Introduction: A unique vantage point to assess this innovation catalyst
Stripe’s announcement of its plans to acquire stablecoin platform start-up Bridge for a reported $1B last month set off a frenzy of excitement within fintech and M&A circles alike… and likely tremendous concern within traditional financial institutions. This moment seems to be fortifying the legitimacy of a transformative technology in the global financial system and many in our networks have discussed and produced great content on that aspect already.1
Together, we, Brendan and Dana, have a unique view of this space and the opportunities that lie ahead for venture given our combined 30 years in and around fintech and financial services. While at American Express, Dana worked on bank stabilizing efforts immediately following the 2008 financial crises and subsequent regulations like the Dodd-Frank Act.2 At Stripe, Dana worked extensively on Connect, Stripe’s marketplaces and platform pay-ins and payouts product, and expanding its use across global platforms like Shopify, Xero & Mindbody. Brendan leads Canaan’s Fintech practice, where we’ve led fintech investments across various sub-verticals from insurance (e.g., Hugo, Ladder, Embroker) to cross-border payment networks (e.g., Taptap Send) and lending (e.g., LendingClub, EVEN Financial). Through his experience with these companies, he’s witnessed the complexities and challenges of the traditional system and the potential for innovative solutions to change the game for consumers.
Notably, we’ve both been skeptical of crypto as a currency in the abstract historically. This was not for lack of imagination so much as skepticism from viewing crypto as a very compelling hammer looking for a nail. Undoubtedly, Stablecoin affords true customer-generated PMF. When we consider what a currency needs, it comes down to really three things: a unit of account, a medium of exchange, and the ability to store value. Stablecoins offer the purest form of these three things that crypto has put forth. What's more, stablecoins appear to be on a path to be blessed by regulators (more on this to come) – there is a sense of inevitability to this.
At Canaan, we get most excited about new technologies that have the opportunity to meaningfully upend the structure and margins of large industries. In 2024, global payments revenue will exceed $2.2T.3 Stablecoins represent a significant disruption to this industry.
We look forward to meeting visionary founders building in this space and are focused on:
- Infrastructure Transformation: technology to advance controls, expand capacity, and enable new onramps and off-ramps.
- Unlocks: capabilities that leverage this new system and the efficiencies and access it affords for B2B, cross-border, and underserved populations specifically.
- Novel Tooling: Platforms to handle fraud, risk, compliance, address regulation, and improve controls.
- Adjacent Services: Solutions to offer new wealth formation, management, access services, and unique insights into the data now available.
While we lay out below in detail what is compelling to us as stablecoins grow in adoption, what excites us even more is the opportunity that this new technology will afford a new generation of fintech founders and builders.
Stablecoin volumes: the path to inevitability
Stablecoin transaction volumes have surged over the last 6 years, reaching levels comparable to that of VISA. While there is debate over the total number of active authentic users due to bot usage, even the more conservative estimates suggest that there were ~27.5 million monthly active users who transferred $265B over a 30-day period. This clearly depicts surging usage.4
These volumes didn’t emerge overnight but more recently stablecoins have been gaining speed. Checkout.com announced its partnership with Fireblocks in 2022 to enable settlements in USDC, PayPal introduced PYUSD Stablecoin in collaboration with Paxos in 2023 and varied reports suggest traditional FIs are getting into stablecoins now as well – J.P. Morgan Chase, Mastercard, and even VISA – are all adopting or issuing their own stablecoins.5
With Stablecoin usage surging, it's helpful to reflect on how we got here to understand the true potential of the moment.
For Stablecoin to power the future, we must understand the past
Analyzing a 100-year arc of financial history informs what we should fortify to propel our next 100 years. Three key elements stand out at this juncture:
- An American history marked by bank failures;
- Persistent volatility of currencies around the globe; and
- The critical role that the rise of VISA played in the global movement of money.
