Original author: Arthur Hayes
Original translation: Luffy, Foresight News
When Circle CEO Jeremy Allaire had to take the “command” of Coinbase CEO Brian Armstrong, I hope that for those who trade any “stablecoin” related assets in the public stock market, this article will help you avoid losses when promoters push worthless garbage to ignorant gamblers. With this as a guide, I will begin to explore the past, present and future of the stablecoin market.
Professional cryptocurrency traders are somewhat unique in the world of capital markets: if they want to survive and thrive, they need to have a deep understanding of how money flows through the global fiat banking system. Stock investors or foreign exchange traders do not need to know how stocks or currencies are settled and transferred; the brokers they must use for trading will silently provide these services in the background.
First, buying your first bitcoin isn’t easy, and it’s not clear what the best and safest options are. At least when I started trading crypto in 2013, most people’s first step was to buy bitcoin directly from someone else via bank wire or cash, before graduating to trading on exchanges, which offer two-sided markets that allow for larger volumes of bitcoin to be traded at lower fees. But depositing fiat currency into exchanges was and still is not easy: many exchanges don’t have solid banking relationships or are in a regulatory gray area in their country, which means you can’t wire funds directly to them. Exchanges find ways around this, such as directing users to transfer directly to local agents that issue exchange cash vouchers, or setting up an affiliated business that appears to the bank account opener to have nothing to do with crypto to obtain an account and direct users to transfer funds there.
Scammers take advantage of this friction and steal fiat in a variety of ways. The exchange itself may lie about where the funds are going, and one day… poof – the website disappears along with your hard-earned fiat. If third-party intermediaries are used to transfer fiat into and out of the crypto capital markets, these intermediaries may abscond with the funds at any time.
Because there are risks in transferring fiat currencies in crypto capital markets, traders must have a detailed understanding of counterparty cash flow operations. As money moved through the banking systems of Hong Kong, mainland China, and Taiwan (a region I refer to as Greater China), I received a crash course in global payments.
Understanding the flow of money in Greater China helped me understand the business models of China and major international exchanges (such as Bitfinex), which is important because all the real innovation in the crypto capital markets is happening in Greater China, especially in the stablecoin space. Read on and you will understand why this is so important. The most successful example of a cryptocurrency exchange in the West is Coinbase, which was founded in 2012. But Coinbase’s innovation was that it established and maintained a banking relationship in one of the most hostile markets for financial innovation (the United States). Otherwise, Coinbase was just a very expensive cryptocurrency brokerage account, which was all it needed to propel early shareholders into billionaires.
The reason I’m writing another article about stablecoins is because of the huge success of the Circle IPO. To be clear, Circle is seriously overvalued, but its stock price will continue to rise. This listing marks the beginning of this round of stablecoin mania, not the end. The bubble will burst after another stablecoin issuer goes public on the public markets (most likely in the United States) and uses financial engineering, leverage, and superb showmanship to siphon tens of billions of dollars of capital away from fools. As usual, most people who put their precious money on it will not understand the history of stablecoins and crypto payments, why the ecosystem has evolved as it has, or what this means for which issuers will succeed or fail. A charismatic, trustworthy person will take the stage, talk nonsense, wave his hands, and convince you that this leveraged shit he’s selling is about to corner the trillion-dollar potential stablecoin market.
If you stopped reading here, the only question you need to ask yourself when evaluating an investment in a stablecoin issuer is: How will they distribute their product? To achieve mass distribution (i.e. the ability to reach millions of users at an affordable cost), issuers must use the channels of cryptocurrency exchanges, Web2 social media giants, or traditional banks. Without distribution channels, they have no chance of success. If you cant easily verify that the issuer can promote the product through one or more of these channels, then walk away!
Hopefully, my readers won’t waste their money in this way because they read this article and can think critically about the stablecoin investment opportunities that lie ahead. This article will discuss the evolution of stablecoin distribution. First, I will discuss why and how Tether developed in Greater China, which laid the foundation for its conquest of stablecoin payments in the Global South; then discuss how the Initial Coin Offering (ICO) boom created a real product-market fit for Tether; then explore the first attempts by Web2 social media giants to enter the stablecoin space; and finally talk about how traditional banks will get involved.
