Stablecoins, Capital Markets and the Fiat/Digital Currency Divide

Finadium
November 2018

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Stablecoins are an exciting new product to enter financial markets. They are a potential bridge between the digital and fiat currency worlds that could end up providing payment systems and financial services with a new roadmap for gross settlement practices.

This report evaluates the model of stablecoins backed on a one to one ratio with government currency; one stablecoin in issuance must be backed by one dollar, euro or yen in a custodial account. These products are betting that trust, built on transparency and regulation, will bring users.

To capital markets, these products look similar to ETFs and ADRs, built as they are on collateral assets. Instead of a management fee however, issuers earn returns by reinvesting the cash holdings in safe assets, including overnight repo, US Treasuries and money market funds. At a modest 2.5% annual return, a relatively successful stablecoin could become a healthy cash generator for the issuing firm.

This report has been written for capital markets participants to understand stablecoins and their potential role in core settlements activity. Stablecoin issuers and service providers may also benefit from understanding how their products could grow to become a mainstream part of the $700 billion in annual revenues generated by the capital markets industry.

Table of Contents

  • Executive Summary
  • Stored Units of Value on the Blockchain
  • Mechanics and Trust
    • – USD Coin (USDC)
    • – Paxos Standard (PAX)
    • – The Gemini Dollar(GUSD)
  • How Issuers Make Money
  • What Could Stablecoins Do for Capital Markets?
    • – The Big Win for Stablecoins
  • Next Steps in Product Evolution
  • About the Author
  • About Finadium LLC
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