Are Stablecoins the Killer Use Case Everyone Missed? | Raoul Pal ft Richard Galvin

Key Concepts

• Stablecoins: Cryptocurrencies pegged to a stable asset, typically a fiat currency like the US dollar, aiming to maintain a consistent value.
• Tether (USDT): A prominent stablecoin operating on the Omni blockchain (initially) and later other blockchains, designed to facilitate dollar movement at blockchain speeds.
• Value Accretion: The increase in the value of an asset or network over time.
• Spreads: The difference between the buying and selling price of an asset on an exchange.
• On-chain Liquidity: The availability of assets and trading activity directly on a blockchain.
• Eurodollar Market: A market for dollar-denominated deposits held in banks outside the United States.
• Total Addressable Market (TAM): The total market demand for a product or service.
• KYC/AML: Know Your Customer/Anti-Money Laundering regulations, compliance procedures for financial institutions.
• Sovereign Selling: The sale of government debt, such as US Treasuries.
• Traditional Finance (TradFi): The established financial system, including banks, investment firms, and stock markets.
• Crypto Natives: Individuals and entities deeply involved in the cryptocurrency space.
• Killer Use Case: A product or service that is so compelling it drives significant adoption and growth for a technology or platform.
• Alpha Research: Investment research that aims to identify opportunities for outperformance.

Stablecoins: A Catalyst for Crypto Adoption and Traditional Finance Integration

This discussion delves into the significant role of stablecoins, particularly Tether, in the evolution of the cryptocurrency market and their impact on traditional finance. The speaker highlights how stablecoins have become a crucial utility and a strategic tool, bridging the gap between traditional financial systems and the burgeoning crypto ecosystem.

The Genesis and Evolution of Stablecoins

The speaker recounts their early fascination with stablecoins, stemming from frustrations with traditional financial processes in 2017. High spreads on cryptocurrency exchanges (e.g., Bitfinex and AEX) and the slow, unreliable nature of wire transfers prompted a search for more efficient solutions. The emergence of Tether, initially operating on the Omni blockchain, presented a groundbreaking concept: enabling dollar movement at blockchain speeds.

• Early Observations (2017): Bitcoin prices exhibited significant spreads (high teens to low 20s) across exchanges.
• Traditional Payment Friction: Wire transfers could take up to five days to clear, if they arrived at all.
• Tether's Innovation: The concept of "unitizing dollars" and facilitating their movement at blockchain speeds was seen as a "super smart" idea.
• Initial Scale of Tether: At its inception, Tether's market capitalization was estimated to be between $10 million and $20 million.
• Personal Commitment: The speaker personally minted Tether in March 2017, a decision that solidified their commitment to the crypto space due to the innovative nature of such ideas.

Stablecoins as a Utility and Strategic Tool

The growth of stablecoins, exemplified by Tether, is described as the "beam of the space," signifying their central importance. Their utility extends beyond crypto trading to strategic applications for the US dollar's global influence.

• Utility Level: Facilitating seamless and rapid transactions within the crypto ecosystem.
• Strategic Level: Enhancing the global reach and demand for the US dollar.

Penetration and Adoption in Asia

The speaker, based in Asia, has witnessed firsthand the significant penetration of stablecoins, particularly Tether, across various levels of the economy.

• Retail and Corporate Adoption: From individual users to large family-run businesses generating hundreds of millions in revenue annually.
• Business Applications: Businesses in sectors like building materials and furniture are accepting Tether for payments.
• Addressing Capital Frictions: In regions with currency controls or illiquid local currencies (e.g., Ringgit Yuan cross), stablecoins offer a solution for instant dollar-in, dollar-out transactions.
• Rationed US Dollars: Businesses often face limitations on accessing US dollars from banks, creating a demand that stablecoins can fulfill.
• Example: Thai Retail Investor: The difficulty for individuals in countries like Thailand to open US dollar bank accounts is contrasted with the ease of acquiring $10 USD via a smartphone using stablecoins. This highlights the democratization of dollar access.

The US Dollarization of the World and Treasury Demand

The adoption of stablecoins is presented as a mechanism for global dollarization, creating incremental demand for US Treasuries.

• Scott Besson's Insight: The speaker references Scott Besson's observation that stablecoins can facilitate the dollarization of the world and potentially fund trillions of dollars in short-term notes.
• Incremental Demand for Treasuries: Each US dollar held by individuals in emerging markets through stablecoins represents new demand for US debt instruments.
• Scale of Impact: While individual amounts may seem small, scaling this across the global population represents a significant "sponge" for sovereign selling in Treasuries.
• Counterpoint to Sovereign Selling: Stablecoin adoption acts as a counterbalance to the selling pressure on US government debt.

Challenges in Traditional Dollar Markets and the Eurodollar Market

The limitations of traditional dollar access, particularly in developing markets and through the Eurodollar market, further underscore the importance of stablecoins.

• Constrained Banks: Many banks globally are facing constraints, limiting access to dollars.
• Eurodollar Market Limitations: While the Eurodollar market can facilitate corporate funding, it struggles to provide individual dollar access.
• Expanding TAM: The Total Addressable Market for stablecoins is vast, encompassing the 8 billion people globally.
• Crypto User Base: With an estimated 600-700 million people using crypto, stablecoins are at the forefront of this adoption.

Stablecoins as a "Wedge" into Traditional Finance

From an investment perspective, stablecoins are seen as a "killer use case" that is effectively driving crypto into the traditional finance (TradFi) world.

• TradFi Excitement vs. Crypto Native Downturn: A notable divide has emerged, with traditional investors showing enthusiasm for crypto while crypto natives are experiencing a downturn.
• Simple Revenue Generation: Stablecoins offer a straightforward and understandable revenue-generating business model, making them palatable to traditional financial institutions.
• Commitment Committees: The business case for stablecoins is clear enough to be presented to commitment committees at major investment banks like Goldman Sachs, JP Morgan, and Morgan Stanley.
• Bridging the Gap: Stablecoins act as a "wedge" that allows crypto to penetrate TradFi, overcoming skepticism and the "crypto kind of investment coach logic" that has hindered adoption in the past.
• Goldman Sachs Conference Example: At a recent Goldman Sachs conference, "stablecoin summer" was a frequently mentioned phrase, indicating their prominence. The attendance at such events has shifted, with a higher proportion of TradFi professionals compared to crypto natives.

Driving On-Chain Liquidity and Incentivizing TradFi

Stablecoins are crucial for on-chain liquidity and are incentivizing traditional businesses to engage with blockchain technology.

• On-Chain Liquidity: The flow of assets and trading activity on blockchains is heavily reliant on US dollars.
• No-Brainer for On-Chain Growth: Bringing more US dollar liquidity on-chain is a clear and logical step for growth.
• Traditional Business Adoption: Companies like Robinhood are increasingly involved in crypto, recognizing the significant profit margins compared to traditional equities.
• Stronger Incentives for TradFi: The potential for increased profits and new revenue streams makes it increasingly attractive for traditional finance to integrate with blockchain technology.

Conclusion and Key Takeaways

Stablecoins have evolved from a niche solution to a fundamental component of the crypto market and a powerful catalyst for its integration with traditional finance. Their ability to facilitate dollar transactions at blockchain speeds, address capital frictions in emerging markets, and create new demand for US Treasuries positions them as a critical innovation. Furthermore, their clear business model and revenue-generating potential have made them a key "wedge" for traditional financial institutions to engage with and understand the value of crypto, driving on-chain liquidity and fostering broader adoption.