Using stablecoins for business: the complete 2023 guide
A guide to stablecoins for businesses, including the benefits, the risks and use cases.
Today, stablecoins account for around 10% of the entire cryptocurrency market, measured by market cap. While the 2022 cryptocurrency crash saw the stablecoin market contract, today overall market capitalisation and trading volumes are almost back at their 2022 peak. Global businesses such as SAP and Visa are now adopting stablecoins as an alternative method of payment and settlement.
In this guide, we will go back to basics to explain what a stablecoin is, the different types of stablecoins and the benefits they bring, and how businesses can adopt them with minimal effort and risk.
What are stablecoins?
A stablecoin is a cryptocurrency that is designed to minimise price volatility. It does this by pegging its price to a more stable asset, typically a fiat currency or a ‘hard’ commodity such as gold. To keep the price of their coins stable, operators will maintain physical stocks of the underlying asset, or employ algorithms that adjust to fluctuations in demand and supply. These operators are typically private organisations or foundations (eg Tether is issued by Tether Limited, USD Coin is issued by Centre, a consortium founded by Circle).
How do stablecoins work?
Just like other cryptocurrencies, stablecoins run on blockchains that operate 24/7, and so can be traded and exchanged around the clock with almost immediate settlement. Many stablecoins are interoperable across multiple blockchains. The combination of the best of cryptocurrencies, with the price stability of more traditional financial instruments, makes stablecoins a popular alternative for settling payments. This is especially true for cross-border transactions, where traditional banking infrastructure can be disconnected, making payments and settlements complex, slow and costly.
As with other cryptocurrencies, stablecoins are exchanged on blockchains using public addresses, (also known as public keys). Think of these as bank account numbers. The balance against each address is recorded in a crypto wallet.
The different types of stablecoins
There are four different types of stablecoins: fiat-collateralised stablecoins, crypto-collateralised stablecoins, algorithmic stablecoins, and commodity-collateralised stablecoins. Let's explore each of these types in more detail:
Fiat-collateralised stablecoins (also known as off-chain stablecoins) are backed by reserves of traditional fiat currencies, such as the US dollar, held in a bank account or custody service. The issuer matches the stablecoin supply by an equivalent amount of fiat currency. This 1:1 supply ratio ensures the value of the stablecoin is pegged to the underlying fiat currency. Examples of fiat-collateralised stablecoins include Tether (USDT) and USD Coin (USDC).
Commodity-collateralised stablecoins are backed by reserves of tangible assets, such as gold, silver, or other commodities. The issuer holds a certain quantity of the commodity in reserve for each stablecoin in circulation, in order to tie the value of the stablecoin to that of the underlying commodity. This type of stablecoin provides a bridge between traditional commodity and cryptocurrency markets. Examples of commodity-collateralised stablecoins include PAX Gold (PAXG) and Tether Gold (xAUT).
Cryptocurrency-collateralised stablecoins (also known as on-chain stablecoins) are backed by a reserve of other cryptocurrencies, such as Ether (ETH) or bitcoin (BTC). These stablecoins use smart contracts to lock in cryptocurrency stock (unlike fiat-backed cryptocurrencies that rely on a central financial institution to hold reserves). Examples of cryptocurrency-collateralised stablecoins include Dai (DAI) and Wrapped Bitcoin (WBTC).
Algorithmic stablecoins (also known as non-collateralised or seigniorage-style stablecoins) use algorithms and smart contracts to control the supply and value of the stablecoin. When the price of the stablecoin is above its peg, the algorithm increases the supply to bring it down, and vice versa. These stablecoins are more complex and rely on market dynamics to achieve stability. USDD is an example of an algorithmic stablecoin.
The best stablecoins for B2B payments
In our article 11 best stablecoin picks for B2B payments in 2023 [ranked & reviewed] we go into detail on the top stablecoins that a business should prioritise.
