Stablecoin Transactions Overtake Visa: Rising Risks

According to experts, stablecoins are growing rapidly; Bitwise predicts that by 2024 their transaction volume will exceed that of Visa. However, Andrey Grachev of DWF Labs warns of systemic risks, such as repurchase pressure and reserve management.

The Volume of Stablecoin Transactions Surpasses Visa

According to several analysts, stablecoins are fast becoming one of the most important financial innovations of the past 20 years due to their exponential growth. The experts' views are supported by a recent report by Bitwise, which showed that by 2024, stablecoin transaction volumes slightly exceeded those of the multinational payment system Visa.

One of the main drivers of stablecoin adoption is their unrivalled payment efficiency. Stablecoins enable near-instantaneous 24/7 money transfers at a fraction of the cost of traditional systems like SWIFT. This speed and cost-effectiveness revolutionises the way value is transferred, offering a stark contrast to the slow and expensive processes of traditional finance.

In decentralised finance (DeFi), stablecoins serve as a reliable unit of account and medium of exchange, enabling a wide range of financial activities.

Despite their rapid growth, the mass adoption of stablecoins poses significant systemic risks that need to be proactively mitigated, warns Andrey Grachev, Managing Partner at DWF Labs. Based on adoption factors, Grachev points to emerging vulnerabilities, and repurchase pressure is one of these risks. The Managing Partner argues that algorithmic stablecoins are particularly vulnerable to this problem.

"Imagine what would happen if users tried to exit en masse for fear of losing the value anchor. This could destabilise issuers and cause widespread market volatility, especially in the case of algorithmic or undercollateralised stablecoins," Grachev said.

Reserve management is another critical risk. Insufficient or opaque reserves undermine trust and create a contagion effect in the event of a large issuer's failure, exacerbated by unsupervised offshore operations.

To overcome these risks, Grachev proposes an articulated solution that prioritises real-time proof of reserves on the blockchain, preferably in short-term US Treasury securities or central bank reserves. Grachev also believes that robust regulation is essential to ensure strict segregation of funds, transparent governance and auditability of smart contracts. Finally, protocols should include risk management tools such as circuit breakers and redemption limiters to manage outflows during periods of stress and avoid rapid destabilisation.

According to Bitwise's data, stablecoin transaction volume declined to $14 trillion last year, down from about $7 trillion in 2023. For example, in 2020, stablecoin volumes were about ten times lower than those of Visa, but took less than five years to reach. This obvious and growing demand has prompted several financial institutions and the State of Wyoming in the US to consider issuing their own stablecoins.

Regulatory Certainty and Adoption of Stablecoins

However, some observers, including Peter Kozyakov, co-founder and CEO of Mercuryo, question whether stablecoins issued by traditional financial institutions will follow the same model as USDT, USDC and other existing stablecoins.

"A big question is whether TradFi stablecoins will run on an authorised public blockchain or an authorised private blockchain," Kozyakov said.

Meanwhile, Mike Blake-Crawford, Chief Marketing Officer at World Mobile Group, told Bitcoin.com News that his experience with financial institutions in both developed and emerging markets suggests that banks tend to prefer authorised models. However, adopting this model is likely to create problems, as he observed in some markets.

Unlike in the US, this produces an interesting tension that we are observing directly in markets such as Pakistan and Zanzibar. Traditional institutions want to get the benefits of stablecoins without the decentralisation that makes them so powerful for financial inclusion. Finding this balance will be critical as banks enter an industry where the concrete uses have already been established based on real market needs, rather than theoretical benefits," explained Blake-Crawford.

However, the exact structure or form of stablecoins issued by traditional financial institutions will likely be determined by the stablecoin legislation currently being debated in the US Congress and those already passed by the European Union (EU). Until recently, stablecoin issuance was largely unregulated, but episodes of stablecoins that have lost their anchor or collapsed have prompted global financial regulators to propose or pass relevant regulations.

While the debate over which assets should back stablecoins continues both in Congress and elsewhere, Blake-Crawford told Bitcoincom News that regulatory certainty is exactly what the mobile money industry needs.

"The STABLE Act represents a potentially critical step that could provide a significant boost to our growth in America. When I talk to our US customers about their payment preferences, the conversation invariably turns to regulatory concerns: they want the same fluid payment options that our African subscribers have, but within clear legal frameworks that protect their assets," said Blake-Crawford.

In addition to the STABLE Act and the GENIUS Act, the path of stablecoins will also be impacted by the international coordination of standards for cross-border payments. According to Grachev, the Bank for International Settlements (BIS) and the International Monetary Fund (IMF) are likely to lead these efforts.

Grachev also believes that finding a regulatory framework that balances privacy needs with compliance requirements will be decisive for a real widespread adoption of stablecoins.

"The other big challenge regulators face is balancing privacy with compliance. How can standards for programmable identification and transaction tracking be established without violating users' rights? Finding this balance will be crucial for large-scale adoption," Grachev concluded.