Stablecoins & Tokenization: New Forefronts in Innovation for Central Bankers

Visa’s point of view on new trends in payments translated for central bankers and policymakers

Stablecoins have evolved from an extension of crypto trading use cases to becoming a payment rail with growing adoption for non-crypto use cases, such as enabling store of value from high-inflation currencies, faster & cheaper cross-border transactions, and dollar access in markets with strong capital controls. Over the last year, Visa has engaged in cutting edge research around onchain analytics and on-the-ground stablecoin user surveys in emerging markets to better understand their impact.

Onchain Analytics Dashboard

In April 2024, Visa launched the Visa Onchain Analytics Dashboard, a freely available, easily digestible tool showcasing key stablecoin metrics using public blockchain. The first major takeaway from the dashboard is the growth in demand for stablecoins. At $168B, fiat-backed USD stablecoin circulating supply is near an all-time high, up from $121B a year ago, reflecting the growing demand for stablecoins.

Of the total supply, 97% is from Tether’s USDT (77%) and Circle’s USDC (20.76%), however, substantial growth has come from new entrants, such as PayPal with PYUSD, at one point reaching $1B in supply.1 As stablecoin adoption grows and the regulatory framework evolves, we expect to see more banks and fintechs start to explore and issue their own stablecoins.

Separating Signal from the Noise

Over the last year, it has been reported that stablecoin volumes have approached $500B (see Figure 1 below).1 However, there is also a lot of noise in this data given that blockchains are general purpose networks where stablecoins can be used across a range of use cases with transactions that can be initiated manually by an end user or programmatically through bots. For instance, developers can create automated bot programs that perform activities such as stablecoin arbitrage, liquidity provision, and market making, among others. These activities are vital for sustaining the growing decentralized finance (defi) ecosystem. However, the onchain transactions resulting from interactions with these automated programs don't resemble settlement in the traditional sense. As a result, there are large spikes in transaction volume, which correlate more with crypto market dynamics, rather than a signal for use cases more akin to payments.

Considering this, Visa collaborated with industry leaders, such as Allium Labs, Castle Island Ventures, and Artemis Analytics, on an adjusted methodology for version 2 of the Visa Onchain Analytics Dashboard, which utilizes wallet address labeling techniques to attribute transactions to specific entities, and heuristics-based filters to draw out high-frequency traders and bots. When making this adjustment, it is apparent that stablecoins have grown throughout market cycles with an average annual growth rate of 225% since 2019. Despite the adjustments, volume is still significant with close to $5T in volume over the last twelve months. Of this volume, 38% is comprised of deposits and withdrawals at centralized exchanges, reflecting their role in distribution and on and off ramps.

Figure 1. Visa Onchain Analytics Dashboard

Source: Visa

Blockchain Speeds and Costs Are Changing Consumer Behaviors

Another key trend highlighted by the dashboard is the shift towards blockchains with higher throughput and lower costs. This is most notable with the advent of layer 2 blockchains built on the Ethereum network, such as Base, Arbitrum, and Optimism. Twelve months ago, of total EVM stablecoin transactions, 52% were on mainnet Ethereum. Today that number is down to 31%, which is largely driven by the growth of Coinbase’s layer 2 blockchain, Base, which went from 1.8% to 18% of total Ethereum transactions. (Visa Onchain Analytics Dashboard)

User Growth

Due to the nature of blockchain data, which uses wallet addresses rather than names, it is unknown how many true stablecoin users exist. However, one can use distinct wallet addresses as an approximation for the trend of user growth.

Since 2019, unique monthly sending stablecoin addresses have grown from 23k to 28M, highlighting consistent growth in address activity. During September 2019, 12M of these addresses sent stablecoins for the first time, meaning prior to, the address had never sent a stablecoin before. This highlights the impact and consistent growth of new addresses entering the market. Today over 70M wallet addresses hold a fiat-backed stablecoin.2

Impact of Weekend Settlement

Stablecoins facilitate near-continuous payment settlements, designed to operate 24/7, 365 days a year. Based on UTC time zones, $425B was settled in adjusted stablecoin volume on the weekends over the last 6 months. This figure represents the opportunity for enabling 7-day settlement.

The impact of 7-day settlement is also noticeable when comparing weekend versus weekday volumes and transactions. On average, weekday stablecoin volume is 93% higher than average weekend day settlement volume over the last 6 months; however, average weekday transaction count is only 17% higher over the same period. This potentially suggests the impact of institutions entering the space who can only operate 5 days a week.

