Writing: Rhythm
From Wall Street's investment banks to Silicon Valley's technology companies, and then to Asia's financial giants and payment platforms, more and more companies are eyeing the same business - stablecoin issuance.
Under the effect of scale, the marginal issuance cost of stablecoin issuers is zero, and in their eyes this is like a risk-free arbitrage game. In the current global interest rate environment, the interest rate spread is extremely attractive. Stablecoin issuers only need to deposit users' US dollars into short-term US Treasury bonds, and they can stably earn billions of dollars a year by relying on the 4-5% interest rate spread.
Tether and Circle have already proved that this road works, and as stablecoin bills in different regions gradually land, the compliance path becomes clearer, and more and more companies are eager to try, and even FinTech giants such as PayPal and Stripe are rapidly entering the market. Not to mention that stablecoins also have the natural ability to integrate with payment, cross-border settlement and even Web3 scenarios, and the imagination space is huge.
Stablecoins have become a must-contend place for global financial companies.
But the problem also lies here. Many people only see the "seemingly risk-free" arbitrage logic of stablecoins, but ignore that this is a capital-intensive and high-threshold business.
If a company wants to legally and compliantly issue a stablecoin, how much will it cost?
This article will analyze the real cost behind a stablecoin to tell you whether this seemingly easy arbitrage business is worth doing.
Several accounts behind the issuance of stablecoins
In many people's minds, issuing stablecoins is nothing more than issuing an on-chain asset, which seems to have a low technical threshold.
However, to truly launch a stablecoin to global users with compliant identity, the organizational structure and system requirements behind it are far more complicated than imagined. It not only involves financial licenses, audits, but also heavy asset investments in multiple dimensions such as fund custody, reserve management, system security and continuous operation and maintenance.
From the perspective of cost and complexity, its overall construction requirements are no less than those of a medium-sized bank or a compliant trading platform.
The first threshold faced in stablecoin issuance is the construction of a compliance system.
They often need to simultaneously respond to the regulatory requirements of multiple jurisdictions and obtain key licenses including US MSB, New York State BitLicense, EU MiCA, and Singapore VASP. Behind these licenses are detailed financial disclosures, anti-money laundering mechanisms, and continuous monitoring and compliance reporting obligations.
Benchmarking medium-sized banks with cross-border payment capabilities, stablecoin issuers often have compliance and legal expenses of up to tens of millions of dollars per year, just to meet the most basic cross-border operating qualifications.
In addition to licenses, the construction of KYC/AML systems is also a mandatory requirement. Project parties usually need to introduce mature service providers, compliance consultants and outsourcing teams to continuously operate a whole set of mechanisms such as customer due diligence, on-chain review, and address blacklist management.
In today's increasingly strict regulatory environment, it is almost impossible to obtain access to major markets without establishing strong KYC and transaction review capabilities.
Market analysis points out that the total cost required for HashKey to apply for a Hong Kong VASP license is as high as 20 million to 50 million Hong Kong dollars, and it needs to be equipped with at least 2 regulatory officers (ROs), and must cooperate with the three major accounting firms, and the cost is several times higher than that of traditional industries.
In addition to compliance, reserve management is also a key cost in stablecoin issuance, covering two major parts: fund custody and liquidity arrangements.
On the surface, the asset-liability structure of stablecoins is not complicated. Users deposit US dollars, and issuers purchase short-term US Treasury bonds of equal value.
But once the reserve scale exceeds 1 billion or even 10 billion US dollars, its operating costs will rise rapidly. For fund custody alone, the annual fee may reach tens of millions of dollars; while treasury bond transactions, clearing processes and liquidity management not only bring additional costs, but also highly depend on the collaborative execution of professional teams and financial institutions.
More importantly, in order to ensure the user experience of "redemption on demand", the issuer must prepare sufficient liquidity positions off-chain to cope with large redemption requests in extreme market conditions.
This configuration logic is very close to the risk reserve mechanism of traditional money market funds or clearing banks, far from being as simple as "smart contract locking".
To support this architecture, issuers must also establish highly stable and auditable technical systems, covering key financial processes on and off the chain. Usually includes smart contract deployment, multi-chain minting, cross-chain bridge configuration, wallet whitelist mechanism, clearing system, node operation and maintenance, security risk control system and API docking, etc.
These systems must not only support large-scale transaction processing and fund flow monitoring, but also be scalable to adapt to regulatory changes and business expansion.
Different from the "lightweight deployment" of general DeFi projects, the underlying system of stablecoins essentially undertakes the role of a "public settlement layer", and the technical and operation and maintenance costs are often at the level of millions of US dollars per year.
Compliance, reserves and systems are the three basic projects for stablecoin issuance, which jointly determine whether the project can develop sustainably in the long term.
In essence, stablecoins are not a technical tool product, but a financial infrastructure with trust, compliance architecture and payment capabilities.
Only those companies that truly have cross-border financial licenses, institutional-level clearing systems, on-chain and off-chain technical capabilities, and controllable distribution channels can operate stablecoins as platform-level capabilities.
For this reason, before deciding whether to enter this track, companies must first judge whether they have the ability to build a complete stablecoin system, including: Can they obtain continuous recognition from regulators in multiple regions? Do they have their own or trusted custody fund system? Can they directly control channel resources such as wallets and trading platforms to truly open up the circulation end?
This is not a light-weight entrepreneurship opportunity, but a tough battle with extremely high requirements for capital, systems and long-term capabilities.