Crypto Banking in Greater China
The current successful stablecoin issuers Tether, Circle, and Ethena all have the ability to distribute their products through large cryptocurrency exchanges. I will focus on the evolution of Tether and discuss Circle to a lesser extent to illustrate that it is almost impossible for any new entrant to replicate their success.
Initially, cryptocurrency exchanges were overlooked. For example, Bitfinex was the largest non-Chinese global exchange from 2014 until the late 2010s, when it was owned by a Hong Kong-based operating company with various local bank accounts. This was great for an arbitrage trader like me living in Hong Kong, as I could wire funds to the exchange almost instantly. There was a street with almost all the local banks across from my apartment in Sai Ying Pun, and I would walk between banks to deposit and withdraw cash to reduce fees and time to fund my account, which was very important as it allowed me to turn my funds around once a day during the weekdays.
Meanwhile, in mainland China, the three largest exchanges, OKCoin, Huobi, and Bitcoin China, all have multiple bank accounts at large state-owned banks. I took a 45-minute bus ride to Shenzhen, and armed with my passport and basic Chinese language skills, I opened various local bank accounts. As a trader with bank accounts in mainland China and Hong Kong, you have access to all global liquidity, and I am sure that my fiat currency will not be lost. In contrast, I was always worried every time I wired to certain Eastern European registered exchanges because I did not trust their banking systems.
But as cryptocurrencies gained popularity, banks began closing crypto-related accounts. Every day you had to check the operational status of each bank-exchange relationship, which was very detrimental to my trading profits: the slower the money moved between exchanges, the less money I made from arbitrage. But what if you could transfer electronic dollars on the blockchain instead of through traditional banking channels? Then dollars could flow between exchanges 24/7, almost for free.
The Tether team worked with the founders of Bitfinex to create such a product. In 2015, Bitfinex allowed the use of Tether USD on its platform. At that time, Tether used the Omni protocol as a layer on the Bitcoin blockchain to send Tether USD (USDT) between addresses, which is the native smart contract layer built on top of Bitcoin.
Tether allows certain entities to wire USD to their bank accounts, and in return, Tether mints USDT, which can be sent to Bitfinex to buy cryptocurrencies. Why is there so much excitement about only one exchange offering this product?
Stablecoins, like all payment systems, only become valuable when a large number of economically significant participants become network nodes. For Tether, in addition to Bitfinex, cryptocurrency traders and other large exchanges need to use USDT to solve practical problems.
All of Greater China faces the same dilemma. Banks are closing accounts of traders and exchanges, coupled with Asian residents’ desire for dollars as their local currencies are prone to sharp depreciation, inflation is high, and domestic bank deposit rates are low. For most Chinese, access to dollars and trading opportunities in U.S. financial markets is difficult or even impossible. Therefore, Tether, a digital version of the U.S. dollar that is available to anyone with an internet connection, is extremely attractive.
The Bitfinex and Tether teams took advantage of this. Jean-Louis van der Velde, Bitfinex CEO since 2013, worked for a Chinese automaker, understood Greater China, and worked to make USDT the preferred USD bank account for Chinese cryptocurrency enthusiasts. Bitfinex, while never having a Chinese executive, built tremendous trust between Tether and the Chinese cryptocurrency trading community. So it is certain that the Chinese trust Tether. And in the southern hemisphere, overseas Chinese are running businesses and they need Tether to provide banking services.
If Tether had only one large exchange as a distributor, it probably would not have succeeded. The market structure has changed so much that trading altcoins against the dollar is only possible using USDT. Let’s go back to 2017, at the height of the ICO boom, when Tether really solidified its product-market fit.
ICO boom and the rise of Tether
August 2015 was a very important month, as the People’s Bank of China (PBOC) significantly devalued the RMB against the US dollar, and the Ethereum network’s native token ETH began trading. The macro and micro phases shifted in sync, and this was the beginning of a legend that fueled the crypto bull run from then until December 2017. Bitcoin soared from $135 to $20,000; Ethereum rose from $0.33 to $1,410.
When the Chinese dollar is in a state of panic, the macroeconomics is always favorable. Since Chinese traders are marginal buyers of all cryptocurrencies (at the time, just Bitcoin), if they get nervous about the yuan, Bitcoin will rise. At least that was the case at the time.
