Stablecoins Are the Talk of Wall Street. Here's When Consumers May Actually Use Them. — Barrons.com

By Nate Wolf

For an asset class touted as a boring alternative to volatile cryptocurrencies like Bitcoin and Ethereum, stablecoins have generated plenty of attention this June.

The Senate advanced legislation last week to establish a regulatory framework for stablecoins. Shares of the stablecoin-issuer Circle Internet Group have popped more than 600% from their June 5 initial public offering. Meanwhile, retail goliaths Amazon.com and Walmart have explored launching their own tokens, and fintech company Fiserv actually announced one.

Wall Street is on alert. Stablecoins — which are a type of cryptocurrency pegged to assets like the U.S. dollar — have a laundry list of use cases, and their market capitalization is primed to almost double from $260 billion today to $500 billion by the end of 2026, according to forecasts from Seaport Research Partners.

But when it comes to payments between customers and merchants, stablecoin issuers face an uphill battle incentivizing consumers to use the tokens, analysts at Bernstein and Evercore ISI wrote in separate research notes Thursday.

Let's start with the most plausible use cases first.

Companies may adopt stablecoins for both cross-border transactions and employee payouts in the next five years, since blockchain technology can move money more cheaply and quickly than traditional banking rails, the Evercore team predicted.

That's rough news for some banks, but innovative early movers could gain an advantage over their peers by offering stablecoin exchange services, charging fees for stablecoin transactions, or adopting the coins for their own transactions, the analysts wrote.

On the consumer side, stablecoins can facilitate remittance transfers, allowing people to circumvent wire fees — while those in volatile markets can store the dollarized, inflation-resistant tokens in digital wallets instead of using local banks, the Bernstein team wrote.

But when it comes to checking out on Amazon or settling up your bar tab, stablecoins may not be the grand disruptor some envision. The main reason? Merchants, not their customers, eat the interchange fees for card-based payments, so consumers have little incentive to switch over to a shiny new currency, the Bernstein team argued.

"Stablecoins are a solution looking for a problem in retail consumer payments," the analysts wrote.

Consumers won't be swayed by a payment option just because it's cheap and efficient, they said. And initiatives by retailers to steer buyers toward their preferred payment method often result in lower sales conversions and increased customer churn.

Instead, what tends to move consumers is ubiquity, the Bernstein analysts argued. Companies need to issue the coins, merchants need to accept them, and tens of millions of consumers need to notice a substantial improvement in their user experience.

Maybe that virtuous cycle is possible on a long enough time horizon. If workers receive stablecoin payments and have stablecoin checking accounts, for instance, retail could be in for a shake up, the Bernstein team conceded.

"But this is a tall-order for now and hard to bake into an investment conclusion," they wrote.

Evercore concurred, arguing that the impact on card giants like Visa and Mastercard, which announced a stablecoin partnership with Fiserv on Tuesday, is likely to be neutral at worst.

"We think the adoption of stablecoins for domestic payments will take a while as the value prop isn't strong enough yet," the Evercore analysts wrote. "And speaking from experience, consumers require a lot of incentives to switch their habits."

That isn't to say investors should ignore stablecoins, particularly as large-cap companies enter what often feels like a crypto arms race. The space is moving quickly, and more stablecoin-related announcements are certain to come down the pike.

But it's difficult to identify sectors as winners and losers — never mind pick specific stocks — when we don't yet know who will use the currencies and how. The truth is, we may not know for quite awhile.

Write to Nate Wolf at nate.wolf@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.