We have selected these stablecoins based on their size. Together, they represent 98% of all stablecoins, measured by market cap. This is an important criteria. As we have read, stablecoins are not without risk. Those with relative maturity, deep liquidity and scale are more likely to withstand market shocks and navigate evolving regulations.
By the same logic, we recommend that the two largest stablecoins are the best for B2B businesses. These are Tether (USDT) and USD Coin (USDC). In our article USDC vs USDT: Which is Best For Your Business? we explore their key features and differences; and delve into their histories to understand their reliability.
Tether and USD Coin are both ‘fiat-collateralised’ stablecoins (also known as off-chain stablecoins). This means that they are backed by reserves of traditional fiat currencies, in both cases the US dollar. Unlike other stablecoins, Tether and USD Coin have been proven to hold their value at parity with the US dollar, and any depegging has been quickly resolved. Both stablecoins are administered by established financial institutions - Tether is issued by Tether Limited, while USD Coin is issued by Centre, a consortium founded by Circle. These organisations publish regular attestation reports prepared by independent accounting firms, which include the composition of their funds. And both stablecoins operate multiple blockchains, which mitigates operational risk and allows for faster transfer, lower transaction fees, and supports innovation.
You can learn more about Tether and USD Coin in our dedicated piece on them: USDC vs USDT: Which is Best For Your Business?
For those seeking alternatives to Tether and USD Coins, there are almost 100 to choose from. Four of these stablecoins—Binance USD (BUSD), True (TUSD), Pax Dollar (USDP) and Gemini Dollar (GUSD)—share the same fiat-collateralised mechanism as Tether and USD Coin. We think they present businesses with the easiest way to bridge traditional and cryptocurrency payment and settlement rails, and so support a flexible approach to stablecoin adoption. Our list also includes two stablecoins that are backed by gold; Pax Gold (PAXG) and Tether Gold (XAUT). Gold has been considered a reliable store of value for centuries, and its value is less volatile compared to other assets.
How to buy, sell and store stablecoins
The most popular business use case for stablecoins is to process payments and settlements. Before we explain how to make business payments and settlements using stablecoins, let’s talk about another use case—balance sheet diversification.
Businesses must frequently adapt their financial strategies to shield themselves from currency fluctuations and the eroding impact of inflation on cash reserves and depreciating assets. Stablecoins provide an alternative currency market, marked by stable prices, deep liquidity and efficient trading rails.
Businesses that want to use stablecoins as a long-term store of value can buy them directly on cryptocurrency exchanges, or use a third party to manage trades. The stablecoins can be stored ‘in custody’ on an exchange platform, which offers convenience but incurs counterparty risk, or transferred to a private wallet, which can be managed by the business or via a third party. (Read how BVNK protects stablecoins that we process on behalf of businesses)
How to make business payments and settlements using stablecoins
Most businesses primarily view stablecoins as an alternative to the inefficiencies of traditional payment and settlement methods. As with traditional payment methods, most businesses choose to make and process stablecoin payments and settlements with the support of a third party. These partners provide the infrastructure and regulatory oversight, secure the best prices through access to liquidity markets, and take on the full exposure to the stablecoin when converting it between fiat currencies.
BVNK is one such fintech. Using our platform, businesses can incorporate stablecoins into their fiat payment and settlement flows, choosing not to ‘touch’ the stablecoin at any stage, if they prefer. Here’s how BVNK processes a stablecoin-enabled cross-border payment. The same process can be used for settling fiat funds between foreign entities within the same organisation.
- The business opens an account with BVNK, which includes multiple wallets for different fiat currencies and stablecoins.
- Via the platform, the business initiates a payment to a supplier, choosing whether to fund the payment via their fiat or stablecoin deposits.
- If using fiat funds, BVNK will access its liquidity partners to secure a competitive price for a stablecoin, typically Tether (USDT) or USD Coin (USDC), and make the trade. BVNK will hold the stablecoin and pay out to the supplier in their preferred fiat currency. Alternatively, BVNK can deposit the stablecoins in the payer’s wallet, and move to step 4.
