Understanding Stablecoin Payments: A Simplified Guide for Web3 Businesses

What are stablecoins?

Stablecoins are cryptocurrencies with a unique feature: their value is pegged to a reference asset. 

This could be globally recognized fiat currencies like the US Dollar, Euro, or Swiss Franc, or even precious commodities like gold and silver. USDT (Tether) and USDC (USD Coin) are the most prominent stablecoins, each with its own set of pros and cons. They offer businesses a gateway to low-cost, real-time, and transparent transactions.

It’s important to note that stablecoins are different from Central Bank Digital Currencies (CBDCs). While CBDCs are issued by a country's central bank, stablecoins can be issued by both regulated banks and non-bank entities. The key difference lies in their governing authority and legal classification.

What are the current challenges?

1. Legal gray areas

The laws around stablecoins are still not set in stone. The stablecoin ecosystem is complex, involving multiple components that perform various functions. These include:

Issuance, Redemption, and Stabilizing Mechanisms: This involves the issuers, reserve assets, custodians holding reserves, market makers, and governance entities.

Transfer Mechanisms: This includes the network, network validators, and operators that facilitate the transfer of stablecoins.

Access Points: Wallets and exchanges usually serve as the entry and exit points for stablecoin transactions.

Each of these components comes with its regulatory challenges, ranging from financial stability and consumer protection to market integrity and concentration risks. 

However, there’s a lack of a globally consistent regulatory framework for stablecoins. 

Different countries may prioritize different aspects of stablecoin regulation based on their specific concerns and financial ecosystems, hence regulatory requirements for stablecoins can vary significantly from one jurisdiction to another. 

This can be a challenge for businesses looking to adopt stablecoins on a global scale. 

If you're thinking about using stablecoins, these barriers mean that a proactive approach is necessary. It’s important to be updated with the regulatory requirements surrounding stablecoins, as governments and international bodies are actively exploring frameworks to regulate stablecoins. 

2. Tax implications

Taxation of stablecoins adds another layer of complexity. Similarly, tax rules can vary significantly from one jurisdiction to another. 

In the United States, for example, the IRS treats cryptocurrencies, including stablecoins, as property. This means any stablecoin transaction could trigger a taxable event, complicating the accounting process for businesses.

3. Limited adoption

Not everyone is on board with the idea of using stablecoins as a standard form of payment. 

With the collapse of UST that led to a series of insolvencies, there’s still skepticism about the adoption of stablecoins. 

The lack of awareness about stablecoins and how they work also slows their mainstream acceptance. This is especially true among those who are new to the cryptocurrency space or those who have reservations about digital assets.

Why businesses should adopt stablecoins

Despite these challenges, stablecoin adoption by businesses is on the rise. 

Paypal recently launched its own stablecoin, PYUSD, to make transactions more efficient and cost-effective. It validates stablecoins as a financial tool with mainstream players which can boost their acceptance by businesses. 

Deloitte reported that nearly 75% of retailers plan to accept either cryptocurrency or stablecoin payments within the next two years, indicating a significant inclination towards stablecoin adoption among businesses.

There’s a growing interest of TradFi institutions in blockchain and stablecoins, and here’s why:

1. They’re stable

Stablecoins offer a buffer against the extreme volatility seen in other cryptocurrencies like Bitcoin. For instance, Bitcoin's price soared to nearly $65,000 in April 2021 and plummeted to below $30,000 in June. 

That's a nightmare for a business trying to keep its finances stable. 

On the other hand, the price stability of stablecoins reduces the risk associated with price fluctuations in the crypto market, making stablecoins an attractive option for businesses looking to avoid volatility in their transactions.

This makes them a safer choice for businesses.

2. Quick and cheap transactions

Time is money, and stablecoins save you both. 

Traditional bank transfers can take days and come with hefty fees. But stablecoin transactions can happen in minutes and cost a lot less. 

If your business makes cross-border transactions, using stablecoins could save you thousands of dollars in fees and speed up transactions, making your operations more efficient.

3. Global reach 

Stablecoins can be a game-changer for businesses looking to tap into markets where traditional banking is a challenge. 

“We can't all have 50 different bank accounts in 50 different countries. But with stablecoins there’s no need,” said William Quigley, co-founder of the WAX blockchain. 

For instance, a business in the UK can effortlessly transact with a client in Japan using USDC, without worrying about currency conversion or bank processing times.

They're especially useful for paying remote workers in areas with poor banking infrastructure. With stablecoins, all you need is an internet connection to make transactions. This opens up opportunities for businesses to expand and tap into global talent pools.

4. Hedge against economic instability

In countries with fluctuating currencies, stablecoins offer a way to protect against inflation and currency devaluation. 

For instance, in Venezuela, where hyperinflation has made the local currency almost worthless, businesses and individuals are turning to stablecoins to safeguard their assets.

How stablecoins work in practice

1. On/off ramp

The growing number of options for direct payouts between crypto wallets and traditional bank accounts is a testament to the increasing utility of stablecoins. 

This expansion is not just limited to traditional financial institutions but also includes non-bank financial institutions (NBFIs) like online brokerages such as Robinhood, fintech payment processors like Stripe, and neobanks like Revolut. These entities act as both on-ramp and off-ramp providers, serving effectively as their own exchanges and market makers.

For businesses, the growing number of on/off ramp options signifies easier access to the stablecoin ecosystem. It simplifies the process of converting fiat to crypto and vice versa, thereby making it more feasible to integrate stablecoins into various aspects of business operations, from payroll to vendor payments. 

The utility of these on/off ramps is evident in various business scenarios: For instance, a U.S.-based company sourcing materials from multiple countries can use stablecoins to make instant payments to suppliers. Businesses that rely on freelancers or contract workers from around the world. Payments can be made instantly, and both parties can avoid the fees usually associated with currency conversion or cross-border transactions.

2. Risk management

Stablecoins serve as the most straightforward and natural instrument for portfolio hedging, offering a less volatile alternative to other cryptocurrencies while also providing operational efficiencies.

If your business holds a variety of crypto assets that are highly volatile, stablecoins offer an effective way to hedge against the extreme volatility often seen in the crypto market. Unlike other hedging options, stablecoins come with low intermediation costs and provide immediate access to exchanges, making them a practical choice for reducing the risk of significant losses.

Moreover, stablecoins offer advantages even when compared to converting crypto assets back to fiat currencies. Rebalancing a portfolio towards stablecoins not only minimizes costs but also avoids the time delays often associated with processing fiat withdrawals. This speed and efficiency can be crucial for businesses that need to make quick financial decisions.

3. Payments operations

Automating payroll in stablecoin with platforms like Request Finance brings a new level of efficiency and transparency to your business. It allows businesses to easily schedule recurring crypto salary payments for their employees, regardless of geographical location. This eliminates the cumbersome process of invoice submissions to HR or finance departments, freeing up valuable time for both employees and employers. 

You can set up automated payments that take care of everything from transaction histories to the exact payment amounts. This feature also allows for a detailed review of transactions, including who was paid, when, and the market price of the stablecoin at the time of payment.

Moreover, Request Finance offers additional features like auto-filling employees' personal information and wallet addresses come payday. It also allows for the management of teams by business units and ensures that all employee data is securely stored in one centralized location.

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Despite the regulatory gray areas and varying tax implications across jurisdictions, the benefits of stablecoins are too significant to ignore. They offer a stable, efficient, and cost-effective means of transaction, making them an increasingly attractive option for businesses.

Learn how you can streamline your financial operations with stablecoins today.