Stablecoins, saving bad businesses

The Lower the Profit, the Greater the Need for Stablecoins

4%, this is the "natural bottom line" in the world of dollar stablecoins.

The entire industry's business model revolves around this number, which is the current yield on U.S. government bonds.

Most of the fees paid by stablecoin users to purchase stablecoins are used by the issuers to buy this risk-free investment product. If they can issue $100 million in stablecoins, the issuer can earn about $4 million in revenue each year. This is the business model of stablecoin companies like Circle and Tether.

On one hand, 4% is too low.

It is just an interest rate; a company can certainly optimize its financial structure through interest, but how can it rely solely on bank interest for sustenance? Moreover, it is volatile; once the Federal Reserve significantly cuts interest rates, the net profits of all stablecoin issuers will plummet. This business has no pricing power over its own profits and is purely cyclical.

On the other hand, 4% is high enough, higher than the net profits of many companies.

Wang Puzhong, CEO of Meituan's core local business, stated a few days ago that Meituan's food delivery profit margin is about 4%. Internet giants have invested hundreds of billions in a war, only to end up earning a dollar interest rate. Not all internet platforms have profit margins as excellent as Pinduoduo; Didi's profit margin for 2024 is even lower than Meituan's food delivery business, at less than 1%.

Traditional retail companies are even more notorious for their low profits; Walmart's net profit margin for 2024 is only 2.3%, with a total profit of about $15 billion, which is hardly commensurate with its long-standing position as a top global company.

Online retailers are not much better; JD.com's net profit margin for 2024 is only 3.6%. Over at Amazon, the net profit margin for the entire year of 2024 is below 10% ------ this is still the result after high-profit cloud services have propped it up, with estimates suggesting its retail business has only about a 5% margin.

As for manufacturing, many leading companies are in the red; let alone 4%, some companies don't even have a 1% profit margin.

A 4% interest rate may just be a bonus for Apple, but for these companies, it is enough to support their core business's main profits. ------ Financials as a primary profit source is not without precedent; Li Auto reported an operating loss in the first half of 2024, with 14.39 billion of its 16.92 billion net profit coming from investment income. General Electric had low manufacturing profits at its peak, but 40%-50% of its profits came from financial services.

It can be said that the lower the profit margin of a company, the more it needs financial tools like stablecoins to optimize its business model.

Of course, not every company has the capability to issue large amounts of stablecoins. The role of stablecoins is in transactions; they need sufficient transaction volume to support ------ the most suitable companies emerge: retail. They have almost the largest transaction volume in all industries and a strong ability to issue coins. At the same time, their profit margins are low, so the returns from entering this field would be more substantial than for high-profit companies.

Thus, retail companies have become the most proactive group in entering the stablecoin space. In June, media reports revealed that both Walmart and Amazon plan to launch stablecoins. Besides these two retail giants, the OTA platform Expedia is also gearing up. Across the ocean, Liu Qiangdong personally announced that JD.com hopes to apply for stablecoin licenses in all major currency countries globally.

Their ultimate goal is obvious: to issue large amounts of stablecoins and use them for transactions of their own products. Ideally, all transactions within their ecosystems would be conducted using their own stablecoins, just like barbershops accept payments through membership cards. They would then save these "preloaded" fees to earn interest.

How Much Can They Earn?

How much income can stablecoins actually bring?

Taking Walmart as an example, Walmart's revenue last year reached $680 billion, and in addition, Walmart has some third-party e-commerce businesses, with total GMV possibly exceeding $700 billion. If they can issue stablecoins equivalent to one-tenth of their GMV, the market value of their stablecoins could surpass Circle. If they can issue stablecoins equal to their GMV, Walmart would become a giant in the stablecoin industry.

So, can Walmart issue $700 billion in stablecoins?

Of course not. After all, money is fluid; $700 billion in GMV does not require $700 billion in stablecoins. The amount of stablecoins Walmart can issue is actually determined by "how much unspent balance can be settled in the market."

This number has a reference: Starbucks' unspent member funds. Starbucks' 2024 financial report shows that the amount of stored value cards on its books reached $1.7 billion. It is worth noting that Starbucks' annual net revenue is only $36 billion, while Walmart is about 20 times that. If Walmart can achieve a preloaded ratio with stablecoins similar to Starbucks, meaning nearly 5% of its revenue is settled in member card preloads, it would have nearly $40 billion in unspent funds.

Caption: This $1.7 billion is member recharges that have not yet been spent. Starbucks can use it to purchase government bonds, earning about $70 million in profits each year.

Moreover, Starbucks is a high-frequency consumption model, while whether it's Walmart's supermarket shopping or JD.com and Amazon's online shopping, the frequency is far lower than "having a cup of coffee." The lower the shopping frequency, the slower the capital turnover, and the more unspent amounts on the card ------ allowing for more coins to be issued.

The single purchase amount in retail is also much higher than that at Starbucks ------ Americans often spend hundreds of dollars on a trip to the supermarket, while a cup of coffee costs only $5. Higher spending amounts mean that the required balance on the account is also larger, and retailers can attract consumers to recharge more by offering promotions like "charge $1000 and get $100 extra" ------ allowing them to issue even more coins.