The capital flight was exacerbated by a massive devaluation by the Chinese central bank. Screw the yuan, give me dollars, crypto, gold, and foreign real estate. By August 2015, Bitcoin had fallen from its all-time high of $1,300 in February 2014 before the collapse of Mt. Gox to a low of $135 on Bitfinex earlier that month, when Zhao Dong, China’s largest Bitcoin OTC trader, suffered the largest margin call ever on Bitfinex, amounting to 6,000 BTC. The narrative of Chinese capital flight started the rally: BTC/USD more than tripled from August to October.
The micro level is always the most interesting place. After the launch of Ethereum mainnet and its native currency ETH on July 30, 2015, altcoins began to proliferate. Poloniex was the first exchange to allow ETH trading, and this foresight propelled it to become the industry leader in 2017. Interestingly, Circle almost went bankrupt by acquiring Poloniex at the top of the ICO boom, and they sold Poloniex to Justin Sun years later at a huge loss.
Poloniex and other Chinese exchanges have seized on the emerging altcoin market by launching pure crypto trading platforms. Unlike Bitfinex, they do not have to interface with the fiat banking system, only deposit and withdraw cryptocurrencies for trading with other cryptocurrencies. But this is not ideal, as traders instinctively want to trade altcoin/USD pairs. How can exchanges like Poloniex and Yunbi (which was the largest ICO platform in China until it was shut down by the Chinese central bank in the fall of 2017) offer these trading pairs if they cannot accept USD fiat deposits and withdrawals? Here comes USDT!
After the Ethereum mainnet is launched, USDT can be circulated on the network using ERC-20 standard smart contracts, and any exchange that supports Ethereum can easily support USDT. Therefore, pure cryptocurrency trading platforms can provide altcoin/USDT trading pairs to meet market demand, which also means that digital dollars can flow seamlessly between major exchanges such as Bitfinex, OKCoin, Huobi, Bitcoin China, and more interesting and speculative venues such as Poloniex and Yunbi.
The ICO craze gave birth to what would become a giant, Binance. Changpeng Zhao (CZ), who resigned as OKCoin CTO a few years ago due to a personal dispute with CEO Mingxing Xu, founded Binance with the goal of becoming the worlds largest altcoin exchange. Binance has no bank account, and to this day I dont know if you can deposit fiat currency directly to Binance without going through any payment processor. Binance used USDT as its banking channel, quickly became the go-to place to trade altcoins, and the rest is history.
From 2015 to 2017, Tether achieved product-market fit and built a moat against future competitors. Due to the trust of the Chinese trading community in Tether, USDT is accepted on all major trading venues. It is not used for payments at this time, but it is the most efficient way to transfer digital dollars in and out of the crypto capital markets.
By the late 2020s, exchanges were having extreme difficulty maintaining bank accounts. Taiwan became the de facto crypto banking hub for all of the largest non-Western exchanges (which control most of the global crypto trading liquidity) because a handful of Taiwanese banks allowed exchanges to open USD accounts and somehow maintain correspondent banking relationships with large US banks like Wells Fargo. However, this model began to unravel as correspondent banks demanded that these Taiwanese banks expel all crypto customers or lose access to global USD markets. As a result, by the late 2020s, USDT was the only way for USD to be transferred at scale in crypto capital markets, solidifying its position as the dominant stablecoin.
Many Western players have raised funds with cryptocurrency payments as a selling point and have created competitors to Tether. The only one that survived is Circles USDC. However, Circle is at a clear disadvantage because it is a US company based in Boston and has no connection with cryptocurrency trading in Greater China. Circles unspoken message is: China = scary; the United States = safe. This message is ironic because Tether has never had a Chinese executive, but it has always been associated with the Northeast Asian market and todays Southern Hemisphere market.
Social media entry
Stablecoin mania has been going on for a long time. In 2019, Facebook (now called Meta) decided to launch its own stablecoin, Libra, with the appeal being that Facebook could offer dollar bank accounts to the entire world, except China, through Instagram and WhatsApp. This is what I wrote in my June 2019 article on Libra:
With Libra, Facebook is getting into the digital asset industry. Before we get into the analysis, let’s be clear: Libra is neither decentralized nor censorship-resistant, and it is not a cryptocurrency. Libra will destroy all stablecoins, but who cares? I don’t feel bad for projects that somehow believe there is value in some unheard-of sponsor creating a blockchain-based fiat market fund.
