The three major takeaways from stablecoins are that they are fast, global, and low cost. But why are they low cost? Thus began our quest to dive into the economic ecosystem of stablecoins.

When creating material for our workshops or roundtable meetings, we’re always thinking about how to give slides the “Glenbrook treatment” – how do we get past the headlines and down to fundamentals?

In this Fanning the Flames episode, Russ Jones and Yvette Bohanan take you behind the scenes to show the “making of” our new stablecoin economics slide. Listen in as they discuss the points of monetization and key revenue streams in the stablecoin value chain, and address questions around practical usage and the evolving landscape.

Take a deeper look at stablecoins (and other industry trends) at our upcoming 1-day Advanced Payments workshop on December 4th in San Francisco. Space is limited – enroll today!

 

 

 

 

 

Yvette Bohanan: Hello, I’m Yvette Bohanan, a partner at Glenbrook and your host for this episode of Payments on Fire.

Russ, welcome to Fanning the Flames with me.

Russ Jones: Thank you, Yvette. Always glad to join you and talk about, hold on, drum roll. Payments.

Yvette Bohanan: Payments. That’s right. Here we are once again. And, we were chatting, this is a little bit of inside baseball in a way, Fanning the Flames, because I think people know we have do a lot of education, we do a lot of speaking, and we have Advanced Topics workshop coming up in person.

Russ Jones: Yes, in San Francisco in December.

Yvette Bohanan: In December, just weeks away. Conveniently between Thanksgiving and the holidays of December. So, we have lots happening here.

And one of the things that happens twice a year is we have our Merchant Payments Roundtable, which for those that aren’t involved directly, is a gathering and facilitated session with some of the largest omnichannel or e-commerce and omnichannel merchants out there in the world.

Russ Jones: Right.

Yvette Bohanan: We do it in the US. We have another one that we partner with a company in Europe to do. And this Fanning the Flames basically came out of work we were doing to refresh material for the Advanced Payments workshop, for the MPR, and all that around one of the topics that’s getting a lot of press these days, stablecoins.

Russ Jones: Yeah. I don’t know where it is on the hype curve, but it’s somewhere on that hype curve.

Yvette Bohanan: Even people hyping it are saying maybe we’re on a hype curve. But it really, it’s a frenzy. Like dot.com and like this sort of exuberance around the potential of everything, right?

Russ Jones: Right.

Yvette Bohanan: We’ll be bringing some more stablecoin guests on. We have some folks in the queue that’ll be coming up on future podcasts too, to talk about this. But we were digging in to give an update on this for our education and our workshop and our facilitated meetings and all that. We did some slides, and then you came back to me and you said, We’re missing a slide. And I think that’s what got really interesting.

Russ Jones: Yeah. So what we do in our education program, what we do in the roundtable and what we do in all of these workshops is we get beyond the headlines.

Yvette Bohanan: Right.

Russ Jones: We don’t care that, I hate to say this, but we don’t care that Salesforce is in a partnership with Stripe. Salesforce, great company, Stripe, great company. When I think about these workshops and the roundtable, you’ve heard me say this probably too many times, is I like to see us give topics the Glenbrook treatment. And what that’s about is getting down to fundamentals, getting past the headlines.

So you look at stablecoins and it’s, the three key takeaways is like, it’s instantaneous, it’s global, and it’s incredibly low cost. So some of these, you can believe at face value. You can say, okay, I, I can see why it’s fast. Because you’re writing, writing and reading things to a blockchain. And I can see why it’s global, because these blockchains float on top of the global internet. You can just accept that as probably a truism.

But it’s low cost. Well, why is it low cost? And that was kind of the stumbling block in our one hour overview of what’s happening in the stablecoin space at our roundtable meeting was, how can you talk about this with any credibility without really diving into the economics in stablecoins? And really proving, first proving to ourselves, let alone talking to someone about it, but proving to ourselves, where are the points of monetization, where are the points of friction? Where do fees get paid? What’s the economics of the whole stablecoin ecosystem? That’s sort of what was behind that.

Yvette Bohanan: Exactly, and there’s always two questions we try to get in in a podcast interview with anyone who’s in the industry doing stablecoins. One is, do we need 2000 or whatever it is now of these things? Why does everyone need a stablecoin? It seemed like there was a period of time in the news that everyone and their brother was coming out with the fact that they were going to have their own stablecoin.

