The Stablecoin Wars: Why Your Bank Might Become the Next Visa

From Facebook’s failed Libra to Wall Street’s looming crypto arms race - Web3 101 podcast breaks down how stablecoins could transform the future of money

Web3 101 is growing into one of the best crypto podcasts. If Wu Blockchain were the CNN for crypto - it recaps breaking events of the moment; Web3 101 would be the Atlantic or the New Yorker of crypto. The hosts are not only knowledgeable but also know how to ask the right questions in the right way (a major weakness for many podcast hosts).

This episode talks about stablecoin and how it might impact the financial industry.

(The below notes represent the views of the guest speaker)

Future outlook

• In the next 3-5 years, many US financial institutions will launch their own stablecoins, very similar to the 60s-70s, when they beat each other in issuing credit cards. They will leverage stablecoin and their credibility to develop new ways of financial transaction settlement.

• In the beginning, banks will form consortiums. They will support a common stablecoin among each other. Fierce tribal competition follows. Then the industry will see consolidation through mergers and acquisitions until a few largest stablecoins dominate the industry, just like Visa and Mastercard of today.

• U cards abound at the moment. These U card issuers, the crypto institutions, all need to partner with traditional banks as sponsors, to connect to the Visa/Master network.

Facebook's failed Libra experiment

• Libra was trying to replace multiple world currencies via a consortium model. Maybe that was the wrong direction. Esperanto never got enough traction for a similar reason. Had Libra tried to focus on the US dollar only, like USDT/USDC is now doing, it might have already succeeded.

• The US regulator imposed tremendous pressure on Facebook, leading to the failure of Libra.

• Blockchain people lean toward the progressive left and support open source, multiple currencies, and decentralization. But the current global trends are on the other end of the spectrum - localization instead of globalization and every country is out for its own interest.

• The rise of Solana, which has deep roots in the US and is unapologetically famous for being centralized, is a strong indication of this trend.

• The death of Libra spells the end of globalization.

Visa

• Visa was started by Bank of America. Its power and influence far exceed Visa the company itself. It represents the collective interests of a republic federation that consists of 22,000 traditional financial institutions.

• Circle was trying to sell itself to Visa in 2021.

• A few banks can easily settle transactions among themselves. When the number of transaction parties grows, there comes the need for a centralized counterparty (Visa) that acts as a hub to route traffic to every other node in the network. That said, when this number grows into hundreds of thousands or millions, the centralized nature of the Visa network may become a bottleneck. That's where peer-to-peer blockchain technology comes in.

• The rise of Visa and Mastercard was helped by circumstantial historical reasons that cannot be replicated. It's now very difficult if not impossible to develop a network outside of America of such critical mass, not even for Alipay or UnionPay.

• The Visa network is like a trade union or cabal from a feudal society. Many rules of the game have precipitated in the network over decades of negotiations. It has strong institutional inertia. Technology, despite its innovative and disruptive nature, may not be able to easily change that.

Payment process & competition

• It consists of issuer, acquirer, and network (in descending order of percentage of profit they take)

• Costs comparison

  • Visa/Master, 1%

  • Alipay, 0.7%

  • Blockchain, <0.3%

• Apple Pay, Google Pay, WeChat Pay, and AliPay, are all potential challengers to Visa.

• Visa is an open loop. It doesn't own anything (neither an issuer nor an acquirer). It doesn't issue its credit card, nor does it try to acquire merchants.

• Other competitors, including Amex, are closed-loop. They either issue credit cards (banks) or try to do both (Amex).

• Visa's open loop model doesn't own anything but has much more sustainable long-term profit and growth than its competitors of closed loop.

Five forces that brought out the birth of crypto

• Open source

• Cypherpunk movement

• Distributed computing

• Cryptography (trusted > Trustworthy > Trustless)

• Evolution of currency. Currency is a form of memory. Bitcoin is a collective public memory in the form of an open ledger.

The value of crypto

• Crypto's contribution is that it improves the efficiency of financial transaction settlement, from the traditional T+2, T+3 (or even T+30 in Japan), to now T+0.

• The traditional settlement model has very high efficiency for the single node but is unable to achieve atomicity, creating many errors that are hard to clean up.

• Blockchain makes a trade-off of the high efficiency at a single node for much larger liquidity. From T+1 to T+0, that's 86,400 seconds to 1 second. Liquidity has increased by tens of thousands of multiples. This unlocks an unprecedented huge market that could give birth to many new use cases.

SWIFT

• SWIFT provides financial transaction information. It handles the information flow of capital, not the capital flow per se.

Stablecoin's use-cases

• Large volume of trade settlement, B2B, order of large amount, small number of participants

• B2C, game points, NFT, cross-border e-commerce (in countries of volatile currency movements, a merchant can convert this currency into stablecoin to guarantee his yield measured in US dollars).

• C2C remittance (against traditional players like Western Union) with lower transaction fees and higher speed

PlatON

• Tries to become the Visa for Web3, competing with Ripple and Stellar