What is a Stablecoin? A Concise Guide

I. Core Concepts:

1. Origin: Emerged from the early demand in the crypto industry for stable pricing tools, addressing the trading challenges caused by the high volatility of Bitcoin and others.

2. Definition: A cryptocurrency pegged to fiat currency value, with its core advantage being deep integration with DeFi and other blockchain projects. As traditional financial institutions venture into the RWA field, stablecoins have made groundbreaking progress in payment and market applications. They not only serve as pricing tools in the cryptocurrency market but are gradually replacing the payment functions of traditional fiat currencies.

3. In terms of category, stablecoins themselves are a form of RWA (Real World Asset tokenization). Their uniqueness lies in the fact that the peg is a special asset—real-world fiat currency. For example, the EU's MiCA legislation distinguishes between two types of stablecoins: one pegged to a single asset (such as the Euro) and another pegged to multiple assets (such as the Euro and gold). Other RWA types include bonds, real estate, securitization of corporate assets (STO), and even charging stations, etc.

4. Essentially, stablecoins are on-chain fiat tools, mapping the value of real-world assets onto blockchain networks. As a typical RWA (Real World Asset tokenization), they can interact peer-to-peer with crypto assets like Bitcoin, whereas traditional fiat currencies cannot be on-chain, lacking blockchain scalability.

II. Two Types of Stablecoins:

1) Fiat-collateralized Stablecoins:

a. USDC, issued by Circle; holds a U.S. payment license, 1:1 reserve mechanism, with clients mainly being exchanges like Coinbase. Issuance scale of 120 billion. The public chain platform used is Ethereum.

Operational Mechanism: Institutional clients wire dollars, after which Circle generates equivalent USDC on the blockchain and deposits dollars into regulated accounts like those at BNY Mellon (banks charge custody fees), earning interest from U.S. Treasury bonds (interest rate 4.5%).

b. USDT, issued by Tether; holds a U.S. payment license. Issuance scale of 150 billion, using the TRON public chain platform.
PS: 100% reserve mechanism: requires collateral, issuing 1 dollar stablecoin requires 1 dollar cash or U.S. Treasury bond as collateral; low risk, mainly from issuer regulation or U.S. Treasury default. Currently, only 1:1 full collateral and over-collateralization exist.

2) Algorithmic Stablecoins:

Luna, relies on algorithms to regulate its stability, lacks underlying assets, and lacks physical guarantees. During the last Bitcoin surge, algorithmic stablecoins faced crises and were gradually phased out.

III. Market Share by Collateral Asset:

Dollar stablecoins account for 95%;

IV. Differences between Stablecoins and Other Virtual Currencies:

BTC: Essentially digital gold, due to scarcity; more inclined towards value storage, whereas stablecoins are more inclined towards payment or value measurement. Simply put, when the market is poor, you would convert BTC to stablecoins, similar to avoiding stock declines by converting stocks to cash.

Ethereum: Digital oil, due to extensive application expenditure.

Trump Coin: Monetization of celebrity credit.

Stablecoins: Close to real-world measurement units.

Central Bank Digital RMB: Semi-centralized design (central bank can see transaction data, but commercial banks cannot), as a payment tool unable to cross chains, stablecoins have both payment plans and large cross-chain conversion functions. The system is completely independent. It will not become a true application like Bitcoin; it is more like an upgrade concept of existing currency.

As an on-chain fiat currency: Stablecoins should be the future trend, such as the dollar, Hong Kong dollar, and euro. Inclusive institutions may manage Bitcoin because it involves their own interests, such as converting to dollars or euros for transactions. The government does not support the use of Bitcoin by the public but has not completely banned it, otherwise, it may lead to hidden dangers, such as turning to overseas transactions. This contradicts China's current foreign exchange control and foreign trade economic situation.

V. Stablecoin Market Size Drivers:

a. Growth in the number of players: If there are 10 issuers similar to Tether, the scale may reach 1.5 trillion.

b. Expansion of application scenarios: Currently, stablecoins are mainly used for speculation or hedging, future expansion may include consumer payments, with the scale possibly increasing 100 times. Currently, VISA, Master, etc., all support stablecoin payments, and malls can accept them. Switzerland can even use USTD to pay taxes. The Philippines can use USTD to pay social security.

