The Bank Account Reimagined, Part I

In May 2018, we wrote an article on the "Stablecoins Wars"¹. Coming off the back of launching the first banking API in the U.S., it was clear to the founder of Relayzero that banking APIs were the future of banking, but stablecoins were for a post-banking world.

Tether had $2.3 billion in circulation - a little more than 1% of its $183 billion market cap today - MakerDAO and its crypto-backed stablecoin were in its infancy, and Basis had just raised $133 million for "price-stable cryptocurrency with an algorithmic central bank." The race was on to bank the world.

Eight years later, it is clear that stablecoins are the end state of bank account unbundling - simply a programmable balance for our lives².

It is time to look back on what's been done, what's left to build, and how new stablecoins can enter the market as a three-part series called Bank Accounts, Reimagined.

As go-to-market specialists for products and companies, it's natural that the first in the series will focus on what's been done as a deep dive into stablecoin go-to-markets³.

Phase 0 (2014-2017): First to Market

Notable Launches: USDT, BitUSD, NuBits, DAI

In July 2014, Realcoin launched counter-positioned against the altcoins which were primarily Bitcoin code forks⁴. Rebranded later that year as "Tether", it was not technically the first fiat-backed stablecoin to market. Still, it was the first to launch with a distribution advantage and a robust keep bank accounts open at all costs mentality.

Incubated by Bitfinex exchange, Tether was launched to solve their own exchange's problem - bank accounts. In short, banks did not want to bank crypto exchanges due to compliance challenges, massive fraud, and regulatory uncertainty. Banks shut down crypto business bank accounts from the U.S. to China⁵⁶⁷⁸.

From firsthand experience, these were complicated times. As part of the founding team and General Counsel of Synapse, Bae led the termination of Bitfinex's banking relationship with its bank partners after the exchange was hacked, and separately led the business relationship with Tether-supported entities.

Bitfinex was one of the most popular exchanges at the time, so naturally USDT volumes grew as the exchange business grew. As programmable dollars, the startup exchanges treated USDT as their bank. No longer constrained by banking, worldwide exchange volume exploded into the 2016-2017 bull market cycle.

What mattered in this phase

1. Mint and redeem with whale traders and exchanges
2. Keep as many backup banks as possible, preferably outside the United States
3. Structure the corporate entity somewhere with light regulation

Lessons from this phase

Tether gave start-up exchanges the functional equivalent of bank accounts when banks and regulators, via proxy, were adversarial. Traders needed a stable asset to quickly move between exchanges and profit from arbitrage. Tether won as a tool for exchange banking and traders in an era of shadow banking.

Phase 1 (2018-2020): U.S. Exchange Distribution

Notable Launches: TUSD, USDC, GUSD, BUSD

TrustToken or TrueUSD (TUSD) was one of the first to launch as a compliance-forward, transparent fiat-backed stablecoin held in U.S. trust bank accounts in March 2018. Two months later, Circle announced "USD Coin" (USDC) with Coinbase Exchange in a joint venture called the CENTRE Consortium. Coinbase came out on top with a 50/50 split on reserve earnings on tokens held outside of Coinbase and 100% of reserve earnings on USDC deposits at Coinbase⁹.

TrueUSD briefly became the second-largest stablecoin with $182 million while USDC had $169 million in deposits¹⁰. Exchange distribution became commonplace with Gemini launching its own stablecoin, GUSD, and Paxos launching a white-label stablecoin, BUSD, for Binance. Each new stablecoin counter-positioned against USDT's apparent lack of transparency and compliance-light approach, but dollar volume growth followed where the dollars were flowing: USDC on Coinbase, the #1 exchange in the U.S.

What Mattered

1. Distribution with Coinbase led to other exchanges supporting your stablecoin
2. Having a strong U.S. bank partner and backup bank
3. Counterposition USDT with trust signals like compliance and reserve transparency

Lessons from the phase:

Circle innovated via distribution, but not in the form most people remember. While most stablecoins offered up to 1% discounts for distribution, Coinbase was given equity-like upside on all reserve assets¹¹. Coinbase had governance, alignment, and a reason to make USDC the default on its own venue.