Libra could put commercial banks and central banks in a difficult position. It could reduce their role to a regulated digital fiat currency warehouse. And that is exactly what these institutions should be expected to do in the digital age.
Stablecoins launched by Libra and other Web2 social media companies should have stolen the limelight, as they have the most customers and almost perfect knowledge of their preferences and behaviors.
Finally, US politicians took action to protect traditional banks from real competition in payments and foreign exchange. Here’s what I said at the time:
I have no sympathy for the foolish comments and actions of U.S. Representative Maxine Waters on the House Financial Services Committee, but the concerns of her and other government officials are not based on altruistic feelings for the public, but on fear of disruption of the financial services industry that has allowed them to enrich themselves and remain in power. The fact that government officials are eager to condemn Libra tells us that the project has potential positive value for human society.
That was in the past, but now the Trump administration will allow competition in financial markets. Trump 2.0 has no love for the banks that deplatformed his entire family during the Biden administration. As a result, social media companies are restarting projects to embed stablecoin technology within their platforms.
This is good news for social media company shareholders. These companies can completely cannibalize the payment and foreign exchange revenue streams of the traditional banking system. However, this is bad news for any entrepreneur creating a new stablecoin, as social media companies will build everything needed to support their stablecoin business on their own. Investors in emerging stablecoin issuers must be careful to see if their promoters claim to be working with or distributing through any social media company.
Some other tech companies are also jumping on the stablecoin bandwagon. Social media platform X, Airbnb and Google are all in early discussions about integrating stablecoins into their business operations. Mark Zuckerberg’s Meta, which has unsuccessfully experimented with blockchain technology in the past, has been in discussions with crypto companies about introducing stablecoins for payments, Fortune reported last month.
The demise of traditional banks
Whether banks like it or not, they will no longer be able to continue to earn billions of dollars in revenue each year by holding and transferring digital fiat currencies, nor will they be able to earn the same fees by conducting foreign exchange transactions. I recently spoke to a board member of a large bank about stablecoins, and they said, We are screwed. They believe that stablecoins are unstoppable and point to the situation in Nigeria as proof. I didnt know the extent of USDT penetration in the country before, but they told me that even after the central bank tried to ban cryptocurrencies, a third of Nigerias GDP was carried out in USDT.
They go on to point out that since USDT adoption was a bottom-up rather than top-down approach, regulators were powerless to stop it. By the time regulators noticed and tried to take action, it was too late because adoption had already caught on among the population.
Even though every large traditional bank has people like them in senior positions, the bank organism does not want to change because it means the death of many cells (i.e. employees). Tether has no more than 100 employees, but can scale to perform key functions of the entire global banking system by leveraging blockchain technology. In contrast, JPMorgan Chase, the worlds best-run commercial bank, employs a little over 300,000 people.
Banks are facing a critical juncture, adapt or perish. But what’s holding them back from streamlining their bloated workforces and delivering the products needed for the global digital economy is prescriptive regulation, i.e., how many people must be hired to perform certain functions. Take my experience at BitMEX trying to open a Tokyo office and get a crypto trading license, for example. The management team considered whether they should open a local office and get a license to do some limited types of crypto trading in addition to their core derivatives business. The cost of compliance is an issue because you can’t use technology to meet the requirements, and the regulators stipulate that for each compliance and operational function listed, you must hire a person with the appropriate level of experience. I don’t remember the exact number, but I think it took about 60 people, each making at least $80,000 per year, totaling $4.8 million per year to perform all the prescribed functions, all of which could be automated with a SaaS vendor for less than $100,000 per year, and with fewer mistakes than hiring fallible humans. Oh… and in Japan, you can’t fire anyone unless you close the entire office.
The problem globally is that banking regulation is a job creation program for a highly educated population that is educated in bullshit and not what really matters, and they are just highly paid clock punchers. As much as bank executives would like to cut headcount by 99% and increase productivity, as regulated institutions they cannot do so.
Stablecoins will eventually be adopted in limited form in traditional banks, which will run two parallel systems: the old slow expensive system and the new fast cheap system. The extent to which they are allowed to truly embrace stablecoins will be determined by the prudential regulators in each office. Remember, JPMorgan is not one organism, but a JPMorgan branch in each country is regulated differently, and data and people are often not shared between branches, which makes company-wide technology-driven rationalization impossible. Good luck, bankers, regulation protects you from Web2, but will kill your survival in Web3.
