How much does it cost to issue a stablecoin?

Author: Rhythm

From Wall Street investment banks to Bay Area tech companies, and then to Asian financial giants and payment platforms, more and more enterprises are eyeing the same business - stablecoin issuance.

Under the effect of scale, the marginal issuance cost of stablecoin issuers is zero, and in their eyes, it is like a risk-free arbitrage game. In the current global interest rate environment, the spread income is extremely attractive. Stablecoin issuers only need to deposit users' dollars into short-term U.S. Treasuries, and they can stably earn billions of dollars a year with a 4-5% spread income.

Tether and Circle have long proved that this path works, and with the gradual implementation of stablecoin bills in different regions, the compliance path has become clearer. More and more enterprises are eager to try, even FinTech giants like PayPal and Stripe are quickly entering the market. Not to mention that stablecoins naturally have the ability to integrate with payment, cross-border settlement and even Web3 scenarios, with huge room for imagination.

Stablecoins have become a must - contend field for global financial companies.

But the problem is here. Many people only see the "seemingly risk-free" arbitrage logic of stablecoins, but ignore that this is a business with heavy capital and high thresholds.

If an enterprise wants to legally and compliantly issue a stablecoin, how much does it cost?

This article will break down the real cost behind a stablecoin and tell you whether this seemingly easy arbitrage business is worth doing.

Several accounts behind stablecoin issuance

In many people's minds, issuing a stablecoin is nothing more than issuing an on-chain asset, and the threshold seems not high from a technical perspective.

However, to really launch a stablecoin as a compliant entity for global users, the organizational structure and system requirements behind it are far more complex than imagined. It not only involves financial licenses and audits, but also includes heavy asset investment in multiple dimensions such as fund custody, reserve management, system security and continuous operation and maintenance.

In terms of cost and complexity, its overall construction requirements are no less than those of a medium-sized bank or a compliant trading platform.

The first threshold for stablecoin issuers is the construction of a compliance system.

They often need to cope with the regulatory requirements of multiple jurisdictions simultaneously and obtain key licenses including U.S. MSB, New York BitLicense, EU MiCA, Singapore VASP, etc. Behind these licenses are detailed financial disclosure, anti-money laundering mechanisms, and continuous monitoring and compliance reporting obligations.

Comparable to medium-sized banks with cross-border payment capabilities, the annual compliance and legal expenses of stablecoin issuers are often as high as tens of millions of dollars, just to meet the most basic cross-border operation qualifications.

In addition to licenses, the construction of KYC/AML systems is also a hard requirement. Project parties usually need to introduce mature service providers, compliance consultants and outsourcing teams to continuously operate a complete set of mechanisms such as customer due diligence, on-chain review, and address blacklist management.

In today's increasingly strict regulatory environment, it is almost impossible to obtain access permits to major markets without establishing strong KYC and transaction review capabilities.

Market analysis points out that the total cost required for HashKey to apply for a Hong Kong VASP license is as high as 20 million to 50 million Hong Kong dollars, and it needs to be equipped with at least 2 regulatory officers (RO), and must cooperate with the three major accounting firms, with fees several times higher than those in traditional industries.

In addition to compliance, reserve management is also a key cost in stablecoin issuance, covering two major parts: fund custody and liquidity arrangement.

On the surface, the asset-liability structure of stablecoins is not complicated. Users recharge dollars, and issuers buy equivalent short-term U.S. Treasuries.

But once the reserve scale exceeds 1 billion, or even 10 billion dollars, the operating costs behind it will rise rapidly. Only for fund custody, the annual fee may reach tens of millions of dollars; and Treasury bond transactions, liquidation processes and liquidity management not only bring additional costs, but also highly rely on the cooperation and execution of professional teams and financial institutions.

More importantly, in order to ensure the user experience of "instant redemption", issuers must prepare sufficient liquidity positions off-chain to cope with large redemption requests in extreme market conditions.

This configuration logic is very close to the risk preparation mechanism of traditional money market funds or clearing banks, which is far from being as simple as "smart contract lock-up".

To support this architecture, issuers must also establish a highly stable and auditable technical system covering key financial processes on and off the chain. It usually includes smart contract deployment, multi-chain minting, cross-chain bridge configuration, wallet whitelist mechanism, liquidation system, node operation and maintenance, security risk control system and API docking, etc.

These systems not only need to support large-scale transaction processing and capital flow monitoring, but also need to be upgradeable to adapt to regulatory changes and business expansion.

Different from the "light deployment" of general DeFi projects, the underlying system of stablecoins essentially assumes the role of a "public settlement layer", and the technical and operation and maintenance costs are at the level of millions of dollars all year round.

Compliance, reserves and systems are the three basic projects of stablecoin issuance, which jointly determine whether the project can develop sustainably in the long term.

In essence, a stablecoin is not a technical tool product, but a financial infrastructure with trust, compliance architecture and payment capabilities.

Only those enterprises that truly have cross-border financial licenses, institutional-level clearing systems, on-chain and off-chain technical capabilities, and controllable distribution channels can operate stablecoins as a platform-level capability.

Because of this, before deciding whether to enter this track, enterprises must first judge whether they have the ability to build a complete stablecoin system, including: can they obtain continuous recognition from regulators in multiple places? Do they have their own or trusted fund custody systems? Can they directly control channel resources such as wallets and trading platforms to truly open up the circulation end?

