welcome to money is freedom
a podcast
exploring how finance and freedom connect in our lives
created from thoughtful research
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this series brings you clear
meaningful insights into finance and beyond
welcome to episode 49 where we unpack
how stable coins
are quietly killing the six trillion dollar payments
industry and why
the first trillion dollar fintech
won't come from Silicon Valley
it'll come from the collapse of banking as we know it
this revolution is already happening
let's break it down
okay let's unpack this
imagine a world where moving money um
anywhere instantly across borders
is genuinely as simple as sending a text right
like no middle man taking a slice at every single turn
no waiting days or weeks for a transaction to settle
no mystery fees just popping up
does that sound a bit I don't know futuristic
it really does
especially when you think about the scale exactly
trillions upon trillions moving on systems that feel
well pretty old sometimes
yeah they kind of do
and you know
for a while
maybe cryptocurrencies felt like that potential future
but the volatility
it just wasn't practical for everyday payments
what we're diving into today
based on the sources you shared
is this really powerful idea that stable coins
you know the ones designed to keep a stable value
usually pegged to something like the US dollar hmm
they might not just be an improvement OK
they could fundamentally rearchitect how
money moves globally okay
so the hook isn't just like faster payment
it's a complete rethinking of the plumbing underneath
exactly these sources are arguing
stable coins
could change the entire payments landscape
and crucially
shift where the real value gets created in this uh
this new world gotcha
so our mission here is to pull out the key arguments
the main insights from this material
we've got sources looking back at the history
and others looking forward at stable coins right
sort of the how we got here and where we might be going
precisely
helping you understand not just what they might do
but why it matters you know
I'm really intrigued by this idea of rearchitecting
mm hmm or even collapsing the system
though
current way payments work feels incredibly complex
oh it is complex and like the sources point out
really seeing that complexity is key to grasping
the potential disruption here
one central idea that comes through really strong
is this thesis
stable coins aren't just a slightly better way to uh
connect to the old payment rails okay
the argument is
they give companies the ability to bypass
those legacy rails completely bypass them
how does that work well
this is where that concept comes in
everything is just a book transfer
if you're stable coin native
it's it's powerful explain that a bit more
a book transfer yeah
so instead of navigating this maze of banks
networks processors
hmm if you're operating directly with stable coins
maybe on a shared digital Ledger
like a blockchain could be or something similar
moving value between two parties
can become just a simple direct update
two balances on that shared Ledger
ah okay
so it's like moving money inside one big bank
but potentially between anyone anywhere
that's the idea without needing
you know
five different intermediaries to all update their own
separate books and reconcile later
okay so collapsing multiple ledgers into a one shared
transparent view essentially
precisely now
the sources do acknowledge
you know the other view
that stable coins
might just end up being another platform
connecting the current system
like a new kind of banking as a service right
just plugging into the old pipes
yeah but
they really emphasize that the deeper potential here
lies in reimagining the payment rails
from the ground up
building on this idea of internet native
stable digital money
and to really appreciate that kind of reimagining
it probably
helps to see how we ended up with the system
we have now absolutely yeah
the sources give us a quick but uh
pretty fascinating look back
so walk us through that history briefly
where did all this modern payment stuff start
according to the sources
you can trace it back to the 1950s
Diners Club ah
the first credit card basically sort of before that
it was mostly cash
or maybe companies extending direct credit
Diners Club created that first closed loop system
they were the central intermediary cardholder
merchant Diners
Club in the middle okay
one company managing it all
then what happened then came bank of America
yeah late fifties
they tried this
massive push for mass market credit cards
famously mailed out
like millions of unsolicited cards across California
well I just sent them out
yep and apparently it was an operational nightmare
huge challenges managing it
delinquency rates were apparently over 20%
tons of fraud just messy
yikes and that chaos LED to something else exactly
the realization was look
managing this kind of thing
needs cooperation between banks
that
spurred the creation of these cooperative structures
which eventually became visa and Mastercard
ah okay
so that created the open loop system
that's it the four party model
you've got the card holder
the merchant the acquiring bank
that's the merchant's bank
and the issuing bank your bank
and visa or Mastercard sits in the middle
connecting them all right
spreading the risk and the workload
and for decades really
innovation was mostly about
tweaking and optimizing that model
making it faster more secure
but still the same basic structure pretty much
then the internet hits in the 90s
and payments start moving more to software
e commerce takes off
the sources mention early things like
apparently the first web purchase was a sting CD huh
really okay
yeah and Pizza Hut's Pizzanet
Amazon eBay
all that starting up
and that's when we got companies like Paypal Stripe
Adyen the gateways
