While crypto continues to trickle into mainstream usage, stablecoins, which provide many of the same benefits of crypto without the volatility, are taking traditional financial institutions by storm.
Despite Jamie Dimon’s crypto skepticism, JP Morgan has already begun adopting blockchain technology with its deposit token, resembling a stablecoin in all of its attributes. In a similar vein, as 90% of central banks explore the implementation of a central bank digital currency (CBDC), the volume of CBDC transactions is projected to increase by 260,000% between 2023 and 2030.
As this tectonic shift towards digital currencies surges across the landscape of traditional finance, all institutions, both traditional and web3-native must prepare for the future of compensation.
The Differences Between Fiat Currency and Stablecoins
Fiat currencies, underpinned by the authority of a central government or monetary institutions, have long been the bedrock for global financial systems. These traditional currencies are regulated, issued, and controlled by their respective central banks and derive their value from the trust and stability bestowed on them by the governing authorities.
Stablecoins, on the other hand, have emerged as a novel and disruptive force in the digital currency arena. With the first stablecoins issued in 2014, BitUSD and NuBits pioneered the way for a revolutionary sub-asset class that has hit a market cap of over $123 billion.
As their name implies, stablecoins, unlike other cryptocurrencies, are designed to maintain stable value by being pegged to assets like fiat currencies, commodities, or other cryptos. This is typically achieved through robust collateralization mechanisms, algorithmic controls, or a combination of both.
Like crypto, stablecoins provide a means for quick and inexpensive borderless transactions. They differ in their mitigation of price volatility, which is a feature inherent to many cryptos. As a result, stablecoins have gained popularity as a medium of exchange, a store of value, a tool for international payments, and a bridge between traditional and digital financial ecosystems.
The Advantages and Limitations of Fiat Currency
Due to its status as being the standard form of money that most people across the globe are accustomed to handling, for companies, there are certain advantages that come with holding a treasury in fiat currency.
Pros of Fiat Currency
Virtually every corner of the globe transacts in fiat currencies, which ensures their universal utility. With this comes relative stability, which is crucial for maintaining the predictability required for daily commerce, investment, and payments. Fiat currencies benefit from well-established regulatory frameworks and governmental backing, which instills confidence and trust among users.
With banking infrastructure existing in its present form, fiat currencies seamlessly integrate into the operations of banks worldwide. This is crucial since it enables financial access to a broad spectrum of individuals and businesses across the globe transacting both locally and internationally.
Cons of Fiat Currency
Despite the ease and comfortability that fiat currencies bring to an organization's financial operations, they also possess certain limitations. Many of their glaring pitfalls in today’s globalized market pertain to cross-border compensation.
While fiat currencies are the global norm, the institutions built around them are notoriously archaic. This can make compensation for remote, international teams tedious to the point of impossible. International payments are often weighed down by high transaction fees and delays in the arrival of funds.
Similarly, while fiat money can serve as a universal form of currency for banked nations, for the unbanked, it makes many financial transactions and remote hiring inaccessible. While 70% of Latin America is unbanked, 51% of consumers in LatAm have made a transaction using crypto. This enthuse around blockchain technology can be best illustrated in Argentina, which is suffering the effects of a collapsing economy and an inflation rate that hit 124% in August of 2023. As mistrust in government-controlled currency intensifies, a steady adoption of crypto and web3 services has gained momentum in reaction.
For companies who presently have zero interaction with crypto or stablecoins, the lack of web3 integration threatens obsolescence in a global market that is rapidly adopting digital transformations in the realm of blockchain technology.
The Advantages of Stablecoins
For companies that are considering switching over to a hybrid crypto and fiat treasury, a recommended place to start is with the integration of stablecoins.
Pros of Stablecoins
Depending on where a company is located, unlike fiat currencies, stablecoins are not affected by inflation. Take a company based in Argentina for example- with a treasury held in mostly stablecoins such as USDC or USDt, the hard blows faced by the Argentine peso, their fiat currency, would have been avoided.
When considered from the perspective of international contracting, stablecoins offer an additional host of benefits. Their stability combined with their blockchain-based nature makes them an ideal option for global remuneration. Unlike crypto which has the potential to depreciate in value and can thus cause complications with respect to payroll, the inherent stability of stablecoins make them a far less risky alternative. Minimizing risk while optimizing blockchain technology situates stablecoins in a unique niche; companies can execute close-to-instant, cost-efficient, borderless transactions without putting their treasuries in a vulnerable position.
A key player in the web3 ecosystem, stablecoins are an entry point that allow companies access to other features of web3 and DeFi such as dApps, smart contracts, and on-chain identity. Through the integration of stablecoins, companies unlock the ability to work with innovative solutions and financial services that bring many of the core benefits of blockchain technology to HR processes and beyond. These can include payroll solutions that offer scalable and efficient payments, hiring services that take care of identity verification and credential checks on-chain, and transactions that are transparent, secure, and tamper-proof.
Cons of Stablecoins
Alongside the major advantages that stablecoins provide, there are notable drawbacks to consider when incorporating them into treasury management strategy and business operations.
First and foremost, regulatory uncertainty looms large. As governments worldwide grapple with how to classify and regulate crypto and stablecoins, companies may face shifting compliance requirement which have the potential to subject their operations to unforeseen legal challenges and liabilities.
Another concern that can arise is the potential for limited access to routing options between fiat and stablecoins. While in 2023 this is no longer such a significant issue, when making the decision to incorporate stablecoins, it's important to ensure access to routing services if certain operations need to be conducted in fiat currency.
When choosing which stablecoins to incorporate, an important feature to look out for is how they are collateralized. While some stablecoins, such as USDC, are collateralized with the US dollar, others rely on collateral reserves in the form of other cryptos, which, depending on market volatility, can undermine the stability of the stablecoin.
Incorporating Stablecoins into your Company’s Operations
The risks associated with holding stablecoins are very minor in comparison with the numerous benefits that they provide. To begin the process of integrating stablecoins into treasury management and business operations, it is a recommended first step to onboard with a comprehensive hybrid crypto and fiat payroll solution.
A product designed to manage a wide range of HR processes and operations in currencies that span fiat and crypto, such as Rise, is an optimal choice for traditional companies and web3-native organizations alike. Rise, for example, handles operations that include compliant hiring, global payroll automation, tax compliance, and routing between crypto and fiat currency.
For companies that want to embrace innovation and agility for a more globally-connected financial future, stablecoins represent a strategic step in the direction of progress.