These banks will certainly not work with third parties on the technical development or distribution of stablecoins, they will do it all in-house, in fact, regulators may explicitly prohibit this. Therefore, this distribution channel is closed to entrepreneurs who build their own stablecoin technology. I don’t care how many proofs of concept an issuer claims to be working on for traditional banks, they will never lead to bank-wide adoption. So if you are an investor, when a stablecoin issuer claims that they will work with traditional banks to bring the product to market, run.
Now that you understand the difficulties new entrants face in gaining access to stablecoin distribution channels at scale, let’s explore why they would attempt the impossible. Because being a stablecoin issuer is incredibly lucrative.
The profitability of stablecoin issuers depends on net interest income (NIM). The cost basis of the issuer is the fees paid to holders, and the income comes from returns on cash investments (such as Tether and Circle investing in Treasury bonds) or some kind of crypto market arbitrage (such as Ethena). The most profitable issuer, Tether, does not pay any fees to USDT holders or depositors, and also earns all net interest income based on the level of Treasury yields.
Tether is able to keep all of its NIM because it has the strongest network effect, and customers have no other choice of USD bank accounts. Potential customers won’t choose other USD stablecoins because USDT is widely accepted. To give a personal example, how I pay for my ski season in Argentina. I ski in rural Argentina for a few weeks each year, and when I first went in 2018, payments were a hassle if vendors didn’t accept foreign credit cards, but by 2023, USDT has been adopted. My guide, driver, and chef all accept USDT as payment, which is glorious because I couldn’t pay in pesos even if I wanted to: bank ATMs max out $30 in pesos per transaction, and charge a 30% fee. Long live Tether, damn criminals. It’s great for my employees, who receive digital dollars stored on crypto exchanges or in mobile wallets that can be easily spent on goods and services at home and abroad.
Tether’s profitability is the best advertisement for social media companies and banks to create their own stablecoins, neither of which have to pay fees for deposits because they already have a solid distribution network, which means they can get all the NIM, so this could become a huge profit center for them.
Tether makes more money every year than this chart suggests. This chart assumes all AUC (issued and outstanding) is invested in 12-month Treasuries, showing that Tethers returns are highly correlated to US interest rates. You can see that returns jumped significantly from 2021 to 2022 as the Fed raised rates at the fastest pace since the early 1980s.
Above is the table I published in my article Dust on Crust Part Deux , which uses data from 2023 to prove that Tether is the bank with the highest per capita profit in the world.
Unless the stablecoin is owned by a captive exchange, social media company, or traditional bank, distributing stablecoins can be very expensive. Bitfinex has millions of users, so Tether has millions of customers from the start. Tether does not have to pay issuance fees because it is partially owned by Bitfinex, and all altcoins can be traded against USDT.
Circle and any subsequent stablecoins will have to pay for distribution through exchanges in some way. Social media companies and banks will never work with a third party to build and operate a stablecoin, so crypto exchanges are the only option. Crypto exchanges can build their own stablecoins, like Binance’s attempt at BUSD, but ultimately many exchanges decide that building a payment network is too hard and a distraction from the core business. Exchanges require equity in the issuer or a portion of the issuer’s NIM to allow trading of their stablecoin, but even then, all crypto/USD trading pairs will likely still trade with USDT, meaning Tether continues to dominate. This is why Circle had to cozy up to Coinbase, the only major exchange not in Tether’s orbit because its customers are primarily American and Western European. Tether was being lambasted in the Western media as some kind of foreign-created scam until U.S. Commerce Secretary Howard Lutnik took a liking to Tether and banked it through his firm, Cantor Fitzgerald. Coinbase’s existence depends on being able to please the U.S. political establishment, so an alternative had to be found. Hence, Jeremy Allaire.
The deal is that Circle will pay Coinbase 50% of its net interest income in exchange for distribution in the Coinbase network.
