introduced a UAE-regulated yield-generating one called the Lift Dollar.

Payments play

Stablecoin issuers giving something back in the form of a money-market yield is a sensible strategy and a potential worry for traditional dollar-pegged tokens like Circle and Tether, which make up the bulk of collateral posted for trading purposes.

But there are other ways goodwill can be shared with users, such as some of the cost efficiencies gained from using a purely payments-focused stablecoin, carrying out transactions on a grand scale. This is the aim of fintech giant PayPal's addition to the stablecoin space: its PYUSD token.

The coming years could see a decoupling of the payment capability of stablecoins from the yield-generating capability of money-market funds, according to PayPal SVP and head of blockchain, Jose Fernandez da Ponte.

"I think that in a few years from now you're going to see corporate treasurers keeping liquidity in a money-market fund, and the moment that they need to make a payment, switch that money-market fund to a stablecoin and make the payment, because those are built for purpose," Fernandez da Ponte said in an interview.

Clearly, PayPal seems to be more focused on honing PYUSD's ability to do faster, cheaper payments – PYUSD is now integrated with the high-throughput Solana (SOL) blockchain, for instance – than worrying about how its locked up value level stacks up against USDT and USDC.

But not everyone thinks a payment-focused stablecoin like PYUSD will necessarily thrive in the face of central bank digital currencies (CBDCs) and yield-sharing tokens, a view taken recently by analysts at Bank of America.

Despite the fact PYUSD is small in comparison to the likes of Tether and Circle, it would likely be unwise to bet against PayPal given its long reach into fintech and payments via applications like Xoom and Venmo.

"Let's be honest, who in crypto has better distribution than PayPal already?" said Dragonfly's Hadick. "It's unlikely in my mind that PYUSD proliferates DeFi [decentralized finance], or that it proliferates other [non-Paypal] applications. But it reduces the burden on PayPal's back office operations and makes them more capital efficient, such that they improve their own margins by 50 basis points and perhaps pass off some of that to the customer."

Dollar base

Stablecoins as a payment method will have enduring value and are very important, said Charles Cascarilla, the CEO of stablecoin issuer Paxos. But there's a much larger world out there when considering the $6 trillion or so in money-market funds plus some $17 trillion of deposits at banks, and many trillions more in overseas money-markets funds and dollar deposits, he said.

"Payment assets are always going to be a subset of the broad deposit and dollar base," Cascarilla said in an interview. "So there's only so much that's going to be in payment stablecoins since many people are going to want to be in something that's generating a return."

Hadick agrees that over time, pretty much all trading in both traditional finance and crypto is going to move towards tokenized yield-bearing collateral. "The benefits of being able to earn yield while increasing capital efficiency and do intraday settlement will be too much for any major institution to ignore," he said.