and processors exactly
they popped up to help merchants
handle the complexities of online payments
you know bundling services
bridging online and offline
but they were building on top of the old system largely
yes that's what the sources emphasize
great software layers but still
fundamentally
relying on that underlying bank and card network
plumbing they didn't rip it out and replace it right
so adding features
but not changing the core infrastructure
yeah and even newer companies
the ones focused on enabling other businesses
to issue cards or offer banking services
like Marcata or Galileo the base providers right
they often found that just putting slick
software on top of quite outdated
core banking systems well
it only gets you so far
it doesn't give you that fundamental leap in speed
or cost or transparency
so that leads to the point where people start thinking
okay what if we built this with internet native money
right from the beginning precisely
you started seeing companies like
you know early Paypal with P2P
Alipay Mpesa in Africa
Venmo Wise Airwallex
they explored digital wallets
direct P2P alternative networks
and they often started with customers
the old system didn't serve well often yeah yeah
because the traditional system was maybe too expensive
or too slow or just inaccessible
they were looking for more uh
monetary sovereignty outside the old rails
the big banks and networks must have noticed this shift
oh definitely and you saw responses
things like Visa Direct Mastercard
send banks and governments
pushing for a faster account to account payments
with real time networks
and those still have limitations
that's what the sources argue
even these faster systems often
bump up against technical constraints
from the old infrastructure
things like uh
need to pre fund accounts
before sending money internationally right
you need the money sitting there first
yeah or taking on foreign exchange risk or credit risk
because the settlement isn't truly instant
using netting and capital
batching payments
and settling the net difference later
instead of true immediate
gross settlement for every single transaction
and still not very transparent
I guess still often suffering from opacity
yeah yeah
it's better
but not fundamentally different plumbing in many cases
OK so the evolution path described is closed loop
trusted intermediary
then open loop trusted intermediaries
maybe a step towards open loop
with partial individual sovereignty of your wallets
but the sources argue that complexity
opacity and rent extraction
you know fees taken at each step
those problems persist right
and that brings us back to today
and stable points as the tech
that could finally
let us bypass a lot of that legacy stuff
exactly this is where it gets really interesting
talking about collapsing the merchant payment stack
yeah because when you look at that
traditional card payment flow
wow the sources list so many players
card holder merchant gateway
PSP payment service provider
yeah then the acquiring bank
the card network like Viz MC routing it
the issuing bank it's a crowd
it really is and one source uses
Stripe's recent work with stable coins
as an example of how this could all be well
collapsed and the vision isn't just stripe
using visa more efficiently
it's about a player like stripe
potentially acting like a unified entity
uh huh
almost like a private central bank for its users as so
by potentially issuing their own stable coin
fully backed by collateral held safely somewhere
like in regulated banks okay
and if they issue the stable coin
how does that change the payment flow itself
well instead of the transaction data
bouncing between all those banks and networks
over days you could have atomic settlement
atomic meaning meaning
the transfer of value happens
instantly and completely between the consumers
and merchants accounts or wallets
or it doesn't happen at all
no waiting period no risk of it failing halfway through
and this happens where on that shared Ledger again
likely yeah
on a transparent open Ledger
maybe a blockchain maybe something else
where the transaction is recorded verifiably
and the value transfer is near instantaneous
so you're cutting out quite a few intermediaries there
exactly
you might not need separate issuing and acquiring banks
doing all that complex reconciliation
the stable coin
issuer just needs banks to hold the collateral safely
and the card network visa or Mastercard
their role in routing that specific transaction
could disappear
because the value moves directly on the Ledger
or via instant instructions to the issuer
clearing and settlement
it's either atomic right there on the Ledger
or may be handled programmatically by smart contracts
for things like disputes or refunds
wow and what about routing
payouts or swapping between currencies
that could become programmable too
build into this new integrated system
and because you're building on a consistent
digital foundation
data standardization gets much easier
no more stitching together that Frankenstein text stack
one source mentioned right
everyone's speaking the same language digitally exactly
fees and reconciliation should
in theory
become way simpler because it's more transparent
and there are fewer parties dipping in along the way
so the outcome sounds like one entity
potentially wearing many hats
yeah player like say
stripe could potentially collapse the stack
they could own the accounts
the issuing function
maybe even credit decisions based on the data
the payment services and act as the network
all on better tech fewer intermediaries
and that gives more control back to the user
it should give near full control and transparency
back to the wallet holder
yeah whether that's you as a consumer or a business
managing its funds
that quote from Simon Taylor you mentioned earlier
really nails it
everything is a book transfer if you're stable