Emerging Markets Adoption

Visa recently sponsored a new original research paper focused on stablecoin preferences and trends in emerging markets.3 For the research, 2500 active crypto users were surveyed across five emerging markets: India, Indonesia, Nigeria, Turkey, and Brazil, to better understand how stablecoins are being used.

When surveyed about their primary goals for using stablecoins, 47% of participants said to get dollar access, 43% said to get better currency conversion rates, and 32% said to send money internationally, showcasing intent to use stablecoins beyond crypto trading. This also extends into experimenting with stablecoins for new use cases, as 69% converted local currency to a stablecoin previously and 23% reported using stablecoins to receive a salary.

Beyond non-crypto use case trends, on a demographic level, the report suggests that younger generations are leading the adoption of stablecoins with 34% of 18-24-year-olds indicating that they convert local fiat to stablecoins on a weekly basis. From a regional perspective, Nigeria had the most participation, with 42% of respondents indicating that they buy, sell, or, trade stablecoins on a weekly basis. India was second with 35%.

Understanding Tokenization & Stablecoins

Stablecoins represent the first use case of tokenizing fiat currencies, however we believe tokenization can apply across the financial systems with banks and other assets. We believe a financial ecosystem is in sight where blockchain and tokenization technology stand to play pivotal roles. Efforts in tokenization over the years show a trend toward transforming financial asset management through digital technology. Visa has helped to shape the adoption of tokenization technologies and played a pivotal role in refining these for payment security.

Today, we have issued over 10bn tokens, a figure that surpasses the number of physical Visa cards in circulation and highlights the widespread adoption and trust in the technology. This sets the stage for further innovation in digital payment security across various transaction environments.

Central to the strategy is the EMV Payment Tokenization Specification, established in 2014. This standard ensures the security and efficiency of digital transactions and by adhering to these rigorous standards, fraud risks can be mitigated, thereby enhancing the integrity of digital payments and facilitating seamless transactions across the global financial ecosystem.

Moreover, the future of tokenization will encompass the digital representation of diverse asset classes on blockchain platforms. Stocks, derivatives, and real estate are ideal candidates for tokenization (see Figure 2 below). These can be used to enhance liquidity, streamline transactions, and revolutionize asset management with unprecedented efficiency.

Figure 2. Use cases for assets can range from payments to art-based collectibles

Source: Visa

Programmable Finance

In the emerging landscape of programmable finance, the integration of different forms of money plays a crucial role. Tokenization could utilize various sources for the cash leg of transactions, each with distinct implications for the financial ecosystem.

• First, wholesale central bank digital currencies could provide a highly secure and regulated foundation for the cash leg in tokenised transactions, promoting stability and trust.
• Second, tokenised commercial bank money would enable commercial banks to issue their own fiat-backed tokens, allowing for seamless integration with existing banking systems and a bridge between traditional banking and new digital platforms.
• Lastly, private stablecoins issued by private entities are designed to maintain a stable value by being pegged to fiat currencies or other assets. They are able to offer an alternative cash leg for transactions within and beyond the banking sector.
• These efforts highlight a proactive approach towards securing trusted tokenization infrastructures, achieving standardization and interoperability.

Further, novel research and innovative solutions are being developed that address the modern financial landscape. In 2021, Visa published Making Digital Currency Interoperable, a report aimed at enhancing the utility of digital currencies across various platforms. That same year, Visa was recognized as a winner in the Monetary Authority of Singapore’s Global CBDC Challenge, which focused on interoperability between digital currencies and retail payment solutions.

The Future of Tokenization

The ability to tokenise a wide range of assets and integrate them with various forms of money highlights blockchain’s potential to create more open, efficient and inclusive financial markets. The potential here extends to creating programmable and automated financial instruments, reducing the costs and frictions associated with traditional finance.

A financial ecosystem is in sight where blockchain and tokenization technology play pivotal roles — not just in transferring value but also in creating entirely new forms of financial interaction and service delivery. This vision involves working closely with financial institutions, regulators, and technology providers to help ensure a secure integration of traditional and digital finance.

By enabling the tokenization of a diverse range of assets and supporting the integration with various forms of digital money, we can usher in a new era in finance. An era that promises greater flexibility, security, and efficiency for individuals and businesses around the world is one that embraces the full potential of digital innovation.

Visa (NYSE: V) is a world leader in digital payments, facilitating transactions between consumers, merchants, financial institutions and government entities across more than 200 countries and territories. Our mission is to connect the world through the most innovative, convenient, reliable and secure payments network, enabling individuals, businesses and economies to thrive. We believe that economies that include everyone everywhere, uplift everyone everywhere and see access as foundational to the future of money movement. Learn more at Visa.com.

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