Bank failures
A lot of crypto and stablecoin coverage focuses on the risk of financial institution instability. Folks worry about stability not being enough of a value creator. We beg to differ. The banking system is incredible, but it's not without its own volatility and failures. From the panic of 1918 to the most recent bank failures (summarized here), we suggest it’s time for a paradigm shift.6 Payments is an interconnected industry - failure at one point can lead to disastrous consequences elsewhere - look at the impact of Synapse’s failure across the broader fintech sector.
Currency volatility
It is broadly known and accepted that monetary policy, political activity, market sentiment, global economic events, and inflation are key drivers of currency volatility. As Americans, despite our line of work, even we can take the U.S. dollar’s relative stability for granted. But across much of the world, this is not an option. In general, emerging markets tend to be more volatile, and in Latin America, even large economies like Argentina and Brazil struggle continuously with volatility.
Visa’s Global Money Movement Network
While a lot of media coverage is focused on the threat that stablecoin presents to VISA, we have a different view: Could VISA be the V1-4 to the stablecoin’s 01? From day one, VISA set out to create a global network for payments, enabling access and always working to improve payment speeds and reach. For those of us working with the networks, today VISA and the direct competitor MasterCard are behemoths, and given they are a core technology upgrading and transforming them is incredibly difficult, and frankly, the juice is not often worth the squeeze.7
Now consider the industry of innovation that has emerged inside and around these super highways –PSPs, cards, lending, and loyalty, to name a few. VISA has spent decades stitching together relationships with consumers, banks, and merchants to make this possible, it's one of the most trusted brands in the world, and ultimately, it created a network of networks… for the last generation… enter stablecoins.
The promise of a new global super highway
As investors, advisors, and operators in fintech, we see how stablecoins offer the opportunity to solve persistent challenges in ways that are not possible with traditional technologies and institutions.
Currency volatility -> stability and new earning power
Many in the emerging market only have access to local, (often) volatile currencies with limited ability to access international markets. For these customers, access to a stable currency or stablecoin, pegged to an asset like the US dollar, will be quite helpful for many reasons.
Given government behaviors, levels of inflation, or long-term political outlooks, there are many reasons why a user may choose to keep assets outside their local currency. This can be a compelling reason to build a financial relationship with a user and expand one’s product offering.
The ventures emerging largely in Africa and Latin America that allow consumers to use stablecoins to save in the US dollar are a natural early extension of the value here. The DeFi lending platform, which allows users to earn interest on stablecoin deposits is particularly compelling, capitalizing on the growing demand for stable, dollar-pegged assets and providing users with a way to preserve value and potentially grow their savings in a more stable currency. We are also intrigued by the opportunity to free up dollars and thus get businesses access to the dollars they need for working capital and paying suppliers. As with many aspects of fintech – we can see great growth when you bring liquidity to illiquid markets.
We believe that stablecoin savings products (where legal) can provide a compelling wedge product to build a broader fintech platform. This is the approach that Dolar has taken in LatAm with great growth. We look forward to seeing other unique fintech platforms built off the back of stablecoin wedges.
Money Movement and Capital Efficiency
Cross-border payments, in particular, often involve high fees due to the currency conversion requirements, associated banking fees, and varied intermediary charges, as well as perceived or real hidden costs given exchange rates and fees charged across the network. With stablecoins, some of these intermediaries are eliminated, thus reducing transaction fees and lowering the cost to end users.
A core value proposition of stablecoins is their ability to settle instantly rather than in the standard two days in the traditional settlement process. While in some industries that delay is not important, in other industries it creates real friction. One way players create instant payouts is by leveraging working capital, using one’s balance sheet to front capital while you wait to collect on the other end. A classic example in the U.S. is the two-day delay between a payroll run and funds hitting an employee’s bank account. There is an entire niche of fintech dedicated to closing this gap by leveraging working capital to advance the paycheck by two days (Chime, EarnIn, etc).