Merchants accept stablecoin payments mainly because a) low payment costs, on-chain instant settlement, shortening supply chain account periods; 2) expanding the crypto customer base, Microsoft, Tesla have already integrated.

c. Financial market leverage: Through financial tools or U.S. stock investments, the scale may increase 500 times; ordinary investors: through exchange stablecoin lending, earning interest income, with high rates reaching 10%.

d. Cross-border payments: For example, usage in places like Nigeria, the scale may increase 100 times.

Currently, legitimate foreign trade applications account for only 10% of Tether's (150 billion scale). For example, due to foreign exchange control, Nigerian importers need to pay a premium to exchange USDT to pay Hong Kong traders, who then convert it to RMB or HKD to complete the transaction. However, traditional banks are still mainstream (accounting for 95%) due to higher security. Stablecoins may involve illicit funds or tax risks, with current foreign trade penetration at about 5%.

In the future, as regulation improves, the exchange path between stablecoins and fiat currencies will become clearer, and traders will be more willing to use them. The role of traditional banks and SWIFT may weaken, and stablecoins may become an alternative solution.

There are already cross-border payment cases, such as e-commerce customers converting dollars to USDT to buy Bitcoin. However, applications in foreign trade are limited, especially in areas lacking local bank accounts, where trust and cost issues exist. Although countries like Nigeria have demand, the scale has not yet formed.

VI. Role of Stablecoins:

a. On-chain fair pricing tool; can serve as an entry token for cryptocurrency market trading;

b. Value bridge between different blockchains;

c. Promote the crypto industry from niche to mainstream applications: Improve cross-border settlement efficiency,

d. Meet the demand for dollar assets in developing countries: Inflationary countries like Argentina and Turkey, due to currency depreciation, hold dollar assets to achieve personal asset preservation.

VII. Risks of Stablecoins:

Risks are decreasing. Early algorithmic stablecoins (such as USDT) once collapsed due to mechanism issues, but most stablecoins now are backed by fiat or high-liquidity assets, offering higher security. The main risk may come from regulatory changes or issuer compliance issues, but the overall trend is towards more stability.

Initially, there were various types of stablecoins, including air coins issued through algorithms, which triggered specific algorithm mechanisms when prices fell; there were also stablecoins pegged to assets like Bitcoin, but these were not true stablecoins because Bitcoin's liquidity fluctuates greatly, easily causing spiral declines. For example, the UST incident in Korea led to many investors losing everything, as its high annual yield (40%, 25%) attracted users to convert USDT or Bitcoin to UST, ultimately resulting in zero or theft.

Such cases are gradually decreasing because regulation requires stablecoins to adopt a 1:1 fiat custody mechanism. Tether's (USDT) bank custody has always been opaque, but future issuer risks will be more controllable. Other risks include institutional bankruptcy restructuring or operator absconding, but these are unrelated to the core mechanism of stablecoins. For example, if Binance collapses, all assets (including Bitcoin) on the platform may be lost.

Governments strengthen control capabilities through license regulation, such as retrieving KYC data, transaction records, and annual audits. Stablecoins will become more transparent, and government regulation will be stricter. Issuers need to restrain partners (such as DEX exchanges), forming a regulatory chain. In the future, exchanges may directly apply for licenses, shortening the regulatory path.

VIII. Industry Chain and Business Model:

1) Upstream: Issuers and service institutions

a. Issuers: Earn interest by purchasing U.S. Treasury bonds with collateralized dollars (main profit method), mainly commercial banks, investment banks, and payment giants (VISA, Master, and Paypal). Issuers are likely to be restricted in the future, with only those obtaining licenses able to issue. Issuers are core, with high barriers and high profits (profit through purchasing U.S. Treasury bonds);

Issuers occupy high-value ground, but exchanges may also attempt to issue stablecoins. For example, Binance cooperates with Circle to issue stablecoins in Europe (since banks issue alone, users are few, compliance barriers are high, thus cooperating with exchanges), but due to tense relations with the U.S., they have not issued in the U.S. (due to custody issues).

Business barriers: a. Capital, just an entry threshold, not a barrier; b. License business, the future is definitely a license business, very important for compliance; c. Ecosystem.

But the core competition point here is still the ability of issuers to develop downstream ecosystems, with very strong network effects.