- If the payer is using existing stablecoin funds, BVNK will transfer the stablecoin across the most appropriate blockchain, directly to the recipient’s crypto wallet.
Stablecoins for business: The key benefits
The leading stablecoins are available on decentralised blockchains, so businesses avoid the fees and costs associated with traditional intermediaries, currency conversions, and compliance requirements. In one study, remittance costs in the foreign exchange market could be reduced by as much as 80%. Even if a business is using stablecoins to bridge fiat currency trades (also known as ‘on- and off-ramping’), where a third party is typically used, savings can be achieved. For example, moving funds from South East Asia to Europe can be 3-4x cheaper when using stablecoins instead of the Swift network, while transfers from Africa to Europe can be up 5-10x cheaper. As with traditional payments, businesses with high volumes and lower risk profiles are typically able to access better rates from providers.
One of the biggest challenges for businesses is cash flow. Slow settlement plays a big part in this problem, especially when money is moving across multiple territories. Payments that cross borders take complex paths, often navigating their way through intermediary banks before they arrive. FX adds more time before the payment clears. Since stablecoins aren’t encumbered by the blockages that exist when fiat money moves, and operate 24/7, they enable fast settlement. Relative cost and settlement times are important benefits of stablecoins, as this ensures the working capital needed to do business is available at the moment of need, and makes financial planning easier.
Stablecoins can provide an alternative payment and settlement rail for businesses in regions with limited banking infrastructure, with restricted access to banking systems. This benefits both businesses selling into new markets, and recipient businesses that can purchase a greater choice of goods and services.
Automation and smart contract integration
Stablecoins often operate by using smart contracts, and these can be extended to automate payment terms and conditions. By using smart contracts to streamline payment and settlement, businesses can reduce their operating costs, and also benefit from faster and more accurate processes.
Balance sheet diversification
As we read earlier, stablecoins play an important function in optimising a business’ asset portfolio by offering an alternative to fiat currencies that are being impacted by high inflation or price volatility. In countries with restricted access to the US dollar and other tier-1 currencies, stablecoins serve as an alternative, dependable store of value.
Risks of stablecoins
Over the past few years, some stablecoins have broken their peg. In March 2023, USD Coin (USDC) lost its dollar peg, dropping to as low as 87 cents, as a result of $3.3 billion of reserves held at the failed Silicon Valley Bank (SVB). When USDC holders learned of this, they quickly redeemed over $1 billion of USDC for dollars, causing the price slippage. Tether (USDT), the largest stablecoin by circulation, temporarily lost parity to the dollar for a few days in May 2022, falling as low as $0.9959. A month later it had slipped again to $0.9975.
Although these fluctuations might appear insignificant at first glance, their repercussions can be considerable for businesses utilising them for payment settlements or maintaining them as an asset. However, it is worth noting that in each of these examples, stability was reinstated promptly, with the peg being restored within a few days.
Most of the leading stablecoins are issued and administered by a central company. This creates counterparty risk (as with traditional banks and financial institutions), including inadequate management, operational vulnerabilities and cyber attacks. For fiat-collateralised stablecoins, the most significant threat is mismanagement of the reserves backing the stablecoin. Businesses should look for stablecoin issuers that publish independent audits of attestations of their reserves. For example, here is the transparency page for Tether, and this is the one for USD Coin. Businesses can mitigate counterparty risk by processing stablecoin-enabled payments and settlements through a third party, such as BVNK, which can take on the exposure to the stablecoin, as well as the operational and regulatory burden.
How to start using stablecoins for B2B payments
As with traditional and other modern payment methods, (or any other technology, for that matter) the fastest and safest way for businesses to enable stablecoins for payments and settlements is to outsource. Fintechs, such as BVNK, have built platforms that eliminate the complexity for their clients, while also mitigating risk.