We also see great opportunities in B2B use cases and treasury management. The reality is that until there are deep regulatory-blessed fiat-stablecoin markets this will be a challenge to scale. International money movement is highly regulated and governments (rightly) care a great deal about how participants of scale operate in the market.
Naturally, the markets where stables create the most value for increasing the efficiency of cross-border money movement, are also the ones with the tightest currency controls. We do not expect or believe this value prop to be a sustainable model as governments implement regulations. On the other hand, we expect there to be an opportunity for companies willing to work in tandem with local regulators to help reduce friction and cost in the system and facilitate financial flows. We already have seen governments begin to invest in and endorse such initiatives.
Complex domestic money movement -> efficient movements and new profit pools
Today, U.S. domestic money movement and merchant payments are slow for many of the reasons mentioned above. Even when processing on Stripe with its flexible APIs, Stripe must work within the traditional financial system. The very act of accepting the payment on the selected payment method (credit/debit card, BNPL, direct bank transfer, etc..) involves authorizing the payment, capturing the funds, communicating with the relevant payment network and financial institutions, minimizing fraud, complying with regulations and ensuring the correct funds move between the transacting parties with proper records in sequential order. Each step in what's commonly called the payments daisy chain includes multiple parties and is fraught with risk of error, delay, fraud, and fees. The sheer cost of the infrastructure to support this is tremendous.
When one understands what's required in the traditional payments chain, it becomes that much clearer how payment processors like Stripe, Checkout.com, or PayPal can leverage the stablecoins to reduce fees and free up capital. To demonstrate the fee savings leveraging stablecoins vs. traditional financial services, it's helpful to evaluate a simple $100 payment processed by Stripe:
- Traditional financial services via Stripe at Stripe’s published rate card at 2.9% of the transaction amount plus a $0.3 fixed fee per transaction on a $100 transaction: 2.9%*100+0.30=2.90+0.30-$3.20
- Stablecoin transaction fee: Transaction fees for stablecoins can be as low as 1-2 basis points (0.01% to 0.02%) depending on the blockchain used. On a $100 transaction at 0.01% fee: 0.01%*100=$0.01
Clearly underpinning these lower published fees are the lower costs to manage simplified infrastructure; both the new APIs vs. older technology maintenance as well as the reduced time and money spent on the network of partnerships enabling transactions in the traditional financial system. Additionally, there are cost savings associated with faster settlement times and increased float. Now, leverage the automation afforded by AI agents that can run pre-defined transactions, compliance checks, and fraud detection, and this efficiency scales massively. We expect processors to pass the savings on to their users and/or invest in enhanced offerings with this freed-up capital.
The companies poised for the greatest growth here will not only offer up efficient domestic payments but will also leverage novel technology to increase compliance, reduce fraud, and free up capital to likely develop value-added services that entrench the user.
Perils of this new highway
As with any novel technology, especially in financial services, we must be clear-eyed about the risks presented and better yet, build to stay ahead of them.
Regulation
The regulatory landscape for stablecoins is still evolving and inconsistent regulations may limit adoption and create confusion and waste. Notably, numerous efforts are underway to enact regulation both in the U.S. at the federal and state levels and around the globe. For example, the European Central Bank has proposed designing its own digital euro CBDC.
A core tenet of fintech investing at Canaan is that the most successful companies will require both a robust respect for and nimble approach to evolving regulatory conditions. While companies that take shortcuts may score points in the short term, this strategy is simply not sustainable; conversely, companies fixed in their ways will miss exciting opportunities as regulations evolve. We appear to be in such a moment of rapid change now and have our eyes open for such companies. This belief in funding companies looking to align with regulators is what informed our investment in Paxos versus all the other BTC exchanges circa 2013.