New stablecoin issuers are in a very bad situation, there are no open distribution channels, all major crypto exchanges either own or work with existing issuers Tether, Circle and Ethena, social media companies and banks will build their own solutions. Therefore, new issuers must return a large portion of their NIM to depositors to try to pry them away from other stablecoins with better adoption. Ultimately, this is why investors will lose a lot of money on almost all publicly listed stablecoin issuers or technology providers by the end of this cycle, but this will not stop the party, lets dig into why investors judgment is blinded by the huge profit potential of stablecoins.
Narrative
There are three business models for creating crypto wealth besides holding Bitcoin and other junk coins. They are mining, operating exchanges, and issuing stablecoins. In my case, my wealth comes from my holdings in BitMEX (a derivatives exchange), while Maelstrom (my family office)s largest holding and largest absolute source of return is Ethena, the stablecoin issuer of USDe. In 2024, Ethena went from nothing to the third largest stablecoin in less than a year.
The stablecoin narrative is unique in that it has the largest and most obvious addressable market of the puppets of traditional finance (TradFi). Tether has proven that an on-chain bank that simply holds people’s funds and allows them to transfer them can be the most profitable financial institution per capita ever. Tether has succeeded in the face of enforcement actions from all levels of the US government. What would happen if US authorities were at least less hostile to stablecoins and allowed them a degree of operational freedom to compete with traditional banks for deposits?
Now let’s consider the current situation: US Treasury officials believe that stablecoin issuance could grow to $2 trillion. They also believe that USD stablecoins can be the vanguard of advancing/maintaining USD hegemony and acting as price-insensitive buyers of US Treasuries. Wow, that’s a strong macro advantage. Even more surprising, don’t forget that Trump has a deep hatred for big banks because they deplatformed him and his family after his first presidency. He has no intention of stopping the free market from providing better, faster, and safer ways to hold and transfer digital dollars. Even his sons have joined the stablecoin team.
This is why investors are so eager for investable stablecoin projects. Before we get into how I translate this into capital investment opportunities, let me first define the criteria for investable projects.
The issuer could list in some form on the U.S. public stock market. Next, the issuer would launch a product for trading the digital dollar; this isn’t some foreign thing, this is “American.” That’s it, and as you can see, there’s a lot of room for creativity here.
Road to Destruction
The most obvious IPO issuer is Circle, they are a US company and the second largest stablecoin issuer by issuance. Circle is currently severely overvalued, remember Circle gives 50% of its interest income to Coinbase, yet Circles market cap is 39% of Coinbase. Coinbase is a one-stop crypto finance shop with multiple profitable business lines and tens of millions of customers worldwide.
Should you short Circle? Absolutely not! Maybe if you think the Circle/Coinbase market cap ratio is problematic, you should buy Coinbase. Although Circle is overvalued, when we look back on the stablecoin craze in a few years, many investors will wish they had just held Circle and at least they would have some money left.
The next wave of listings will be Circle copycats, which will have higher price/AUC ratios on a relative basis than Circle, and may never surpass Circle in revenue. Promoters will tout meaningless TradFi credentials, trying to convince investors that they have the connections and capabilities to disrupt traditional banks in global USD payments by partnering with them or leveraging their distribution channels. The ruse will work, and issuers will raise huge amounts of money. For those of us who have been in the trenches for a while, it is hilarious to watch clowns in suits being able to trick the public into investing in their shit companies.
After the first wave, the scale of the fraud depends entirely on the stablecoin regulation enacted in the U.S. The more freedom issuers get in terms of what backs their stablecoins and whether they can pay yields to holders, the more financial tools they can use to hide the ugliness. If you assume a light or even no-touch stablecoin regulation regime, then you might see a repeat of Terra/Luna, where issuers create some kind of fake algorithmic stablecoin Ponzi scheme where the issuers can pay holders high yields that come from leveraging some of the assets.
As you can see, I have relatively little to say about the future, as the distribution channels for new entrants are already closed and there is no real future.
But don’t short, these new stocks will make short sellers lose a lot of money. The macro and micro are synchronized, as former Citigroup CEO Chuck Prince said when asked about his company’s involvement in subprime mortgages: “When the music stops, it’s complicated in terms of liquidity. But as long as the music is playing, you have to stand up and dance. We are still dancing.”
I’m not sure how Maelstrom will dance, but if it makes money, we’ll do it.
Any opinions expressed in this article are the author’s personal opinions and should not be used as the basis for investment decisions, nor should they be interpreted as a recommendation or suggestion to participate in investment transactions.
