Arthur Hayes Warns: New Stablecoin IPOs Face Major Distribution Hurdles

The stablecoin market, a foundational pillar of the modern cryptocurrency ecosystem, stands at a pivotal moment, as articulated by the influential crypto essayist Arthur Hayes. In his recent essay, “Assume The Position,” Hayes issues a stark caution: a new wave of public offerings for stablecoin projects is poised to disappoint investors. He contends that while the underlying business model for stablecoins is exceptionally profitable, the critical element of widespread distribution is now largely inaccessible for new entrants, setting them on a path toward inevitable failure and substantial losses for those who commit capital.

Hayes’s analysis underscores a fundamental truth often overlooked by market participants: a stablecoin’s success hinges not merely on its technological robustness or asset backing, but profoundly on its capacity to penetrate global payment networks and achieve extensive user adoption. This necessitates deep integration with major cryptocurrency exchanges, prominent social media platforms, or established banking infrastructure. Without these vital conduits, a stablecoin faces insurmountable barriers to scale, severely limiting its utility and investment potential.

The Genesis of Stablecoin Dominance and Distribution

The evolution of stablecoins, particularly Tether (USDT) and Circle (USDC), illustrates the intricate interplay between market demand, regulatory dynamics, and strategic distribution. In the nascent stages of cryptocurrency, acquiring digital assets was a challenging endeavor, often requiring complex fiat transfers or even in-person exchanges. This inherent difficulty in moving fiat currency into and out of the crypto ecosystem fostered fertile ground for innovation in regions such as “Greater China” (comprising Hong Kong, mainland China, and Taiwan), which emerged as a crucial early market for crypto development.

Tether’s ascent to prominence in the mid-2010s exemplified the power of strategic partnerships. Bitfinex, then a leading global exchange operating from Hong Kong, integrated USDT at a time when traditional banking relationships for cryptocurrency firms were becoming increasingly precarious. As Chinese banks began restricting crypto-related accounts and local currencies faced devaluation, the demand for a digital dollar proxy surged. Tether, despite lacking Chinese founders, benefited from strong regional ties, notably through Bitfinex CEO Jean-Louis van der Velde’s prior experience in the Chinese automotive industry. This established trust facilitated USDT’s widespread adoption across Asia and, subsequently, the Global South, solidifying its status as a de facto “dollar account” for millions of users and becoming essential for altcoin trading on exchanges lacking direct bank access.

The Initial Coin Offering (ICO) boom of 2015-2017 further cemented USDT’s market position. The emergence of Ethereum enabled a proliferation of new altcoins, and exchanges like Poloniex and later Binance readily embraced USDT for crypto-to-crypto trading pairs. This mechanism allowed platforms to offer dollar-denominated trading without direct interaction with the traditional banking system, fostering a vast liquidity network that propelled USDT’s demand and utility. By the end of the decade, as many exchanges faced the loss of their traditional banking channels, USDT became the primary method for mass dollar movement within the cryptocurrency industry. While Circle’s USDC later achieved significant success in Western markets, driven by its regulatory alignment in the United States and a strategic partnership with Coinbase, Tether maintained its historical stronghold and trust among a vast global user base.

Emerging Threats to New Entrants: Tech Giants and Traditional Banks

The landscape for new stablecoin issuers is now dramatically altered. Major technology companies, recognizing the immense potential in global payments, are increasingly exploring their own stablecoin initiatives. While Meta’s Libra project faced significant regulatory pushback in 2019, the current political climate in the United States—particularly under a new administration assumed to be less inclined to protect incumbent banks—could pave the way for giants like X, Airbnb, and Google to launch their own digital currencies. These platforms possess unparalleled user bases and vast data, enabling them to construct comprehensive payment infrastructures internally. This development poses a direct threat to new stablecoin startups, as tech giants will have minimal need for external partners for distribution.

Concurrently, traditional banks, while threatened by stablecoin adoption, are unlikely to emerge as viable distribution partners for new projects. A senior bank executive reportedly views stablecoins as an existential threat, citing examples like Nigeria, where a significant portion of the GDP is said to flow through USDT despite regulatory attempts to curb it (Nigeria’s SEC reported that 33.4% of its population uses cryptocurrencies). Banks are structurally resistant to the radical transformation required to compete with the efficiency of stablecoin operations. Tether, for instance, manages functions comparable to a large bank with a team of approximately 100 people, a stark contrast to institutions like JPMorgan Chase, which employs over 300,000 individuals. Regulatory burdens often mandate an inefficient, headcount-heavy approach that banks cannot easily shed. While banks may eventually integrate stablecoins, it will likely be in a limited, in-house capacity, primarily designed to retain control and protect existing revenue streams, rather than opening up massive new distribution channels for external issuers.

The Profitability Dilemma for New Stablecoins

The appeal of issuing stablecoins stems from their substantial profitability, primarily derived from Net Interest Margin (NIM) on underlying reserves. Issuers like Tether and Circle invest their reserves in safe, interest-bearing assets, predominantly US Treasury bonds, while others, such as Ethena, employ crypto arbitrage strategies. Tether’s model is arguably the most profitable, as it pays no interest to USDT holders, thus retaining all income generated from its reserve investments. This effectiveness is reinforced by its strong network effect and widespread global usage, rendering alternative dollar-pegged stablecoins less attractive to its established user base. Tether’s reported profits, which surged with rising US interest rates, highlight its exceptional efficiency, with data from Arthur Hayes’ “On Thin Ice” essay suggesting Tether is among the most profitable financial entities per employee globally.

However, achieving this profitability necessitates significant distribution, which inherently comes at a cost. Tether benefited immensely from its shared origins with Bitfinex, allowing it to leverage the exchange’s user base without incurring substantial distribution fees. Circle, as a later entrant, had to account for the cost of its market penetration; its partnership with Coinbase, for example, involved Circle sharing 50% of its Net Interest Margin in exchange for distribution through Coinbase’s extensive ecosystem. For new stablecoin issuers, the challenge is even more formidable. With primary distribution channels already occupied by established players like Tether and Circle, and the looming entry of tech giants and insular banking solutions, new projects face a drastically constrained landscape. Their only remaining viable strategy would be to offer a substantial portion of their potential earnings back to users to incentivize adoption, thereby making the business model considerably less attractive. This dynamic leads Hayes to conclude that investments in new public stablecoin issuers are highly likely to result in losses, as their path to profitable, scalable distribution is largely blocked.