coin native
anyone operating with stables is the gateway
PSP and acquiring bank in one
and everything's a book transfer
yeah yeah
perfectly captures that potential shift
now the sources don't gloss over the challenges right
fraud compliance
absolutely not they're very clear
fraud compliance usability
ensuring there's enough liquidity
these are all really hard problems
but the perspective seems to be their solvable problems
things that entrepreneurs are actively working on
exactly they point to companies like Circle Paxos Agora
various payments focus blockchains
they're all positioning for this future
trying to move up the stack
to offer more of these integrated services okay
so collapsing the domestic stack is huge
but cross border payments
that feels like where the current pain is
maybe even worse absolutely
the sources definitely highlight cross border
B to B payments as a prime area for stable coins
and they cite data suggesting it's already happening
there's real uptake there
why is cross border b to B such a good fit
what's so bad now well
think about the current process
one source references Matt Brown's explainer
a typical international BTB payment involves
multiple bank senders
maybe one or two intermediaries recipients yeah
they rely on networks like Swift
just for messaging back and forth yeah
then you have other clearing counterparties involved
the slow very slow
painfully slow settlement times
often 7 to 14 days think about that
two weeks for money to be in transit tied up
that creates massive risk
counterparty risk and significant costs
and the visibility is terrible right
you just send it and hope
the opacity is extreme
the customer often has no idea where the money is
they have to call their bank
who calls the next bank
the source mentions that infamous example of JP Morgan
apparently losing millions for weeks
just gone into the ether temporarily
wow add in foreign exchange risk at multiple points
high average transaction cost
one source cited 6.6% average
plus for most businesses globally
just getting access to US dollar accounts
or yield bearing accounts is incredibly difficult
okay so how do stable coins attack those problems
they can address them quite directly
uh huh again
using stripes work as an example from the source
they're enabling businesses to get USD
financial accounts that are backed by stable coins
so you can hold a USD balance essentially
but it's represented by stable coins
exactly companies can mint stable coins
create them by depositing regular currency
maybe via services like bridge
they can redeem them back to fiat
they can move money globally using a dashboard or Apis
and potentially issue cards linked to that balance
or swap into other assets
and the key is
trying to stay within that stable coin ecosystem
as much as possible that seems to be the crucial part
while you might still need the traditional system
for the final on ramp or off ramp to local currency
today the core actions
the sending receiving issuing
swapping of stable coins and other tokenized assets
that happens on a different set of rails
potentially much faster much more transparent
so the more you can stay tokenized
maybe using local stable coins if they exist
the more you essentially bypass that slow
expensive correspondent banking system
which means the business using it has more control
and keeps more of the value
that's the promise
less reliance on all those third parties
potentially capture more value
lower costs overall
the sources mentioned companies like squads
rain stability building
tools
to help businesses stay in that tokenized world longer
and the expectation is these companies
will try to grab more of the value chain themselves
yeah because again
if money movement is just a book
transfer within that ecosystem
why wouldn't they try to offer more integrated services
right that makes sense
and even for flows that still touch fiat
there are companies like conduit pay mentioned
working with banks to use stable coins as a bridge
for near instant
cross border transfers yeah
even if it starts and ends in fiat
okay so for cross border
the vision is wallets become accounts
tokens become products the blockchain is the network
resulting in potentially better UX
easier reconciliation more user control transparency
speed interoperability
and lower cost that's a great summary of the potential
laid out in the sources for Cross Border
now let's maybe pivot slightly
and look at the second source
you shared it really
tries to dissect the stable coin market itself
and figure out where value might actually end up
concentrating right
this one breaks the market down into
what was it seven different categories
seven categories yeah
the argument being that payments are complex
and each piece
has different ways to build a competitive advantage
a moat as they call it and capture value
okay a moat being something that protects your business
gives you pricing power exactly
so the categories are settlement rails
stable coin issuers liquidity providers
Lps value transfer
money services like PSP's aggregated APIs
messaging platforms merchant gateways
ramps and finally
stablecoin powered fintech applications
got it so
let's quickly run through where this source sees value
potentially ending up in each one
first up settlement rails
these are seen as potentially incredibly valuable
the moats are things like network effects
everyone wants to build on the rail everyone else uses
right where the money is exactly
deep liquidity low fees
speed reliability
the analysis suggests it might be a winner
take most market
and success probably requires purpose built solutions
just for stable coins and payments
not necessarily general purpose blockchains
trying to do everything okay
next stable coin issuers like circle or Paxos
now yeah
historically they've been big winners
partly from network effects
