Stablecoins are crypto’s breakout profit machine, and the market’s about to get a lot more crowded

Crypto is so over the “hot new thing.” The tech now grabbing the industry’s attention has been around since 2014, is seemingly designed to be boring, and, when it’s working as intended, runs quietly in the background.

And everyone wants a piece.

Say hello to stablecoins, the cryptocurrency that’s grabbed the attention of crypto native firms, fintech giants, and even the state of Wyoming.

For the unaware, stablecoins are a type of cryptocurrency that’s pegged to the price of an underlying asset. Many stablecoins are backed (at least in part) by traditional currencies, like the US dollar. As the name suggests, stablecoins are designed to maintain a steady value. Often, this translates to one stablecoin being worth one dollar. They can play a vital role in decentralized finance (DeFi) by helping traders, borrowers, and lenders avoid crypto’s typical volatility.

And, importantly for the companies diving headfirst into the market, stablecoins can generate head-turning profits. 

New players enter the ring

The stablecoin market is currently dominated by Tether’s USDT. The company’s coin represents about 70% of the total stablecoin market cap, and it’s used around the world. But Tether’s top spot isn’t set in stone, and challengers are lining up.

On September 4, Ripple Labs CEO Brad Garlinghouse said his firm’s USD-pegged stablecoin, RLUSD, would be ready to launch within a matter of weeks. Ripple Labs, founded in 2012, focuses on cross-border payments. “We felt like there was an opportunity for a credible player already working with lots of financial institutions to lean into that market,” Garlinghouse said.

Ripple Labs first announced its stablecoin project back in April. On August 9, the company said it had deployed a beta version of RLUSD on the XRP Ledger and ethereum mainnet.

Garlinghouse clearly believes there’s room for the market to grow. In a recent interview with Bloomberg, he said that a stablecoin pegged to the Japanese yen would likely see demand. However, Garlinghouse confirmed that Ripple Labs’ upcoming RLUSD is the firm’s top priority.

Ripple’s not alone in getting in on the stablecoin action.

Fintech giant PayPal launched a USD-pegged stablecoin, PYUSD (which is issued by Paxos), last year. The market has embraced it. On August 26, the company announced that PYUSD’s market cap reached the $1 billion mark, a milestone that took 383 days to hit, Paxos recorded. It hit that mark nearly two times faster than Circle’s USDC and three times faster than USDT. It has since fallen from that high, however.

Paxos, a New York-based stablecoin issuer, joined the party earlier this summer with its own stablecoin, dubbed Lift Dollar (USDL). As designed, USDL holders earn yield, which the company said is generated from short-term liquid US government securities and cash equivalents.

Earlier this month, Datachain, a Japanese firm that focuses on crypto interoperability, in collaboration with Progmat, a startup that builds digital-asset infrastructures, announced the launch of Project Pax. Pax is a stablecoin platform designed to facilitate cross-border payments. Datachain said that some of Japan’s top banks — Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group — are involved. The platform is projected to go live next year.

But it’s not just companies eyeing their own stablecoin projects. 

At the Wyoming Blockchain Symposium, Governor Mark Gordon said that the state will release its own USD-pegged stablecoin called Wyoming stable token early next year. Gordon said the token will be backed by short-term US Treasuries and other financial instruments. As planned, the proceeds from the stablecoin will fund public schools across the state.

Not to be left out, the Trump family has been hyping a reportedly stablecoin-related project of its own. World Liberty Financial, a project promoted by Republican presidential nominee and former US President Donald Trump, said that it intends to maintain the US dollar’s reserve-currency status by supporting decentralized finance and USD-pegged stablecoins.

World Liberty Financial has drawn criticism from the industry. Nic Carter, a Trump supporter and partner at the crypto VC firm Castle Island Ventures, told Politico it was “a huge mistake” that looks like a cash grab. Last week, Trump said the project would launch on Monday, September 16. Spoiler alert: It didn’t.

The billion-dollar prize

Stablecoins have seized the industry’s attention because, when done right, they can be incredibly profitable. 

Many stablecoin issuers keep a vast majority of their funds in short-term US Treasuries and other liquid assets, and they typically don’t pass on interest earned on reserves to their customers. That can equal huge paydays. 

Then there’s Tether. 

In July, Tether released a report which said the firm had registered an eye-watering profit of $5.2 billion in the first half of 2024. Driving those profits in part was the fact that Tether keeps a sizable chunk of its reserves in US Treasuries and earns a profit on the interest it collects.

“Tether is likely the most profitable company in the world per head count,” Alex Svanevik, the CEO of on-chain analytics platform Nansen, told Sherwood News. “It’s natural that more players are entering the stablecoin category for that reason.” 

Similarly, Circle’s USD-pegged stablecoin, USDC, which is the second-largest stablecoin by market cap, holds the majority of its reserves in US Treasuries and repurchase agreements.

But relying on US Treasuries as a profit engine can carry risk along with any hopes for reward. The Federal Reserve is expected to start cutting rates at this week’s FOMC meeting, and any rate cut could translate to reduced revenues for stablecoin issuers.

A not-so-stable future?

The stablecoin industry has undergone a boom, and industry insiders have said they expect that momentum to continue. 

“Stablecoins are one of the clearest examples of product-market fit on blockchains,” Svanevik told Sherwood, predicting that the majority of dollars will be traded on-chain by the 2030s. Svanevik added that he expects more new players will enter the stablecoin space.

Potentially adding to a global stablecoin stampede: in June of last year, the EU implemented a regulatory framework for EU-pegged stablecoins. Under the Markets in Crypto-Assets Regulation (MiCA), stablecoins issuers are required to get an electronic money institution license and maintain transparent reserves. 

That could help pave the way for more euro-pegged stablecoins as, broadly speaking, the crypto industry has welcomed regulation, as it provides clearer rules of the road. Circle, for its part, has moved to embrace the EU rules. On July 1, the company announced that its USDC and EURC stablecoin were fully compliant with European laws.

It’s not alone. Last month, Banking Circle, a payments bank, announced the release of its EURI token, which it said was the first MiCA-compliant stablecoin issued by a European bank.

But while existing stablecoin issuers have generated record profits, there’s no guarantee the good times are here to stay. The Federal Reserve is expected to cut rates by 25 to 50 basis points tomorrow, and market participants are penciling in even more cuts later this year. Those cuts, plus all the new companies fighting for market share, threaten to slash existing stablecoin issuers’ profits.

Tarang Khaitan is a reporter who has written for Decrypt and The Defiant.