Stablecoins have become indispensable in the cryptocurrency sphere, acting as a conduit for capital within the digital economy. They provide a way to bypass volatility without liquidating assets into fiat or using them as trading collateral.

Their utility in payments is self-evident: they mimic traditional currencies like the U.S. dollar or euro, but in a blockchain-based format, making them digital proxies for familiar monetary units. Yet, the substantial capital held in stablecoins generates significant profits for their issuers—profits typically not shared with token holders.

Tether’s USDT ranks as the third-largest cryptocurrency globally with $112 billion in assets, while Circle’s USDC holds the sixth position at $32 billion, according to CoinDesk. These funds are invested in supremely safe assets like U.S. Treasuries, accruing billions in annual yield for these companies. This scenario likens stablecoins to money-market funds in traditional finance, with the critical distinction being that money-market funds share their earned interest with customers.

The absence of competition in a low-interest environment has historically allowed stablecoin issuers to retain all interest earnings, as users and distribution partners showed little concern. However, as interest rates climb, stablecoin issuers’ profitability has surged, prompting partners, such as exchanges and significant users, to demand a greater share of the revenue, explained Rob Hadick, general partner at venture capital firm Dragonfly.

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Regulations in the U.S. prohibit stablecoin issuers from returning yield to users, with the upcoming Markets in Crypto-Asset (MiCA) framework set to impose similar restrictions in Europe. However, blockchains are global, and stablecoins offering returns to customers have emerged. The competitive landscape is heating up with companies like Ondo, Mountain, and Agora advocating for a more equitable economic model. Recently, Paxos introduced a UAE-regulated yield-generating stablecoin, Lift Dollar.

Offering a money-market yield to users is a sound strategy that could challenge traditional dollar-pegged tokens like Circle and Tether, which dominate trading collateral. Yet, there are other ways to share goodwill, such as through cost efficiencies achieved by a payments-centric stablecoin. This is the goal of PayPal’s PYUSD token, which aims to perform transactions on a massive scale.

According to Jose Fernandez da Ponte, PayPal SVP and head of blockchain, the future might see a separation between stablecoins’ payment capabilities and money-market funds’ yield-generating abilities. He envisages corporate treasurers maintaining liquidity in a money-market fund and switching to a stablecoin for payments as needed, given their purpose-built design.

PayPal appears focused on enhancing PYUSD’s ability to facilitate faster, cheaper payments—evidenced by its integration with the high-throughput Solana blockchain—rather than competing directly with USDT and USDC in terms of locked value.

However, some analysts, such as those at Bank of America, are skeptical about the success of a payments-focused stablecoin like PYUSD, especially in the face of central bank digital currencies (CBDCs) and yield-sharing tokens. Despite PYUSD’s modest scale compared to Tether and Circle, it would be unwise to underestimate PayPal’s extensive reach in fintech and payments via platforms like Xoom and Venmo.

“Who in crypto has better distribution than PayPal?” remarked Dragonfly’s Hadick. “While PYUSD may not dominate DeFi or other non-PayPal applications, it streamlines PayPal’s operations, enhancing capital efficiency and potentially passing some benefits to customers.”

The Broader Financial Context

Stablecoins as a payment medium will retain significant value, underscored Charles Cascarilla, CEO of Paxos. Yet, considering the approximately $6 trillion in money-market funds, $17 trillion in bank deposits, and additional trillions in global money-market funds and dollar deposits, payment assets will only represent a fraction of this vast monetary landscape.

Cascarilla noted, “Payment stablecoins will always be a subset of the broader deposit and dollar base, as many will prefer assets generating a return.”

Hadick concurs, foreseeing a shift towards tokenized yield-bearing collateral in both traditional and crypto finance. “The advantages of earning yield while boosting capital efficiency and enabling intraday settlement will be too compelling for major institutions to ignore,” he concluded.