partly from earning interest on the reserves
but the sources argue they need to evolve
they can't just be asset managers
they need to do more
they need to invest heavily in the infrastructure
compliance integrations
making sure there's deep liquidity
the prediction is that neutral issuers
ones not tied to a specific bank or fintech
trying to compete elsewhere
might win big because of trust and competitive dynamics
hmm so they hold value but they have to keep innovating
their model makes sense how about liquidity providers
the ones making markets
this category is viewed as likely becoming
highly commoditized not much pricing power
the moats are pretty thin
maybe access to cheap funding
reliable systems the prediction is big
established
financial players will likely dominate here
purely stable coin focused Lps
might struggle to build a lasting edge
okay what about value transfer money services
the new PSP's
these are seen as potentially building strong modes
if they build proprietary rails
and get direct banking relationships
not just relying on aggregators
their value comes from that direct bank access
flexibility global reach
managing liquidity handling tough compliance
so they do the hard stuff right
the sources expect them to have moderate pricing power
maybe form regional duopolies or oligopolies
and become very large businesses
supplementing or competing with traditional PSPs
interesting then aggregated APIs
messaging platforms
these are the ones that wrap APIs from other providers
act like marketplaces critically
they usually
don't take on the risk of handling the money
or compliance directly so they connect things
but don't touch the money flow itself
exactly the sources argue that
while they might charge high fees now
they're vulnerable they could get squeezed or bypassed
because they aren't doing the hard parts
to survive long term
they might need to move closer to the customer
and take on more core payment functions
okay merchant gateways
ramps helping merchants accept stable coins
yeah kind of like early stripe for cards
offering developer tools aggregating infrastructure
but the analysis suggests this is tough
established players can just partner with others to add
stable coin acceptance relatively easily
so it's hard to build a moat just doing that
seems to be the view
BDC ramps are seen as a likely losing category
long term
BDB might find niches maybe around treasury management
but lasting pricing power probably not expected here
okay last one
stablecoin powered fintech applications
this is described as a knife fight huh
why because it's relatively
easy to build an application on top of these new rails
once they exist
success here depends heavily on distribution
go to market skills product sense
the sources are pretty skeptical about pure crypto
stable coin consumer apps and develop markets
why is that because existing trusted brands banks
major fintech like new bank
Robin Hood Revolut
or mention can just add stablecoin features
if customers want them they already have the users
right they bolt it onto their existing app exactly
emerging markets might be different
where existing finance is weaker
the Zar pay example comes up
but overall
high failure rates are predicted for consumer startups
built only on this layer business focused apps
solving specific problems might have a better shot
okay that's a really helpful breakdown
so even though there are overlaps
thinking about these distinct roles is important
yeah it clarifies where the analysis suggests
defensible value might be built
okay so let's try and tie these threads together
now the main argument from both sources
really seems to be that stable coins provide this new
tech foundation
that lets companies bypass and fundamentally collapse
the existing very complex payment value chain
right and that collapsing
that removal of all those intermediate layers
and their fees
is why the first source makes that bold prediction
we could see the first trillion dollar fintech
built on stablecoin rails
yeah because the value
doesn't have to be sliced up so thinly
across so many players anymore
and they acknowledge the bumps in the road
fraud compliance regulation usability
absolutely yeah
but the perspective is that these are things
entrepreneurs are actively tackling
it's framed as building real net new systems
not just fiddling around the edges
there will be resistance from the old guard presumably
oh inevitably
incumbents benefit from the current system
but the prediction is
they'll eventually have to join in
launch their own versions or partner up
which brings us back to that final step
in the evolution you described earlier
from closed loop to open loop
trusted to open loop with some user sovereignty
and now potentially towards truly open
digitally native systems where the tech allows
potentially anyone to compete across more of the stack
and users customers gain more direct control
self sovereignty using these open networks
that's the potential path laid out
it is so
the big takeaway here
feels like stable coins might be much
more than just another crypto asset
they could represent a fundamental
reshaping of global payments
not just improving the old system
but potentially
collapsing it into something far more efficient
transparent and uh
user controlled
and the economic opportunity tied to that shift
the sources suggest it's potentially enormous
trillion dollar company enormous
yeah it definitely
leaves you with something pretty significant
to think about what does it really mean
if moving money anywhere becomes essentially
just a book transfer on an open
digital network hmm
and maybe more personally
what does it mean for you
as an individual or a business
to potentially have that much more direct control
that much more transparency over your own funds
in that kind of system what doors does that open
what new challenges might it create