We genuinely believe that stablecoins offer meaningful improvements to payments infrastructure. Some of the massive growth the market is seeing is antagonistic to regulators and will likely be curtailed (see the Binance executives jailed in Nigeria), but much is also legitimate. If done well, we could actually realize improved regulatory compliance with stablecoin technology,
‘When winds of change blow, some build walls, others build windmills’
The Chinese proverb couldn't be more applicable here. So we are thinking about what this enables well beyond cryptocurrencies. We are thinking about what's broken and needs fixing, what's slow, who is excluded, what won’t Stripe do with Bridge (because it's outside scope or frankly not in their interests), and how a transparent, lower cost, higher velocity system solves this? Spaces that excite us include:
Infrastructure Transformation:
As the use of stablecoin continues to increase across new use cases, picks and shovels will be required to fortify the technology, advance controls, expand capacity, and likely enable new onramps and ramps, to name a few. We are excited to see cross-chain capabilities that are built to maximize usage with innate fraud protections for example.
Unlocks: B2B, Cross Border, Underserved, Hard to Reach:
The promise of an entirely new money movement system offers a great unlock in the complex B2B and cross-border payments spaces as well as more efficient access to underserved populations. We look forward to seeing ventures that work within regulation to make B2B both faster, cheaper, and easier to complete. We are also looking forward to seeing the applications that enable those far-reaching communities to move money at friendly price points- finally.
Novel Tooling:
Ultimately products, services, and platforms will be needed across chains to handle fraud, risk, compliance, address regulation, improve controls, and offer analytics. We are looking for Founders who leverage AI models and agents to speed up and improve how fraud, risk, and compliance are handled across the chain and offer the data necessary for constant improvement and compliance.
Adjacent Services:
This new system's speed, reach, and transparency offer up new opportunities for ventures addressing wealth formation, management, access, and other value-added services in and around the new system. We hope to see Founders leverage the new revenue pools and lower pricing to offer up meaningful platforms that enable savings and propagate real-time data for smart decisions.
And this all aligns with Brendan’s original fintech framework that Canaan has invested from since 2017. We’ve had a long-held view that fintech shouldn’t be assessed by discrete verticals but instead through the lens of products, platforms, and infrastructure. While Stablecoin is itself infrastructure we strongly believe it is the fintechs of the future that will disrupt and exploit that very infrastructure through pioneering uses, adjacent platforms, and new products; this time though, it's all technology, 24/7, truly around the world and we are thrilled to lean into it.
1. If newer to stablecoin, we suggest taking a look at What is a stablecoin, from Coinbase, Primer on this chapter and the evolution of stablecoin from Huan, the early stage Crypto investing firm & Circle’s 2020 overview of Programmable Money: Opportunities & Benefits of Digital Dollar Stablecoins. Simon Taylor wrote a great assessment of the Stripe Bridge planned acquisition, Why did Stripe spend $1 bn on series A Stablecoin?
2. For a primer on the Dodd Frank Act we recommend referencing Investopedia’s summary, Dodd-Frank Act, What It Does, Major Components & Criticisms. Of course there are numerous articles about its implications and source documents available online.
3. MasterCard’s State of Global Payments: Six Trends Shaping the Industry, BCG’s Global Payments Revenue Pool to Reach $2.2 Trillion by 2027, with Growth Likely to Slow.
4. Visa now publishes a Visa Onchain Analytics Dashboard as well as publishes articles on this data. The April release, Making Sense of Stablecoins, summarizes the volume data as well as explains complexity involved in tracking the data.
5. 2022 Checkout.com announced Fireblocks partnership (coverage sample here). 2023 PayPal announced Paxos enabled stablecoin (coverage sample here). Coverage of J.P. Morgan’s stablecoin, JPM Coin includes the 2024 announcement that they developed instant dollar-euro settlements using its Kinexys blockchain (coverage sample here).
6. A lot is written about American Banking Failures, we went down a rabbit hole in the previous version of this note in fact. But for a quick summary just refer to the Banking Strategist summary of a History of bank failures.
7. Two incredibly entertaining podcasts on the history of VISA worthy of listening to: Alex Rampbell on Colossus, VISA: the original protocol business, Acquired’s did a deep dive into the History of VISA.