Improve the circulation scenarios and speed of their issued stablecoins. Either like JD with supply chain scenario ecosystems, or Paypal with payment ecosystems, the stronger the application scenarios, the stronger the circulation of their issued stablecoins, the more funds settled through this business, and the more interest.

Introduction of Core Players

Tether was the first to discover the demand for stablecoins, so its ecosystem is the most extensive. However, it is not as compliant as Circle. Tether's annual profit is 13.7 billion USD.

Circle entered late, expanding scenarios by paying some traffic fees to Coinbase, with Coinbase leading the use, and the ecosystem gradually prospering. Submitted a listing prospectus, with annual profit of 160-170 million, because all traffic fees were paid to Coinbase.

Future competition between the two: But subsequent competition may depend on the ability to obtain licenses, as each U.S. state requires a license.

Circle: Strong shareholder background—IDG, ZTE, Everbright, CreditEase. Logically, Circle's growth potential should be higher. Circle is also very scarce in the secondary market. The hardest-to-get New York state license has been obtained by Circle. They are now also trying to obtain a Hong Kong license.

Tether: But the financial company Cantor Fitzgerald, owned by former U.S. Secretary of Commerce Ross, holds 5% of this company, so it also has strong backing. The company says it will issue stablecoins fully compliant with U.S. standards in 26-27.

b. Custodian Banks: For example, BNY Mellon custodies stablecoins issued by Circle, charging custody fees, which may amount to hundreds of billions; fixed fees, stable but low profits.

c. Custodians and Audit Firms: Similar to traditional finance, responsible for asset custody and auditing. Audit institutions can also earn millions of dollars annually.

2) Midstream: Public Chains/Consortium Chains

Stablecoins need to be issued relying on blockchain. Public chains profit through transaction fees.

Public chain platforms like Ethereum, Solana, TRON, etc., because stablecoin transactions require miner fees, public chain parties will earn a portion of the revenue. Profit sharing through Gas fees;

Business barriers: Currently, when regulatory legislation restricts issuers, it can constrain issuers to choose specific public chain platforms, so the status is also unstable.

And stablecoins can be issued on multiple chains, when receiving USDT on Binance, you can choose Ethereum, Solana, or BNB. Different chain addresses are different, once stablecoins are received, the source chain is no longer distinguished. But when transferring out, the chain still needs to be chosen, so competition between chains is very fierce, especially in terms of compliance.

Although Ethereum is technically slower, it is highly recognized in the European and American markets; Solana is faster and more popular in Asia. In the future, public chain regulation will be conducted indirectly through issuers rather than directly regulating the chain itself. For example, Hong Kong may require the use of specific chains when issuing stablecoins to meet regulatory requirements.

Public chain acceptance: There is already regional preference. European and American users tend to use Ethereum, while Asian and African users prefer chains like Solana. Exchanges have low technical barriers to access chains and cheap fees, so they are widely used. In the future, public chains will become one of the competition points for sovereign countries.

Hong Kong will not allow all stablecoins to be issued on Ethereum because it is uncontrollable. But completely restricting it is also unrealistic because Ethereum is widely recognized. Therefore, Hong Kong may indirectly influence chain choice through licenses or issuer constraints.

3) Downstream: Exchanges, Payments, Cards

a. Exchanges: Provide stablecoin trading services, earning fees and interest on demand deposits. Binance buys a large number of stablecoins and earns fees through trading; competition is fierce

b. Decentralized projects: Such as lending protocols, using stablecoins as base assets.

c. Payment companies and wallets: Manage cryptocurrency assets, charge transfer or exchange fees. In the future, they may be similar to Alipay, charging merchants fees.

IX. Regulatory Trends:

Countries are legislating to regulate stablecoin issuance. In the future, stablecoin issuance is destined to be a license business. Europe has MICA, Hong Kong has just legislated, and the U.S. has also just legislated. The essence of legislation is to stabilize stablecoin pricing rights.

1) Legislative Regulatory Starting Points:

a. Issuers have sufficient asset backing, preventing air coins;

b. Regulate anti-money laundering;

c. Meet audit requirements;

d. Essence of legislation: Compete for stablecoin pricing rights, as issuers need to purchase U.S. Treasury bonds with reserves.

