Thread by @ccatalini

Stablecoins, a novel form of interoperable and programmable money, have the potential to rewire the global financial system. In doing so, they could allow software to eat banking and financial services — sectors left relatively untouched by the internet. @HarvardBiz w/@wu_jane

Given these high stakes, we are witnessing intensifying competition among stablecoin issuers, prominent digital wallet providers, and traditional banks, each racing to establish their platform as the dominant one.

Usually the actual technology matters much less than people think. While experts endlessly debate the technical merits of each solution, in the end, winning is about execution. The classic but dated example is the ’80s battle between VHS and Betamax, where JVC beat Sony despite having fewer resources and a lower quality product. JVC understood that having more content — what we would call “applications” today — mattered far more than perfect video.

The same has been unfolding in the world of blockchains: More than a decade into the Bitcoin experiment, countless teams raised billions to displace Bitcoin’s limited design. Yet Bitcoin persists, with stronger network effects and institutional adoption than the alternatives.

The conclusion of a platform war is always the same: A dominant design emerges, everyone switches over, and the conflict is done. The losing side has no second chance until a completely new technological paradigm emerges: Think Mac vs PC, where Apple only got a re-do with the iPhone; or Meta aggressively pursuing AR/VR because it is currently hostage to iOS and Android on mobile.

Regulators understand the relevance of stablecoins. Without stablecoins, blockchains are uncompetitive. But in their current form, stablecoins challenge banks, are used to circumvent capital and anti-money laundering controls, and can ignite or accelerate a banking crisis.

The run on Silicon Valley Bank was a small preview of what can happen: because Circle’s USDC had about 8% of its reserve at risk, it rapidly depegged and withdrew $3 billion from the struggling bank. While it is easy to avoid this with proper reserve design, the risks are real.

Incumbents are threatened by stablecoins becoming the new operating system for money, doing to the existing system what the internet did to Barnes & Noble. As a result, they are determined to embrace, extend and extinguish.

The last serious attempt at reforming the financial system did not use a blockchain. It was @elonmusk’s original version of , before the merger with Peter Thiel’s PayPal. Musk was ahead of his time, and wanted to build a universal financial services app.X.com

@peterthiel was more pragmatic and focused on ensuring backward-compatibility with cards and banks. That solidified PayPal’s growth in the short term, but ultimately doomed its chances of changing the system.

Two decades later, the card networks are a comfortable oligopoly and banking is untouched by the internet. Stablecoins present a 2nd at reforming the system. But whether they will be able to do so depends on whether regulators tip the scales in favor or against innovation.

So will only pure-play issuers such as Tether and Circle push for a winner-take-all scenario? After all, the market is very concentrated today, and network effects seem to matter. Stablecoin liquidity has been important so far in ensuring lower cost conversions to and from fiat, and this will only increase in relevance with mainstream adoption.

But the reality is that incumbency is unlikely to automatically translate to non-crypto use cases, and as banks are allowed to enter, traditional distribution channels will matter more. So while Tether and Circle have dominated the crypto era, graduating from this niche, unregulated market to billions of consumers and businesses is a fundamentally different game.

In the end, the most likely outcome is one with many stablecoins that fade into the background and deliver lower-cost, faster payments to the world.

So it will be up to the leading neobanks and crypto exchanges to try something truly novel, and they may be the ones that actually succeed at changing the game.

Read the full article: hbr.org/2024/08/the-ra…