Stablecoin Payouts

Here at String Theory we work with a lot of FinTech companies, and lately we’ve seen a huge uptick in interest in payouts using stablecoins. These tokens have many possible benefits, but also come with a lot of complexity. We’re going to dig into why payouts with stablecoins might be a good idea for you, and what to watch out for.

What’s a stablecoin?

A stablecoin is a specific kind of crypto asset that has its value pegged to that of another asset. For example, a lot of the most popular stablecoins are tied to the value of USD. This means the company operating the coin sells the coins for $1 USD and buys them back at the same price. (While this is the claim that coins make, it is operationally untrue which we’ll get into below.) This is in direct contrast to a crypto asset like Bitcoin, the value of which fluctuates regularly and intentionally.

Another important thing about stablecoins is that they are primarily focused on being a currency rather than a security. In other words, stablecoins are meant to be spendable; not an investment. Due to that focus, stablecoin chains are often relatively performant (settling in minutes) and cheap (low transaction fees). Since crypto chains are automated and de-centralized they also operate 24/7 which avoids the weekend and holiday blackout periods that are common in bank processing.

Finally, stablecoins are regulated in many jurisdictions (including the US and Europe) to have very strong reserve requirements. This is because it is easy for a poorly managed stablecoin to become a Ponzi scheme. The coin itself is only as stable as the assets that are backing it, and it’s important to know how secure your coin of choice is.

So, what’s the point? If a stablecoin is not a potentially appreciating asset, and is ultimately just pegged to something like USD… why not just send USD?

The Banner Case: International Payments

The big draw is cheaper international money transfers, but there are a lot of caveats to it. Here is a summary of where it’s good, and where it struggles.

There are two headline use cases here:

• Paying in countries with volatile exchange rates
• Saving on fees for international payments

If you pay in a country with a volatile exchange rate to the coin basis, paying in stablecoin provides a lot of value. Your payee gets to decide when to cash out to their local currency, and they can wait for a favorable rate. Additionally, traditional transfer rails tend to have high interchange fees, and slow transfers for those markets. Stablecoin is undeniably better in these cases.

You can also potentially save on transfer fees. There are three distinct fees associated with paying out via stablecoin: minting fee (on-ramp fee), transfer fee (gas), and several fees associated with cashing out (off-ramp fees). Even the combination of these fees are generally lower than the flat fee of an international wire, and you only pay one exchange rate fee on the final cash out to local currency instead of multiple interchange fees along the way. We’ll go into more detail below, but one important callout here is that part of the reason it’s cheaper is because the fees associated with cashing out (often the highest fees in the end-to-end transfer) are paid by your payee, instead of you.

Things to watch out for

While crypto as an asset class has become more common, a lot of companies (and consumers) don’t have experience working with it operationally. Here are some of the common gotchas and misconceptions we’ve seen about stablecoin payments.

Delivery isn’t value

Moving a token isn’t the same thing as paying via a bank transfer.

In the crypto ecosystem once a coin is in the customer’s wallet, payment is complete. The payee now owns it, and your responsibility is over. However, having a coin in your wallet and spending it are two very different things. Finding ways to pay for goods or cash out a stablecoin can still be very difficult. This is especially true in places with volatile currencies, or poor banking support.

Even in those cases stablecoin is still a net benefit, because the traditional options for receiving money are just financially not viable. However, expect your payees to need a high level of motivation and technical savvy to be able to manage it.

Not-so-immediate transfer

An often-cited benefit of stablecoin is the “immediate” transfer speed. Stablecoin transactions tend to settle on-chain in minutes, and can settle on weekends/holidays, but it’s important to keep the end-to-end perspective in mind. Operationally this is much less impressive than it sounds. These steps must all be completed to actually exchange the coin for value:

1. Payer buys the token (moves money from a bank and settles it)
2. Finalize the on-chain transaction
3. Payee redeems the token for value (cash out from an exchange)

The long poles on each side are your bank as the payer, and the off-ramp exchange for the payee. The fastest any real value can be transferred is still based on the speeds of those processors, which tend to have traditional banking hours and blackout dates, somewhat invalidating the touted speed claims.

