Stablecoin Report Series (Part 1): Are Stablecoins Bigger than Web3?

Original Article Title: "Stablecoin Series Report (Part 1) Is Stablecoin Greater than Web3?"

Original Article Author: XinGPT, AI Researcher

For professionals in the Web3 industry, stablecoins seem to be a term as familiar as it gets. Since the early days of crypto trading, depositing to buy stablecoins has been a standard procedure.

So why was the first stablecoin, Circle, able to achieve a staggering threefold increase in value within two weeks of its listing?

The most significant catalyst came from the United States Senate, which on June 17th voted on and approved the GENIUS Stablecoin Act. Let's analyze the key points of this act and why it was able to pass the Senate and is likely to be formally implemented.

Key Regulatory Points of the Stablecoin Act are as follows:

1. Dual Regulatory System: The GENIUS Act establishes a federal and state "dual-track" regulatory framework, setting clear operational rules for the stablecoin market. Stablecoin issuers must choose between a federal or state-level regulatory path based on their scale. Large-scale issuers (issuances exceeding $100 billion) must adhere to federal regulations to ensure compliance and transparency.

2. 1:1 Reserve Requirement: The act mandates that all stablecoins maintain a 1:1 reserve ratio, limited to high-liquidity, secure assets. The act explicitly allows reserve assets to include: US dollar cash, insured bank demand deposits, US Treasuries maturing within 93 days, repurchase/reverse repurchase agreements, government money market funds investing solely in the aforementioned secure assets, and tokenized forms of the legal assets mentioned. Issuers are prohibited from using high-risk assets such as cryptocurrency as reserves.

3. Disclosure and Audit Mechanism: To enhance market transparency, stablecoin issuers must disclose their reserves monthly and undergo independent audits. This is aimed at increasing public trust in the stablecoin system and mitigating run risks.

4. Licensing and Compliance Requirements: Issuers must apply for licenses from regulatory bodies and meet banking supervision requirements. The transition period is 18 months, during which existing stablecoin markets must complete compliance adjustments.

5. Anti-Money Laundering and Sanctions Compliance: Stablecoin issuers must comply with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations, establish Know Your Customer (KYC) and monitoring systems to prevent illicit fund flows.

6. Consumer Protection: The bill stipulates that in the event of the issuer of a stablecoin going bankrupt, holders of the stablecoin have priority rights to repayment, ensuring that their reserve assets are not misappropriated.

The second provision reveals a piece of information that is likely the main reason why the stablecoin bill received significant attention during the Trump administration: Debt Monetization.

Senator Bill Hagerty's blueprint to "strengthen the dollar's hegemony" is quickly being realized by the capital markets: According to a Standard Chartered Bank analysis, if the bill is passed, the global stablecoin market capitalization could skyrocket to $20 trillion by 2028, creating what is essentially a behemoth buyer dedicated to feasting on short-term U.S. Treasuries out of thin air. Even more astonishing is that the two major issuers, Tether and Circle, currently hold $166 billion in U.S. Treasuries, with Wall Street analysts predicting that in the coming years, stablecoin issuers will surpass hedge funds to become the third-largest player in U.S. debt, behind only the Federal Reserve and foreign central banks. Treasury Secretary Scott Bessent has done the math: by the end of this decade, if the stablecoin market reaches trillions of dollars, private sector demand for U.S. Treasuries could drive down government borrowing costs by several basis points—essentially providing a discount on the U.S. Treasury's financing costs using hot money from the crypto world. More subtly, this demand is fundamentally "gold-plating" U.S. Treasuries globally, reinforcing the dollar's reserve currency status through the stablecoin pipeline. It's no wonder President Trump gave the following assessment of the bill, "Get it to my desk as soon as possible, the sooner, the better."

While the final passage of the bill still requires approval and passage by the House of Representatives before being submitted to the President, market expectations suggest that the implementation of the stablecoin bill is a done deal.

How Will the Passage of the Stablecoin Bill Affect Investments?