Russ Jones: They’re like websites.

Yvette Bohanan: And we would we pose this question to people a lot, and the answer is sort of squishy, right? It’s a little squishy.

And the other one is economics. How are you making money on this? Right? And we ask that question as part of the Glenbrook treatment or whatever with everyone when we have a briefing or whatever.

Because if you’re a business, you’re going to have to make money somehow. There has to be some viability to what you’re doing. And everyone likes to say they’re the lowest cost provider. Everyone in cross border likes to point to Western Union as like this case study of egregious fees and say that they’re lower or whatever.

So here we were trying to figure this out and, very hard to get a straight answer, right?

Russ Jones: Yeah. And sometimes you have to do the math yourself to work through the numbers and understand under what scenarios does something have a cost advantage? Under what scenarios is it more expensive than the alternatives? Things of that nature. So, we were looking at, I guess there’s two real things here.

One is, we were looking at the value chain and the points of monetization. How do people make money in stablecoins? And the reverse is how do you spend money from an expense point of view in stablecoins? And there were really five key categories of revenue streams involved in stablecoins.

You had what’s called on-ramp fees to convert fiat currency into stablecoin currency. FX transaction, I’ll point that out. You had transaction fees that are paid to exchanges to initiate stablecoin transfers, but also to move stablecoins from one blockchain to another blockchain, to move them from one currency to another currency. And here it’s, stablecoin is pegged against a fiat currency. And the word, the very name has stable in it. So that kind of conditions your mind.

But there’s FX fees all, all over this, all over stablecoins because you’re using a a stablecoin pegged to the US dollar. Your counterparty wants to get paid in a stablecoin pegged to the Euro, FX fee to convert USD pegged stablecoins into Euro pegged stablecoins.

Yvette Bohanan: Right.

Russ Jones: So, there’s transaction fees exchanges make, there’s the so-called gas fees that the blockchain validators earn as a revenue source.

Yvette Bohanan: Right.

Russ Jones: And, and I think you were kind of surprised by the gas fees, right?

Yvette Bohanan: Well, yeah. I mean, this is worse than surge pricing on rideshare, right? But it’s a lot like that, right?

And just to be clear, when we’re talking about FX, I don’t think they call it FX fees in the literature. And I think that was a point of confusion too. It’s on ramp, off ramp kind of descriptions. Part of getting into this was understanding who is doing what in that. You kind of glossed over this like, Well, you need to know the stakeholder value chain. But getting to that point in this exercise, I just have to say, was a little elusive.

Russ Jones: It took us more than a couple hours, maybe a couple days, to really get a value chain that we thought-

Yvette Bohanan: Was credible.

Russ Jones: Credible. Yeah.

Yvette Bohanan: And didn’t mask the important revenue streams and parties.

Russ Jones: Right, right.

Yvette Bohanan: Then you get to the surge pricing, right, which is very algorithmic. I don’t know. How would you say in terms of transparency, on a scale of one to five, to someone using stablecoins, how transparent is it to the end user about surge pricing?

Russ Jones: That’s a good open-ended question. The investigation I did looked pretty transparent, but-

Yvette Bohanan: Mm-hmm.

Russ Jones: My hunch is that that was just the exchanges that I sampled and you could just like in payments where you find sometimes pricing is transparent, sometimes it’s bundled. I have a feeling you could find exchanges that work with a bundled model where there’s just a transaction fee and it’s kind of lost in the noise what it really pays for.

Yvette Bohanan: And so these gas fees can fluctuate and they fluctuate based on demand. That’s why I kind of say surge pricing.

So when you need the transaction to occur, if you can take your time, it’s great. But if you need it tomorrow, just like anything else in logistics, it’s going to cost you.

Russ Jones: So you had the, the gas fees, you had off-ramp fees on the receiver side if they want to take their stablecoins back into fiat. And then you had yield income earned by stablecoin issuers and typically revenue shared with exchanges.

So a lot of economic levers here and it’s worth sort of teasing that all apart to understand who’s charging what, who’s earning what revenue for what actions, for what value. And that’s what we do in these workshops. And that’s certainly what we’re going to be sharing and going through in our Advanced Payments workshop in December.

