While the internet has transformed virtually every aspect of our lives, how we move money remains largely unchanged. Today, we can text, call, and send anything to anyone in the world in seconds. Yet, sending money across different banks or countries is still cumbersome, and costly, involves multiple intermediaries, and often takes days to settle.

Today’s money is electronic, but not truly digital.

Online payment processes and money movement still rely on legacy systems and multiple intermediaries — card networks, payment processors, and intermediary banks, and each takes a cut, adding time, cost, and complexity. The average SWIFT transfer settlement time takes three to five days. Domestic transfers cost $28 on average, or $44 for an international transfer. And Visa or Mastercard cross-border fees can reach up to 7%.

But what if sending money was as easy as sending a text? Enter stablecoins: internet-native money.

What are stablecoins?

Stablecoins are digital currencies pegged to an external reference, like the US dollar, other fiat currencies (government-issued currencies not backed by a commodity, such as gold), real-world assets, or another digital currency. Transactions are recorded on a digital ledger, typically a blockchain, enabling them to be traded 24/7 between any two wallets on the same network. These transactions settle in milliseconds, with fees a fraction of those in traditional finance.

Fiat-collateralized stablecoins, which are the focus of this research, are issued by a central entity holding a reserve of fiat currency (for example, US dollars) equivalent to the stablecoins in circulation. When a user deposits fiat currency, the entity mints an equivalent amount of stablecoins and transfers them to the user’s wallet via a blockchain transaction.

To maintain stability, the entity ensures that each stablecoin is backed 1:1 by the fiat reserve in custody, usually a money market fund, which is regularly audited for transparency. Users can redeem stablecoins for the underlying fiat currency, prompting the entity to burn the redeemed stablecoins and adjust the supply accordingly. This mechanism ensures the stablecoin’s value remains pegged to the fiat currency.

A means of exchange

Stablecoins represent a shift towards a more cash-like digital currency. Cash is efficient, universal, and simple to use. Stablecoins use a distributed ledger, meaning that transactions and details can be recorded in multiple places at the same time. This reduces the number of intermediaries involved in the process.

While stablecoins are the first significant application of tokenized assets, in theory, all assets could eventually be settled in the blockchain – a database that maintains all records and transaction data and that cannot be retroactively altered. Stablecoins are a good example of cryptocurrency’s ultimate aim: to protect individuals against currency devaluation, reduce the cost of global payments, and build infrastructure for a more open, accessible financial system.

Stablecoins are not just a new asset but potentially a radical new platform: the foundation for future fintech innovation and a redesigned financial system.

The vision and the reality

Stablecoins have already reached a $135bn market cap with three early use cases: crypto hedging and off-ramping, inflation protection, and remittance. This has led to the creation of two highly profitable businesses: Tether and Circle. Tether, the largest stablecoin globally, has surpassed a $100bn market cap, generating $6.2bn net profit last year. Circle, the second largest, has a $30bn market cap and generated an estimated $1.5bn revenue last year. However, their success does not mean there isn’t space for other companies to make their mark.

Despite stablecoins making up less than 15% of the broader crypto market, they typically represent around 60–70% of traded volumes. And the transaction volume of stablecoins, at $11.1tn, was nearly on par with Visa’s $11.7tn in 2022.

Furthermore, companies including Visa are starting to use stablecoins, too. Visa is piloting using stablecoins to settle payments. PayPal has launched its own USD stablecoin. Telegram has embedded a wallet into its chat platform, meaning you can now transfer money via stablecoins as quickly as a text. EQT’s portfolio company Volt is using stablecoins to enable real-time global payments.

Despite these advancements, the stablecoin market remains in its infancy. Only about seven million people have transacted with stablecoins, while more than half a billion people live in countries with 30%+ inflation. There are very few stablecoin issuers, a handful of traditional depository institutions (banks) facilitating on and off-ramping, and even fewer major liquidity providers. Stablecoins make up less than 2% of total money supply globally. There is a huge market still to go after.

But what if stablecoins aren’t stable?

The instability argument stems from the risk of a stablecoin losing its peg to the underlying asset. This has occurred several times with leading providers, particularly those using algorithmically backed and on-chain asset-backed models. Even for Circle and their stablecoin, USDC, maintaining the peg has proven challenging, as when USDC lost its peg to the USD following the collapse of Silicon Valley Bank in 2023.

This stability risk implies slower adoption, as both consumers and institutions will be more cautious and less likely to exchange their fiat currencies for stablecoins. However, this issue is more about trust than technology. Many countries have successfully pegged their currencies for decades despite occasional disruptions. Denmark, for example, has pegged the Danish krone to the Euro under the European Exchange Rate Mechanism. Despite fluctuations, or even losing the 2.25% peg at times, the Danish Central Bank and Government have consistently acted to reassure trade partners of the currency’s stability, maintaining the peg since 1999. Similarly, the Swiss Franc deliberately broke its peg with the Euro in 2015. Both countries have healthy and growing economies with continued positive growth in net trade balances. Ultimately, whether a currency is pegged or not comes down to trust.

Why now?

Regulation will be the big unlock.

We are seeing a wave of green light, led by Europe and Singapore. In 2023, European regulators took key steps to provide clarity on stablecoins through the Markets in Crypto-Assets Regulation (MiCA), with full implementation due in December 2024. The UK is expected to follow suit with a parliament vote in the first quarter of 2025.

Similarly, Japan, Hong Kong, UAE, Nigeria, and Switzerland are establishing regulatory frameworks for stablecoin adoption in retail and business payments.

Things are even changing in the US, where regulation has been hesitant if not outright disapproving. The US has found product market fit with USD-denominated stablecoins, and with HR 4766 expected to pass through Congress in 2025, stablecoins could soon integrate into the domestic payment regime with bank charters and payment licenses. This regulatory clarity will enable new startups and allow existing financial institutions to work with stablecoins.

While there are a lot of unanswered questions about how regulations will develop and what technical challenges might arise, the innovation potential is seemingly vast. Stablecoins could present a moonshot opportunity to rebuild the world’s economic infrastructure as internet-native technology.