This is not a start-up opportunity with light equipment, but a tough battle with high requirements for capital, systems and long-term capabilities.

After issuing a stablecoin, then what?

Completing the issuance of a stablecoin is just the beginning.

Regulatory permits, technical systems and custody structures are only the prerequisites for entry. The real problem is how to make it circulate.

The core competitiveness of a stablecoin lies in "whether anyone uses it". Only when a stablecoin is supported by trading platforms, integrated by wallets, accessed by payment gateways and merchants, and finally used by users, can it be said to have truly achieved circulation. And on this road, there are high distribution costs waiting for them.

In the stablecoin industry chain diagram released by Insight Beating in conjunction with digital asset self-custody service provider Safeheron, stablecoin issuance is only the starting point of the entire chain, and to make stablecoins circulate, we need to focus on the middle and lower reaches.

Taking USDT, USDC and PYUSD as examples, we can clearly see three distinct circulation strategies:

- In the early days, USDT relied on gray scenarios to build irreplaceable network effects, and quickly occupied the market standard position by virtue of first-mover advantage;

- USDC mainly focuses on channel cooperation under the compliance framework, relying on platforms such as Coinbase to gradually expand;

Even though PYUSD is backed by PayPal, it still needs to rely on incentive measures to drive TVL, and it is always difficult to enter real usage scenarios.

Their paths are different, but they all reveal the same fact - the competition of stablecoins is not in issuance, but in circulation. The key to success or failure lies in whether it has the ability to build a distribution network.

1. The irreplaceable first-mover structure of USDT

The birth of USDT stems from the practical difficulties faced by cryptocurrency trading platforms in that era.

In 2014, the Hong Kong-based cryptocurrency trading platform Bitfinex expanded rapidly to global users. Traders wanted to trade in US dollars, but the platform always lacked a stable US dollar deposit channel.

The cross-border banking system was hostile to cryptocurrencies. Funds flowed difficultly between China, Hong Kong and Taiwan, accounts were often closed, and traders might face fund outages at any time.

Against this background, Tether was born. It initially ran based on Bitcoin's Omni protocol with a simple and direct logic: users wire US dollars to Tether's bank account, and Tether then issues equivalent USDT on the chain.

This mechanism bypassed the traditional bank clearing system, allowing "US dollars" to circulate 24 hours a day without borders for the first time.

Bitfinex was the first important distribution node of Tether, and more importantly, the two were actually operated by the same group of people. This deeply bound structure allowed USDT to quickly obtain liquidity and usage scenarios in the early days. Tether provided Bitfinex with a US dollar channel with vague compliance but high efficiency. They colluded with each other, had symmetric information and consistent interests.

Technically, Tether is not complicated, but it solved the pain point of cryptocurrency traders' fund inflow and outflow, which became the key for it to occupy users' minds at the earliest.

In 2015, as capital market volatility intensified, the attractiveness of USDT increased rapidly. A large number of users in non-US dollar regions began to seek US dollar substitutes to bypass capital controls, and Tether provided them with a "digital dollar" solution that could be used with the Internet without opening an account or KYC.

For many users, USDT is not just a tool, but also a means of hedging risks.

The ICO boom in 2017 was a critical moment for Tether to complete PMF. After the launch of the Ethereum mainnet, ERC-20 projects sprung up, and trading platforms turned to cryptocurrency trading pairs. USDT then became a "US dollar substitute" in the altcoin market. By using USDT, traders could move freely between platforms such as Binance and Poloniex to complete transactions without repeated fund inflows and outflows.

Interestingly, Tether has never actively spent money on promotion.

Different from general stablecoins that adopt subsidy strategies in the early stage to expand market share, Tether has never actively subsidized trading platforms or users to use its services.

On the contrary, Tether charges a 0.1% fee for each minting and redemption, with a minimum redemption threshold as high as 100,000 US dollars, and an additional 150 USDT verification fee.

For institutions that hope to directly access its system, this charging mechanism almost constitutes a "reverse promotion" strategy. Because it is not selling products, but setting standards. The cryptocurrency trading network has long been built around USDT, and any participant who wants to access this network must move closer to it.

After 2019, USDT has almost become synonymous with "on-chain US dollars". Despite repeated regulatory investigations, media questions and reserve disputes, the market share and circulation of USDT continue to climb.

By 2023, USDT has become the most widely used stablecoin in non-US markets, especially in global southern countries. Especially in high-inflation regions such as Argentina, Nigeria, Turkey and Ukraine, USDT is used for salary settlement, international remittances, and even replaces local currencies.

Tether's real moat has never been code or asset transparency, but the trust path and distribution network it established in the Chinese-speaking cryptocurrency trading community in the early years. This network started from Hong Kong, took the Greater China region as a springboard, and gradually extended to the entire global non-Western world.

And this advantage of "first-mover is standard" makes Tether no longer need to prove who it is to users, but instead the market must adapt to the circulation system it has already established.

2. Why Circle relies on Coinbase

Different from Tether's path of natural growth in gray scenarios, USDC was designed as a standardized and institutionalized financial product from the beginning.

In 2018, Circle and Coinbase jointly launched USDC, aiming to build a set of "on-chain US dollar" systems for institutions and mainstream users under a compliant and controllable framework. To ensure governance neutrality and technical cooperation, the two parties each held 50% of the shares and established a joint venture company called Center, which is responsible for the governance, issuance and operation of USDC.

However, this joint governance model cannot solve the key problem - how can USDC really circulate?

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