The other thing that I always sort of question is, going back to fundamentals, somebody says, Oh, it’s low cost. Is it low cost because it’s low cost? Or is it low cost because you have an expensive marketing team, you know?

So when we were doing the analysis in the stablecoin ecosystem, we were sort of comparing three different approaches to moving money cross-border. Once you get past a couple things, it’s pretty obvious that the big opportunity for stablecoins is not for domestic payments, but for cross-border payments.

Yvette Bohanan: Some things never change. Right.

Russ Jones: Yeah. Right. I made a note to myself last week. Try to understand why somebody in the US would want to get paid in stablecoins. I’m not saying they don’t want to, I’m just saying, trying to understand why, right.

Anyway, economically, we were comparing, you’re moving money from one country to the other country. We were doing US to Europe, we were doing US to Singapore, and we’re doing US to Malaysia, kind of tiering super mainstream currency, second tier currency, exotic currency type of thing. Then we were looking at the cost to do this over, if you’re working with Coinbase as an exchange, if you’re working with Wise as a fintech specializing in super low cost cross-border FX, and we looked at using Visa rails to do it, pervasive Visa rails to do it.

It was really sort of eye opening in a lot of ways that there’s really not that much difference between transferring funds in stablecoins across currency here now. US to Malaysia, kind of didn’t matter whether you’re doing it in stablecoins or you’re doing it using Wise. They’re both about the same cost. If I was going on vacation though, I’d take my Visa card with me. I’d get a ton better exchange rates than either Wise or USDC to Malaysian stablecoin transfers.

Yvette Bohanan: And to be fair, it would be any credit card, right?

Russ Jones: Yeah. Right, right,

Yvette Bohanan: So what was the biggest, was that the biggest aha out of this? Because when you were explaining this slide, and we have an hour’s worth of content on stablecoins, but you were on this slide with the roundtable folks for a good long while going through the economics, were there light bulbs going off in the room? Was this an aha moment for people?

Russ Jones: It was sort of like they wanted to understand their ability to control all of this stuff. So as an example, can I schedule stablecoin transfers in such a way that they’re delayed until gas fees hit a certain level and then they automatically flow? They’re very operational. They’re very much coming from the perspective of how does this work in the real world? How would this work for me in the real world? So most of their questions were along those lines.

But the overwhelming sort of takeaway from all this stuff is, you want to eliminate where the revenue occurs and where expenses are incurred. So you eliminate on-ramp fees, you eliminate off-ramp fees, and you eliminate FX jumping from one pegged stablecoin to another pegged stablecoin.

So stablecoins are pretty low cost, when it’s like, I’m paying you in USDC, and I don’t care what you want. I’m paying you in USDC, and I’m going to let you, if it turns out you want it in a fiat currency, that’s your expense. If it turns out you want it in a different pegged stablecoin, that’s your expense. If you could push the FX cost onto your partner or onto your supplier or onto your affiliate, if you can push those FX costs onto others, then stablecoins look pretty low cost in a lot of ways.

The real interesting thing to me is that the stablecoin advocates are all coming from the perspective of, Well, you know. 90% of all stablecoins are pegged to the US dollar. If we just worked in US dollar, if everyone in the world just worked in US dollar pegged, stablecoins, this thing would have very minimal friction.

And they’re right. But that’s not reality. When you look at Swift transfers around the world, which I think reflect, the reality to large extent, something like 48% of them are done in US dollars.

Yvette Bohanan: So is this the hope of all of those people that were creating their quote unquote own stablecoin? Is this one of the hopes that they’re trying to materialize is, If I am a huge retailer and I have my own stablecoin and I have to pay thousands of suppliers or hundreds of suppliers, and I’m paying in my own, globally, I have now shifted something that can be a huge cost on my P&L month to month or a huge fluctuation in my profits to somebody else.

Russ Jones: That’s part of it, I think.

Yvette Bohanan: It could be the sort of unspoken, below the rah rah of the X, Y, Z is offering their stablecoin, there’s efficiency that they’re seeking from, call it a treasury perspective, call it a supply chain perspective, whatever you want to call it, of like shifting the burden, right? The burden doesn’t go away necessarily, it just shifts.