2) Situation in Various Countries

a. Emerging Market Stablecoin Issuance Demands:

a. Mainly due to currency depreciation and foreign exchange control, providing a way to purchase dollar assets.

b. Cross-border remittances: High fees for Mexicans remitting money back home, low fees for digital currencies.

c. Similar to Russia: Can bypass the bank SWIFT system, cryptocurrencies can bypass sanctions, after large-scale application of stablecoins, it will overturn the traditional currency system divided by national borders;

b. U.S. Legislative Promotion Demands:

a. The core motivation is to consolidate the dollar's position, this process is likened to establishing the Bretton system in the digital economy era.

b. Supplement the demand for U.S. Treasury bonds; Tether should be the seventh largest U.S. Treasury bond purchaser globally.

c. European Legislative Promotion:

Through the MICA legislation, requiring digital asset service providers to obtain licenses by the end of 2024. Institutions like Binance issue euro stablecoins compliant with regulations (100% collateralized euros). The U.S. has also recently introduced legislation, implementing a dollar stablecoin license mechanism by the end of the year. But currently, MICA has only approved 20 companies to issue stablecoins.

X. Hong Kong Stablecoin and Legislative Situation

1) Hong Kong Promotes Stablecoin Legislation (Completed by the end of May):

Policy Logic: In principle, if China's economy is poor, regulation will only become stricter, controlling capital outflow, while asset on-chain equals global circulation, which is unfavorable for China's exchange rate control.

Therefore, Hong Kong stablecoins may serve as offshore RMB channels, not linked to onshore RMB, only piloted in Hong Kong, also helping the nationalization of offshore RMB. Essentially, if the demand for Hong Kong dollar stablecoins grows, then the demand for purchasing Hong Kong bonds will also grow.

China's Stablecoin Promotion Purpose: Avoid U.S. sanctions, trade with Russia, etc.; strengthen regulation of issuers.

Legislation for physical asset on-chain: Hong Kong has legislated to promote stablecoin development, drawing on the experience of dollar stablecoins and the framework of the EU's MiCA legislation. Hong Kong may require 1:1 reserves and allow financial institutions or payment institutions to participate, but the final regulations may impose higher requirements on issuer qualifications. The goal is to enhance financial influence, similar to the role of dollar stablecoins in U.S. Treasury bonds and U.S. stocks.

2) Main Functions of Hong Kong Stablecoins:

a. Cross-border settlement; b. Interbank settlement; c. Facilitate the purchase of dollar assets.

Current Issues: Hong Kong lacks quality public chains in the entire industry chain. Moreover, the global demand for Hong Kong dollar stablecoins is insufficient.

3) Specific Operations:

Users: HK users can exchange Hong Kong dollars for USDT/USDC through licensed exchanges (HashKey/OSL), then trade assets like BTC, reducing exchange rate losses. Users use stablecoins from different issuers for cross-border payments, which may be interoperable with WeChat, Alipay, etc., in the future.

Issuers: Regulated by licenses, 1) pay a 25 million HKD deposit; 2) can only operate in a 1:1 HKD collateral mode; 3) algorithmic stablecoins are prohibited.

Currently, only three issuers are approved: a. JD's Coin Chain; b. Circle Innovation Technology; c. Standard Chartered; meanwhile, a sandbox mechanism is established, allowing unlicensed institutions to participate in testing to promote innovation.

Application Scenarios:

a. Commercial payments: Nigerian merchants can complete cross-border trade settlements through Hong Kong dollar stablecoins, promoting the internationalization of the Hong Kong dollar while avoiding local currency fluctuation risks.

b. Stablecoins can also be used for investments in financial products like U.S. Treasury bonds, forming a complete ecological loop.

c. After the Hong Kong dollar is pegged to the dollar, due to the dollar's vast financial market (including U.S. Treasury bonds and stocks), users can indirectly invest in stocks through dollar stablecoins. Although not real stock purchases, but through mechanisms like contracts for difference, this essentially promotes the use of the dollar and provides more income channels for stablecoin users.

4) Motivation for HK Institutions to Apply for Licenses:

a. Layout in high-growth areas

b. Expand international influence

c. Ecosystem synergy;

5) Sources of Profit:

a. Invest settled funds in U.S. Treasury bonds;

b. Token minting fees (Tether charges 0.1%);

c. Payment scenario profit sharing, Visa card consumption charges a 3% fee and rebates;

d. Extend to financial scenarios like wealth management through stablecoins.

Risk Disclosure and Statement of this Article:Dolphin Research Disclaimer and General Disclosure