What Happened This Week?
Stripe's Acquisition of Bridge leads Visa/Mastercard Disruption through Stable-Coins adoption
Weekly Brief
This week, I’m diving into the ever-evolving world of payments, exploring the journey from the familiar swipe of Visa and Mastercard to the emerging realm of stablecoins. Initially I planned to talk about a case for a weakening dollar and sovereign wealth funds however after watching the Collison Brothers talk about Stable Coins on this week’s All-In Podcast, I decided to push it back a week. After listening to Ben and Gilbert’s 2023 Acquired episode on the Visa this Sunday, I hurried to finished this week’s Substack Sunday night. I would like to post a disclaimer that this is not financial advice and I personally am not invested in, and do not use/work with any cryptocurrencies. So without further ado, let’s get into it!
Stable-Coins challenging decades old hegemony - Stripe's Acquisition of Bridge leads Visa/Mastercard Disruption through Stable-Coins adoption
The Evolution of Payment Systems: From Visa and Mastercard to Stablecoins
Think of Visa and Mastercard as the established highway system for your money – they've built the roads and tolls that connect banks, merchants, and consumers for decades, making transactions smooth. But now, imagine a new kind of currency that can travel on a different, potentially faster and cheaper, set of digital rails: stable coins. Stablecoins are a type of cryptocurrency, but unlike the rollercoaster ride of Bitcoin's price, they're designed to be, well, stable. They do this by tying their value to something familiar, like the US dollar – it's like having a digital dollar that can move instantly across borders without the usual banking fees. Are stablecoins ready to challenge the dominance of credit card giants? What does this mean for the future of how we pay, and is it a viable system? Let's explore the possibilities, the hurdles, and whether this digital shift could change the way we all handle money.
The Rise of Visa and Mastercard
The story of Visa began with a forgotten wallet and a determined businessman named Frank McNamara. In 1949, after an embarrassing incident at a business dinner, McNamara partnered with Ralph Schneider and Matty Simmons to create the Diners Club card, the first universal credit card. This card, initially made of cardboard, allowed members to dine on credit at select New York restaurants. While Diners Club paved the way, it was Bank of America that truly revolutionized consumer credit with the launch of the BankAmericard program in 1958, a program kickstarted in Fresno, CA, when 65,000 unsolicited credit cards were mailed to consumers thus marking the beginnings of Visa.
Bank of America faced challenges with fraud and consumer adoption having lost $20M within a year, and rumors of competition sparked panic within the organization. After implementing financial controls and apologizing to millions of households for the inconvenience caused, Visa’s initial struggles led to a focus on security and consumer trust. However, breezing by initial headwinds, by 1974, the BankAmericard program had expanded internationally, and in 1976, it was rebranded as Visa, a name that resonated globally.
Meanwhile, another player was emerging in the credit card arena. In 1966, a group of banks, most notably Wells Fargo, formed the Interbank Card Association (ICA) to compete with the growing popularity of BankAmericard. Establishing a national brand was initially a challenge for ICA, as each member bank had a say in the card design. To overcome this, ICA adopted the "Master Charge: The Interbank Card" brand in 1969, featuring the now-iconic overlapping red and yellow circles. This move, along with strategic alliances with Banco Nacional in Mexico and Eurocard in Europe, helped Mastercard establish a strong brand identity and expand its reach. In 1979, Master Charge was rebranded as Mastercard, solidifying its position in the market.
Both Visa and Mastercard continued to innovate and expand their networks. In 1985, Mastercard acquired the Cirrus ATM network, further strengthening its presence in the financial services industry. This acquisition, along with the launch of Maestro, the world's first online point-of-sale debit network in 1991, demonstrated Mastercard's commitment to providing a comprehensive suite of payment solutions.
Factors Contributing to Visa and Mastercard's Dominance
Dominant Market Share: Visa and Mastercard control approximately 90% of all payment processing outside of China.
First-Mover Advantage: Early entry into the credit card market allowed them to establish strong brand recognition and build extensive networks of merchants and financial institutions.
Network Effects: The value of their networks increases with the number of users, built on leverage from highly scalable platforms allowing them to process billions of transactions efficiently.
Influence on the Regulatory Landscape: They engage with regulatory authorities to shape policies and lobby for industry-friendly regulations.
These factors have combined to create a formidable duopoly that has shaped the way we pay for goods and services for decades.
The Emergence of Stablecoins
While Visa and Mastercard were revolutionizing traditional payments, a new form of digital currency was emerging: stablecoins. In 2014, the first stablecoin, BitUSD, was launched on the BitShares blockchain, marking the beginning of a new era where cryptocurrencies could offer the stability of traditional currencies while leveraging the benefits of blockchain technology.
Stablecoins are designed to maintain a stable value by pegging themselves to a reserve asset, such as the US dollar or gold. This stability makes them suitable for various use cases, including payments, remittances, and as a store of value in volatile markets. The need for stablecoins arose from the inherent volatility of cryptocurrencies like Bitcoin, which can experience dramatic price swings, making them unsuitable for everyday transactions.
The early years of stablecoins saw experimentation with different models. BitUSD, for example, was crypto-collateralized, meaning it was backed by reserves of another cryptocurrency. Tether (USDT), launched later in 2014, took a different approach by pegging its value to the US dollar through fiat currency reserves. This model proved more sustainable, and Tether quickly became the dominant stablecoin in the market.
The stablecoin market has grown significantly, with a total market capitalization of approximately $227 billion. This growth reflects the increasing demand for stable digital assets and the market's evolution toward more sophisticated and regulated financial instruments.