Russ Jones: That’s exactly right, I think. I’m going to use a word here, Yvette, that’s going to make you smile. Power dynamics. And so if the two, the sender and the receiver, the counterparties, if they’re sort of co-equals and they negotiate what currency they’re working under, under what conditions, you have one scenario. You have a completely different scenario if the power dynamics favor one of the two parties dramatically. If you are going to be my supplier, you are going to get paid in my currency,

Yvette Bohanan: Right.

Russ Jones: And vice versa in other scenarios.

Yvette Bohanan: Right. And it is interesting because there’s a lot of dynamics around the world for small, tiny merchants too, where how they have to pay their suppliers influences how they want to be paid by their customers.

Russ Jones: Yeah.

Yvette Bohanan: And you see that implicating or affecting adoption of any particular payment method all the time. And we could be talking about small bottegas in small rural town somewhere in the world, or we could be talking about multinational global companies. In some kind of broad way, it doesn’t matter.

And so when you go back to who would want to use this, your question of who practically is going to use this and the power dynamics of it, there’s still a lot of open questions, right? We can understand it better now, but we are not necessarily convinced, maybe, that this is really going to be adopted as easily as people are thinking, right? And who wins and loses in this, the fluidity of this supply chain is a lot different than cards.

Russ Jones: Yeah. I don’t think cards are really, that’s a little bit orthogonal here. What I would add to the mix here that makes it all the more challenging is the landscape in the payments industry is never static. The incumbents are not set in their ways. They’re always innovating, they’re always making adjustments or always responding to competitive pressures in the marketplace.

From an alternative point of view, Swift, at their Sibos conference two weeks ago, they were making all sorts of announcements and they were claiming that 90% of swift payments arrive at the receiver’s bank within 10 minutes.

Yvette Bohanan: Right.

Russ Jones: To some extent that sort of undercuts the instant payment aspect of stablecoins. It doesn’t eliminate it. Maybe stablecoins still have an advantage on Saturday night or something like that. But for everyday transactions in the middle of the week, international wires aren’t that slow anymore.

Yvette Bohanan: That’s right.

Russ Jones: And they’re not that expensive if you are a major corporation. If you’re Russ Jones the consumer going into their local bank to send a wire to the other side of the world, yeah, they’re expensive. But for big corporations in the aggressive pricing that they demand, the status quo has gotten a lot faster and a lot lower cost. And that closes the window, that the stablecoin ecosystem has to, to some extent. And then on top of that, Swift also announced that they were going to be developing a blockchain based product with the top 30 banks in the world so that Swift transactions could, bank to bank transfers, incumbent to incumbent in fiat dollars could happen 24 by 7 by 365 on a blockchain. So the marketplace is pretty fluid.

Yvette Bohanan: I think it is and I think the power dynamics are fluid. I don’t think they’re going to be consistent. There’s going to be a lot of different ways of doing this because you have quite a toolbox with the technology right.

Russ Jones: Yeah.

Yvette Bohanan: See Swift doing this with the top 30 banks. You see private companies working on their own stablecoin issuance and how they’re setting up their supply chain payments and their treasury optimization. You have the exchanges doing different things. You have tech providers doing different things. This is going to play out in a very multifaceted way, I would think. It’s just not rigid.

And that was really what I was getting at with cards. It’s like cards have settled over 60, 70 years, whatever it’s been that they’ve been around. You kind of know, in a predictable way, a lot of the economics around cards, how things are going to play out. It’ll evolve, you keep adding different players in the value chain, but you kind of know what you have to work with. I think here it’s a little bit nascent in a lot of ways in terms of being predictable, the predictability of what’s going to happen. Which is why we keep updating all the material, right?

Russ Jones: I know. So I know this is going to change in the next six weeks.

Yvette Bohanan: Yes. Don’t send the slides to print just yet.

Russ Jones: Right. We’re going to keep our ink dry for now. Print them at the last minute. But, I’m really looking forward to having this conversation at our Advanced Payments workshop in San Francisco in December and sharing our findings with all of the participants.

Yvette Bohanan: Me too. It’s been fun watching the slides evolve and it’ll be fun sharing them to all the participants. So, Russ, thank you very much. Appreciate your time. Always fun to chat with you about what’s going on in payments.

Thank you, Yvette.

And to all of you listening, thank you so much and we will see you next time. Until then, bye for now.