By using a fintech partner businesses can register and create an account with a stablecoin wallet and be ready to initiate and settle stablecoin payments immediately. Platforms that offer multiple accounts allow businesses to hold and manage different stablecoin funds alongside fiat-denominated deposits, all from a single account. This makes it easier and cheaper to trade currencies and move money between entities.
Risk is also minimised by working with a trusted third party. Businesses that want to use stablecoins as an intermediary instrument to bridge trades and settlements between two (or more) fiat currencies can offload exposure to the fintech, meaning the stablecoin never touches their asset sheet. This mitigates the threat that a stablecoin will depeg, mismanagement of the stablecoin by the issuing organisation, or that regulators take an unexpected negative approach.
BVNK is a next-generation, fully-regulated stablecoin payments platform, trusted by hundreds of businesses globally to process billions of dollars in payments every year. We bridge the gap between traditional and digital finance to help merchants experience the benefits of stablecoin payments with minimal risk and technical setup. Our clients include other fintechs and payment processors that are looking for expert support with stablecoins through our Embedded Payments solution, such as Ebury.
What does the future hold for stablecoins?
Stablecoins have got over the first challenge of any new payment and settlement method: critical mass. Today, stablecoins account for around 10% of the entire cryptocurrency market, measured by market cap. Today overall market capitalisation and trading volumes are almost back at their 2022 peak, while 75% of digital asset owners reportedly now hold stablecoins. Stablecoin trades worth billions of dollars are made every day using stablecoins, with settlements reaching approximately $8 trillion in 2022, surpassing volumes of major card networks like Mastercard and American Express. By the end of 2023, it’s expected that on-chain stablecoin volumes will surpass Visa volumes, the world’s largest card network.
Meanwhile, around the world regulations are being developed to protect merchants that want to adopt stablecoins. A new draft bill in the United States proposes that the Federal Reserve approves any non-bank stablecoin issuers, including those located abroad but offering their stablecoins on US exchanges. Among the factors for approval are the ability to maintain and prove reserves backing stablecoins; demonstrable technical expertise and established governance; and initiatives that promote financial inclusion and innovation. In the EU, the new MiCA framework (Markets in Crypto-Assets) is now in force, which subjects stablecoins to new obligations around transparency and consumer protection.
In the UK, the new Financial Services and Markets Bill (FSMB) places similar regulatory oversight on stablecoins. Advocates of stablecoins should be encouraged by this trajectory. Governments are clearly signalling that they intend to integrate stablecoins into the mainstream financial ecosystem, paving the way to establish them as a legitimate form of payment and settlement.
Stablecoins have emerged as a valuable tool to access markets and settle payments and as an asset that can protect against inflation and currency fluctuations. Fiat-collateralised stablecoins have been proven over many years to maintain their value, with any fluctuations quickly corrected.
Six of the largest 10 stablecoins by market cap have a fiat-collateralised mechanism, a sign of their suitability for supporting payments and settlements. Meanwhile, the direction of regulation is pointing to a future where these stablecoins become established mainstream financial instruments.
At BVNK, we see stablecoin adoption primarily taking place for cross-border payments and settlements, as that is where traditional banking infrastructure is at its most inefficient. The relative cost and speed of using stablecoins for making cross-border payments, either as a bridge between fiat currencies or a standalone solution, will make it the de-facto choice for businesses.
Businesses do need to be aware of the risks of stablecoins that we have discussed in this article, namely depegging, counterparty mismanagement, and the resources needed to build the infrastructure in-house. These risks can be offloaded to a third party, with existing solutions and experience in stablecoin. This will be the fastest, safest, and most cost-efficient way to adopt stablecoins, scale and extend their use; and adapt to new innovations and opportunities as they arise.
BVNK can help your business make the move to stablecoins. Today, BVNK works with more than 300 customers around the world, supporting them to process billions in payments.