You can mitigate the funding time by pre-purchasing coins and keeping them on hand, but that brings us to our next point…

Treasury simplification

Another compelling argument for stablecoin is the simplicity of managing it. It’s just USD! Your systems already know how to handle that! Except… you absolutely can’t treat it that way. Stablecoin is another currency in all the ways that matter for treasury operations. Even if you use a stablecoin provider that supports being basically just a payment processor, you will end up holding coins of your own, and you will have to worry about managing those holdings. The FX (foreign exchange) might be simpler if you operate in a single corporate currency and the stablecoin is backed by that currency and your exchange doesn’t charge a spread for minting, but that’s a lot of things that need to line up perfectly.

In particular, watch out for the on-ramp and off-ramp fees. They can be spreads on the exchange rate, and are often different from each other. That means that there is a good chance the exchange rate isn’t 1:1, foiling any plans you might have to just count it directly as USD. Additionally, the difference in fees means that the USD->Coin and Coin->USD rate will often be different. Many traditional corporate financial tools and ERPs struggle with asymmetric exchange rates, so make sure you know if it’ll be a problem before you go big on a coin.

Finally, most stablecoins aren’t operationally one thing. They exist on different networks, each of which has its own wallets, fees, and settlement timeframes. You may end up needing to hold and move USDC on Solana, Ethereum, and several other networks, each of which have assets denominated in the coin but are distinct and non-mixable assets.

Mistakes are permanent

In traditional banking methods there are often ways to undo mistakes. Even things like international wires that are “effectively final” can be fixed if you move enough volume and have good enough relationships with the banks. That isn’t the case when it comes to on-chain transfers. If you have a typo in a wallet address, send the coin to the wrong network, or have a code bug that makes duplicate payouts there is no bank you can go to in order to get that reversed. It’s extremely important that you have rock-solid payments infrastructure (and, in our opinion, a sophisticated operational ledger) managing these payouts.

Also worth noting that the same risk checks and consumer protections common in traditional payment methods don’t exist for stablecoins. They are an appealing vector for fraud due to the finality of transactions and the relative anonymity of the chains. Expect that you’ll need tighter risk checks, you’ll be paying more to fix issues that are your fault (since you can’t undo them), and increased customer support costs over traditional methods for payee-initiated mistakes.

What makes String Theory great for stablecoin?

Crypto and multi-currency management have a lot of quirks that can easily cost you a lot of money if you aren’t careful about how you manage it. String Theory comes with all the tools you need to easily manage the context, exchanges, and reporting right out of the box.

• Supports all currencies (even crypto or reward currencies)
• Easy to define your own exchange logic
• Flexible modeling of fees
• Audit trail of how, when, and at what rate money changed from USD to coin
• Wallet/token tracking via context
• Built in controls to avoid or mitigate mistakes

Stablecoin seems like a good bet for me, now what?

Abstract the rails

Paying via stablecoin is fairly complex and requires in-depth knowledge of how the crypto eco-system works. I wouldn’t try to get into that business. Instead, find a provider who can take most of the delivery burden off your shoulders, and leave you with just what your business needs to manage (which is still a lot). Here is a high-level overview of what the flow entails:

Stripe has some great offerings for either using stablecoin as a payout method, or running your own coin via Bridge. If you are interested in stablecoin just as a payout method, then using their tools will take away a lot of the complexity of the crypto ecosystem.

Make sure your treasury is ready

Even in the rare case that there is no FX, and your payment tools handle most of the complexity for you by enabling stablecoin transfers. you will now be actively holding a new currency. Your people, systems, and reporting all need to be ready for managing that.

Level up your tools

Working with a non-fiat currency can throw a serious wrench into a lot of systems. If your systems are only designed to work only with traditional currencies (or worse, a single currency) then processing, reporting, and financial controls are going to have a hard time. Here are some high-level requirements to look for in your tooling:

• Easily handles tracking multiple currencies
• Tracks exchanges between currency types
• Can do point-in-time reports that are translated to a single currency
• Maintains key context (like wallet id, network) alongside assets

The chain is the easy part

Providers can make the actual work of minting and transferring coins easy, but that still leaves a lot of work on your plate. You’ll need treasury functions to manage new currencies, strong attribution, bulletproof payments infrastructure, FX reporting, and stronger risk checks, just to name a few. While you are at low volume or providing limited support you can get away without these for a while, but before you open the flood gates make sure you are prepared.

Some of this work is specific to your business (deciding on a treasury strategy, figuring out how you want to report on multiple currencies), but String Theory can handle the bulk of the infrastructure work for you: from tracking exchanges and spot rate conversions, to helping to block duplicate payouts and fine-grained auditing for mistakes or fraud.