Phase 2 (2021-2023): DeFi Distribution

Notable Launches: UST, AMPL, BAC (Basis)

The push in the 2020's into decentralized finance and onchain finance naturally encouraged experimentation like lending, trading, and algorithmic stablecoins, which was a step change beyond even crypto-backed stablecoins like DAI. Algorithmic stablecoins were making headlines with Terra's UST briefly becoming the #3 largest stablecoin with nearly $17 billion before collapsing¹². However, the real stablecoin story was being won with DeFi traders.

For over a decade, the base pair for many trading assets on exchanges was BTC, and with the introduction of DeFi on Ethereum, ETH became the dominant base pair onchain. However, as traders took advantage of new leverage and arbitrage opportunities, USDC slowly took over as the asset of choice for DeFi deposits and trading on lending protocols like Compound Finance and exchanges like Uniswap.

What mattered

1. Replacing BTC and ETH as quoted pairs
2. Being the preferred stablecoin in crypto wallets
3. Deposit asset of choice for DeFi yield farming

Lessons from this phase:

In the DeFi distribution phase, the distribution (read: trader) moved onchain. Becoming the stablecoin of choice for DeFi developers and traders was critical to winning the fast-growing market of stablecoins, which went from $15 billion in August 2020 to $177 billion by February 2022¹³.

For U.S. related flows, USDC won the developer race, from wallets and DeFi to new-age "neobanks" being built on Ethereum.

Phase 3 (2024 - Present): Embedded Distribution

Notable Launches: USDe, fraxUSD, USDG, RlUSD, USAT, USD1, OUSD

Enter today. Where the prior phases were about winning the trader offchain and then onchain, the embedded distribution phase is dominated by traditional payment flows where businesses and consumers spend and get paid.

In this phase, stablecoins issued grow via (i) fintechs upgrading their own customers' payment flows at scale (e.g., Ramp)¹⁴, (ii) issuers acquiring companies with high-volume customer flows (e.g., Ripple acquiring Hidden Road)¹⁵, or (iii) acquiring tech companies supporting apps with payment flows (e.g., Stripe acquiring Bridge)¹⁶. Where Bridge's U.S. virtual accounts are key for international gig workers getting paid in Bridge's developer customer apps, Ramp and Hidden Road have captive customer payment flows to upgrade into stablecoins. Most of these flows come down to business payments for goods and business payments for international payroll.

While becoming Genius Act compliant dominates the news cycle, it broadly formalizes geographic boundaries already present in practice where USDC dominates the U.S., and USDT dominates non-U.S. use cases. Drafts of the Clarity Act, however, are likely to formalize market incentives where stablecoin issuers lose out on yield to their partners who own the end customer¹⁷. This created an environment where the cost of acquiring new partners rose to reserve revenue levels. Stablecoin profits are being squeezed.

Where USDT broadly has no competitors of size outside the U.S. and generally shares no reserve revenues with partners, competition for US-related payment flows required Circle to share reserve revenues with most partners to retain the deposits. Recently, Stripe announced the launch of Open USD, a consortium that shares almost all of the reserve revenue with partners by default. Short of Circle renegotiating its deal with Coinbase, there are not enough reserve revenues for USDC to compete against OUSD revenue share programs¹⁸. USDC's integration network effect off and onchain, however, is a big mountain to climb. This is why captive customer bases now matter.

What mattered

1. Reward partners with reserve yield and end customers with "rewards"
2. US virtual accounts gain popularity amongst international workers
3. GENIUS Act compliance creates regulatory moat for current U.S. issuers
4. Mergers & Acquisitions for captive distribution

Lessons from this phase

Incumbents will protect their markets with regulatory capture. The cost to acquire and retain partners is now the majority of reserve revenues. Captive customer payment flows are key for future growth as profits move from infrastructure to distribution¹⁹.

Bringing traders from centralized platforms to DeFi was achieved in Phase 0 through 2. Phase 3 is about enterprise use cases taking over and growing beyond traders and embedding into business payment flows.

Where this leaves us

The dollar account stablecoin stack has become commoditized, and channels are taking all of the economics. Regulatory capture and integration network effects make it - on the surface - look like the stablecoin market has already been won. Short of reimagining the bank account, funding for new stablecoin startups is at risk of freezing up, and competition is moving from innovation to marketing spend.

As a firm specializing in go-to-market, we believe there is a lot left to be built (Bank Account: Reimagined, Part II) and wide-open lanes for new and novel go-to-markets (Part III of Bank Account: Reimagined).

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