Circle (CRCL 6.33%), the issuer and operator of the USD Coin (USDC +0.00%) stablecoin, recently posted a strong fourth-quarter report that crushed analysts’ expectations. Its revenue and reserve income surged 77% year over year, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) skyrocketed 412%.
During the conference call, Circle’s CEO, Jeremy Allaire, predicted stablecoins would “drive the greatest acceleration of economic activity” in “human history”. That’s a bold claim, but several long-term catalysts support that bullish outlook.
Stablecoins are cryptocurrencies that are usually pegged to the U.S. dollar. It might seem pointless to buy a stablecoin that trades at $1 rather than appreciating, but stablecoins can be held without a bank account and used to settle payments and cross-border transfers.
Unlike banks, stablecoins can be accessed 24/7 and facilitate near-instant cross-border transfers. They also charge much lower fees than slower, traditional wire transfers. Those advantages make stablecoins attractive to people in countries with high inflation, currency devaluation issues, and limited access to U.S. dollars. They’re also becoming popular options for international businesses, cross-border freelancers, and other workers.
Stablecoins can also be staked on centralized exchanges and decentralized finance pools to earn higher yields than conventional dollar-based savings accounts. However, banks have been pushing the U.S. to ban those yields through revisions to the stablecoin-regulating GENIUS Act — a move that major crypto exchanges and Circle adamantly oppose.
Most stablecoins aim to maintain a peg to the U.S. dollar, but not all are backed by U.S. dollars. The world’s most valuable stablecoin, Tether (USDT +0.01%), holds a mix of cash, commercial paper, and other assets in its reserves to stay pegged to the U.S. dollar. Smaller stablecoins, like Dai (DAI +0.26%), are backed by other crypto assets rather than cash.
Those structures are riskier because an abrupt collapse of those underlying assets could cause the stablecoin to suddenly lose its peg to the U.S. dollar. That’s what happened during the Terra-LUNA crash in 2022, which wiped out the TerraUSD stablecoin.
Circle addresses those concerns by backing its USD Coins with cash and U.S. Treasuries held through regulated custodians. That makes it completely centralized, since it’s only issued by Circle and its reserves can be directly regulated by the U.S. government.
That might make USD Coin less appealing to people seeking a fully decentralized stablecoin shielded from government intervention. Yet that makes it an ideal partner for financial companies looking to safely accelerate transactions for their users.
Visa (V +0.34%), which helped design Circle’s Layer 1 (L1) Arc blockchain, already allows its banking partners to settle card transactions in USD Coin rather than through its own payments network. Intuit (INTU +2.30%) also embedded USD Coin into its top financial products — including TurboTax, QuickBooks, Credit Karma, and Mailchimp — to settle their payments and refunds. Bermuda has even been working with Circle and Coinbase (COIN 4.24%) to move all of its tax and government payments “on-chain” so they can be paid in USD Coins.
That support indicates growing interest in replacing U.S. dollars with stablecoins to facilitate faster, cheaper, and more convenient money transfers. With near-instant payments, lower working capital requirements, and programmable payouts via smart contracts (for payroll and contracts), businesses can improve operating efficiency and expand more rapidly.
The growing adoption of stablecoins among consumers should also reduce payment friction and make it easier for e-commerce platforms to expand into developing markets with volatile local currencies. Those benefits could all fuel a significant acceleration in global economic activity.
Therefore, Allaire’s rosy prediction might eventually come true. If that happens, Circle’s stock could soar even higher as it challenges conventional banks and other financial institutions.