Let's first look at Circle: Based on Circle's current market capitalization of around $50 billion, a projected profit of $160 million in 2024, and an optimistic estimate of a full-year profit of $490 million in 2025 based on Q1 financial reports, resulting in a price-to-earnings ratio of over 100 times. However, this assumption is based on USDC's circulation volume nearly tripling by the end of 2024, reaching a scale of $120 billion by June 2025, which would require doubling from the $60 billion base in June 2025, whereas Tether USDT's circulation volume is only $150 billion. This financial projection clearly presents an almost impossible task for Circle.

But the market is not stupid, why such a high premium for Circle?

Bitmex co-founder and Ethena stablecoin investor Arthur Hayes put it this way:

A U.S. Treasury official believes that assets under stablecoin management (AUC) could grow to $20 trillion. They also believe that dollar-pegged stablecoins could become a sharp weapon, both promoting/maintaining U.S. dollar hegemony and serving as buyers insensitive to Treasury prices. This is an absolutely significant macro tailwind.

The dream of the market is that stablecoins are almost portrayed as Trump's way of upholding U.S. dollar hegemony, enhancing the attractiveness of U.S. Treasuries, and further driving the financial leverage for the Fed to cut interest rates. For such a leader in the race, is it too expensive to sell you $50 billion? Forget about the price-to-earnings ratio, even at $100 billion, one would not dare to say it's expensive.

What are other investment opportunities in the stablecoin mega trend?

If stablecoins are seen as cars, the automobile industry chain can be divided into car manufacturing (OEMs), car sales (distribution channels), car parts, car maintenance, car servicing, etc.; in the context of stablecoins, the industry chain includes stablecoin issuance (stablecoin issuer), stablecoin distribution (stablecoin channels), stablecoin use cases (services), stablecoin technology support (parts), etc.

Stablecoin issuance is already a race dominated by the top players, with Tether occupying the entire underground dollar (black market) market and actively working to legitimize its operations. Circle is currently far ahead in the compliant market, but will face significant competition in the future. Payment giants (PayPal, Stripe) have their own channels, and distribution costs are likely to be less than half (for a detailed cost analysis of Circle, please refer to my previous post at https://x.com/xingpt/status/1930305013404053909); the USD1 from the Trump background team is closely linked with the universe, and is expected to take a share from both Tether and Circle.

I prefer to consider other issuers as extensions of the distribution channel, such as multinational logistics and e-commerce companies. The cost-effectiveness of issuing their stablecoins may not be as high as earning a revenue share using mainstream stablecoins.

For startups, I have a more positive view of stablecoin service providers in niche scenarios, similar to Square in traditional payments, focusing on stablecoin acquiring in specific scenarios and so on. If I just tell merchants that my transaction fees are 90% lower than traditional card acquiring, it is much easier for them to accept than convincing them to adopt a stablecoin payment called USDC.

As for the selection of specific scenarios, **I believe that small-value cross-border transactions are a pain point. Remote small-value remittances via SWIFT cost $10-30 and take 1-3 business days to arrive. In comparison, stablecoins offer near-instantaneous transaction times and almost negligible transfer costs, improving the user experience by more than 10 times.** Channel partners who can address this specific scenario demand may become the "Paypal of the stablecoin era."

Technical service providers, such as custody and Regtech, are, in my opinion, a relatively low ROI entrepreneurial direction. Compliance costs are high, operations are heavy, and profit margins are low. However, this sector is very stable, countercyclical, and suitable for defensive entrepreneurs looking to earn stable cash flow, or for large companies' internal incubation projects like Ceffu and CB Custody.

Apart from Circle, what other opportunities are there in the secondary market for stablecoins?

The most direct benefit of Circle's increased market value is Coinbase. Before the unequal treaty is abolished, Coinbase can enjoy a windfall by collecting 50% of the channel fees.

Other newly listed stablecoins may also have the potential to replicate Coinbase's hype. In addition, the progress of brokerage firms, payment processors, and card networks in joining the stablecoin network will play a role:

For the cryptocurrency industry, the growth of stablecoin volumes indicates a significant increase in on-chain DeFi asset supply, benefiting leading DeFi lending protocols like Aave and Morpho. It also means that profit layers like Ondo and Maple Finance, especially enterprises that tokenize U.S. Treasury bonds on-chain, have the most direct advantage.

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