In terms of capability, Walmart's ability to accumulate funds is stronger than Starbucks. If its stablecoin payment ratio can reach Starbucks' member card payment ratio, its issuance could very likely exceed $50 billion, with annual interest income surpassing $2 billion. For Walmart, which has an annual profit of $15 billion, this is certainly not a small sum.

And it doesn't stop there; retailers like Walmart and Amazon also have to pay card organizations like VISA, MasterCard, and American Express tens of billions of dollars in fees each year. If the payment system can be largely replaced by stablecoins, this would save a significant amount of profit.

Additionally, if all liquidity is settled on their own chain, it could give rise to a vast array of financial management services.

------ An even more unrealistic vision is that as terminal retailers, Walmart, Amazon, and JD.com could even use stablecoins to pay for upstream goods and employee bonuses, which can be directly referenced against the company's accounts payable. Walmart's accounts payable has long been over $50 billion, and JD.com's latest financial report shows accounts payable as high as 176.736 billion RMB. If these payables are settled through stablecoins, upstream suppliers would receive stablecoins, and during the time between the stablecoins being received and redeemed, the issuer could earn interest.

Caption: Retailers, as the most downstream in the supply chain, hold a large amount of upstream funds.
As long as the above visions can be partially realized, for these high-revenue but low-margin companies, income from stablecoins could even surpass that from their main business. The business model of consumer companies may completely change; they could operate like Costco: not making money from selling goods, but making friends, and then earning profits through stablecoins (membership cards).

Everyone is an Insurance Company

Of course, in the world of finance, simply earning a lot is not enough; one must also survive in the long run.

In fact, before stablecoins, many companies tried to rely on finance to improve their low profits, but most ultimately failed.

Take the manufacturing giant GE (General Electric) as an example. Compared to the meager profits from manufacturing, money from finance seemed abundant and easy to earn. This became GE's tool for "improving poor businesses," with over half of its profits coming from the financial sector at its peak.

However, the risks were also evident. Because the vast majority of companies engaging in finance have only one source of funds: borrowing.

For instance, GE was one of the most prolific bond issuers in history; before the financial crisis, GE's commercial paper scale had already exceeded $100 billion. These short-term loans were reissued by GE to earn interest from the inflow and outflow ------ this was also the business model of many domestic internet finance companies.

Today, people can easily spot the problem: this is essentially "borrowing to pay off debt" or "robbing Peter to pay Paul." It cannot withstand any fluctuations, and if there is even a slight uncertainty in the entire chain, the company may default. The outcome was indeed as such; during the financial crisis, GE collapsed, and its stock price evaporated by 80%.

It is precisely the extreme risk of finance that has made GE's approach nearly disappear. Today's internet finance companies like Du Xiaoman primarily serve as platforms, with funds coming from banks and other partners, rather than borrowing to earn interest spreads, as one fluctuation could break the entire chain.

------ But stablecoins do not have this problem.

Compared to traditional finance, the financing model of stablecoins is akin to playing tricks: companies issuing bonds must pay high interest, and even banks must pay interest to depositors. But stablecoin issuers do not have to pay any interest. They can even charge a certain fee when cashing out; for example, Circle, the first stablecoin company, raised its redemption fee last October, up to 0.1%. Not only do they not pay interest for financing, but they can even collect a fee when repaying?

Even if there are fees, stablecoins are not redeemable by just anyone. For example, Tether (USDT) stipulates that only certain trusted entities that have undergone KYC certification can directly mint or redeem USDT. In short, only large institutions can redeem stablecoins. Even more dominantly, Tether reserves the right not to redeem for users, truly embodying the saying "the one who owes money is the master."

This greatly reduces the frequency of stablecoin redemptions, meaning stablecoin issuers do not need too much reserve to meet liquidity demands.

Moreover, due to the extremely low financing costs, coupled with regulatory requirements, stablecoin issuers do not need to seek various high-return but high-risk loans like GE; they only need to purchase risk-free investment products ------ government bonds. Currently, the four major U.S. dollar stablecoin issuers collectively hold about $180 billion in U.S. government bonds. Of course, stablecoin companies can also invest in other products; for instance, Tether, the largest stablecoin issuer, holds some gold and Bitcoin.

If GE, Lehman Brothers, and Goldman Sachs had such financial tools, they would not have faced collapse during the 2008 financial crisis ------ government bonds are a risk-free investment; during a financial crisis, not only do they not decline, but they actually appreciate. Even if users redeem on a large scale and sell stablecoins, they can still repay debts smoothly.

In short: the financing costs of stablecoins are very low, and the risks are also very low.

In fact, the reason banks and insurance companies can make money is that they have a very low-cost and relatively low-risk source of funds.

But with the support of stablecoins, companies like Walmart, JD.com, and Amazon, which have large transaction volumes, are likely to become the players with the lowest financing costs in the future. They are not insurance companies, but they can enjoy negative-cost leverage like insurance companies.

Of course, the issuance of stablecoins by companies is still in the exploratory stage. Whether it will be issued on a large scale or only serve as a supplement in a few scenarios like cross-border trade remains unanswered by each company.

Even if issued on a large scale, can it become a widely accepted currency? If not, it would simply be a "preloaded shopping card" with a different skin for consumers. If consumers were previously unwilling to pre-deposit thousands of dollars at Walmart, having stablecoins may not change their acceptance.

Whether it will be a revolution or just a gimmick can only be verified by time.