Types of Stablecoins
Today, there are 3 main types of stablecoins:
Fiat-Collateralized Stablecoins: Backed by reserves of fiat currencies, these are centralized and “stable” cryptocurrencies such as Tether (USDT). These currencies are off-chain. $1M in USDT = $1M in real life.
Crypto-Collateralized Stablecoins: Backed by reserves of other cryptocurrencies, these are decentralized and over-collaterized coins such as DAI. These are on-chain coins working on smart contracts. As stated on Gemini’s website, “a real-world example [is as follows]: If you want to buy $1,000 worth of DAI stablecoins, you would need to deposit $2,000 worth of Ethereum (ETH) — this equates to a 200% collateralized ratio. If the market price of ETH drops but remains above a set threshold, the excess collateral buffers DAI’s price to maintain stability. However, if the ETH price drops below a set threshold, collateral is paid back into the smart contract to liquidate the CDP.”
Algorithmic Stablecoins: Use algorithms and smart contracts to maintain price stability instead of being backed with fiat or cryptocurrencies. As stated by Gemini, “an algorithmic stablecoin system will reduce the number of tokens in circulation when the market price falls below the price of the fiat currency it tracks.” Examples include Frax (FRAX), Ampleforth (AMPL).
There also exists a fourth class of stablecoins called Commodity-Backed Stablecoins however there hasn't been much development in these experimental coins in recent years. They are collateralized via commodities like gold, oil, silver etc.
Stablecoins for Payments: Benefits and Challenges
Stablecoins offer several potential benefits for payments:
Reduced transaction fees: Transactions can be significantly cheaper than traditional payment methods, especially for cross-border payments because they eliminate the need for intermediaries like banks and payment processors, which typically charge fees for their services.
Faster settlements: Allows for near-instantaneous settlement of stablecoin payments, compared to the days it can take for traditional bank transfers, thus providing instant capital to businesses.
Increased accessibility: Can provide financial services to the unbanked and underbanked populations who lack access to traditional banking systems.
Reduced volatility: Compared to other cryptocurrencies, stablecoins offer price stability, making them more suitable for everyday transactions .
Transparency and security: Blockchain technology ensures that stablecoin transactions are transparent, and secure which has tailwinds to building trust and reducing the risk of fraud.
Stablecoins are already being used for various payment applications including e-commerce payments, remittances and supply chain financing. However, there are also challenges associated with using stablecoins for payments:
Volatility risk: They are not immune to market fluctuations and can de-peg from their underlying asset creating uncertainty for users.
Regulatory uncertainty: The regulatory landscape for stablecoins is still evolving, creating uncertainty for businesses and consumers.
Scalability issues: Some stablecoin platforms may face scalability challenges in handling a large volume of transactions.
Usability challenges: Converting stablecoins into fiat currency and integrating them with existing payment systems can be complex.
Despite these challenges, stablecoins have the potential to disrupt the payment industry by offering faster, cheaper, and more accessible payment solutions.
The Future of Stablecoins in Payment Processing
The future of stablecoins in payment processing is promising, with several trends pointing towards increased adoption:
Growing institutional interest: Major financial institutions and payment providers are exploring the use of stablecoins for various applications . For example, JPMorgan executes a daily average of $1 billion through the Onyx platform using JPM Coin. Introduced in 2019 and although dwarfed by JPM’s $10T daily transaction volume, the banking behemoth had tokenized around $700M in short term loans through Onyx in 2023. Visa's Tokenised Asset Platform (VTAP) is also working with banks like BBVA in the issuance of tokenized assets, showcasing how stablecoins are being woven into the fabric of traditional banking .
Regulatory developments: Governments worldwide are working on regulatory frameworks for stablecoins, which could increase trust and adoption. The EU's MiCA framework, for instance, categorizes stablecoins into electronic money tokens (EMTs) and asset-referenced tokens (ARTs), providing a comprehensive regulatory structure . Similarly, the UK implemented stablecoin regulations in November 2023, requiring FCA authorization and strict asset segregation .
Technological advancements: Ongoing innovations in blockchain technology are improving the scalability and usability of stablecoins. These advancements include advanced smart contracts with enhanced security features, multi-source data integration for precise supply management, and improved blockchain scaling for higher transaction throughput .
Increasing use cases: Stablecoins are finding new applications in various sectors, including remittances, cross-border payments, and e-commerce. They are also being used for payroll solutions, offering freelancers and small businesses a more efficient way to receive payments. Stripe completed its acquisition of Bridge Feb 5, 2025, highlighting growing adoption of stablecoins by the broader FinTech industry.
Final Thoughts
Stablecoins have the potential to extend the supremacy of the US dollar in the global financial system. Their accessibility and efficiency make them a valuable tool for financial inclusivity, particularly in regions with unstable currencies or limited access to traditional banking.
However, the future of stablecoins also depends on addressing the challenges mentioned earlier. Regulatory clarity, improved scalability, and user-friendly solutions will be crucial for widespread adoption. The emergence of Central Bank Digital Currencies (CBDCs) also presents both opportunities and challenges for stablecoins 13. CBDCs could potentially compete with stablecoins while also driving innovation in the broader digital currency space.
As the world becomes increasingly digital, stablecoins and other digital currencies are poised to play a significant role in shaping the future of money. They have the potential to disrupt the dominance of traditional payment providers like Visa and Mastercard, promote financial inclusion, and revolutionize the way we transact and interact with the global economy.