Issued a stablecoin, then what?
Completing the issuance of stablecoins is just the beginning.
Regulatory permits, technical systems, and custody structures are just prerequisites for entering the market. The real problem is how to make it circulate.
The core competitiveness of stablecoins lies in "whether anyone uses it". Only when stablecoins are supported by trading platforms, integrated by wallets, connected to payment gateways and merchants, and finally used by users, can it be truly circulated. And on this road, there are still high distribution costs waiting for them.
In the insight into the stablecoin industry chain diagram released by Beating in conjunction with digital asset self-custody service provider Safeheron, stablecoin issuance is only the starting point of the entire chain, and if you want stablecoins to circulate, you need to focus on the middle and lower reaches.
Taking USDT, USDC and PYUSD as examples, you can clearly see three distinct circulation strategies:
·USDT relied on gray areas in the early days to build an unreplicable network effect, and quickly occupied the market standard position by virtue of its first-mover advantage;
·USDC focuses on channel cooperation under the compliance framework, relying on platforms such as Coinbase to gradually expand;
And PYUSD, even with the backing of PayPal, needs to rely on incentives to drive TVL, and it is always difficult to enter the real use scenarios.
They have different paths, but they all reveal the same fact - the competition of stablecoins is not in issuance, but in circulation. The key to success or failure lies in whether it has the ability to build a distribution network.
1. USDT's unreplicable first-mover structure
The birth of USDT stems from the real difficulties faced by cryptocurrency trading platforms in that era.
In 2014, Bitfinex, a cryptocurrency trading platform headquartered in Hong Kong, rapidly expanded to global users. Traders wanted to trade in US dollars, but the platform always lacked stable US dollar deposit channels.
The cross-border banking system is full of hostility towards cryptocurrencies, funds flow with difficulty between the three regions of Mainland China, Hong Kong and Taiwan, accounts are often closed, and traders may face capital flow disruptions at any time.
In this context, Tether was born. It initially ran on Bitcoin's Omni protocol, with simple and direct logic: users wired US dollars to Tether's bank account, and Tether then issued USDT of equal value on the chain.
This mechanism bypasses the traditional bank clearing system and allows the "US dollar" to circulate 24 hours a day without borders for the first time.
Bitfinex is Tether's first important distribution node. More importantly, the two are actually operated by the same group of people. This deeply bound structure allowed USDT to quickly gain liquidity and usage scenarios in the early days. Tether provides Bitfinex with a compliant but efficient US dollar channel. Colluding with each other, information symmetry, and consistent interests.
From a technical point of view, Tether is not complicated, but it solves the pain points of cryptocurrency traders entering and exiting funds, and is becoming the key to its earliest occupation of users' minds.
In 2015, the volatility of the capital market intensified, and the attractiveness of USDT rapidly increased. A large number of users in non-US dollar regions began to seek US dollar substitutes to bypass capital controls, and Tether provided them with a "digital dollar" solution that does not require opening an account, KYC, and can be used with the Internet.
For many users, USDT is not just a tool, but a hedge against risks.
The IC0 boom in 2017 was a key moment for Tether to complete PMF. After the Ethereum mainnet went live, ERC-20 projects exploded, and trading platforms turned to cryptocurrency trading pairs, and USDT immediately became the "US dollar substitute" for the altcoin market. By using USDT, traders can freely shuttle between platforms such as Binance and Poloniex to complete transactions without repeatedly depositing and withdrawing funds.
Interestingly, Tether has never actively spent money on promotion.
Different from general stablecoins adopting subsidy strategies to expand market share in the early days, Tether has never actively subsidized trading platforms or users to use its services.
On the contrary, Tether charges a 0.1% handling fee for each mint and redemption, and the minimum redemption threshold is as high as $100,000, and an additional 150 USDT verification fee is required.
For institutions that want to directly access its system, this charging mechanism almost constitutes a "reverse promotion" strategy. Because it is not selling products, but setting standards. The cryptocurrency trading network has already been built around USDT, and any participant who wants to access this network must lean towards it.
After 2019, USDT has almost become synonymous with "on-chain US dollars". Despite repeated regulatory investigations, media doubts and reserve disputes, USDT's market share and circulation continue to climb.
By 2023, USDT has become the most widely used stablecoin in non-US markets, especially in the global south. Especially in high-inflation areas such as Argentina, Nigeria, Turkey, and Ukraine, USDT is used for wage settlement, international remittance, and even to replace local currencies.
Tether's real moat has never been code, nor asset transparency, but the trust path and distribution network it established in the early years in the Chinese cryptocurrency trading community. This network starts from Hong Kong, serves as a springboard for Greater China, and gradually extends to the entire non-Western world.
And this advantage of "first-mover is the standard" also makes Tether no longer need to prove who it is to users, but rather the market must adapt to its already established circulation system.
2. Why does Circle rely on Coinbase
Unlike Tether's natural growth path in gray areas, USDC was designed from the outset as a standardized, institutionalized financial product.
In 2018, Circle and Coinbase jointly launched USDC, aiming to create an "on-chain US dollar" system for institutions and mainstream users under a compliant and controllable framework. To ensure governance neutrality and technical collaboration, both parties each hold 50% of the shares and established a joint venture called Center, which is responsible for the governance, issuance and operation of USDC.
However, this model of governing joint ventures cannot solve the key problem - how to truly circulate USDC?
