Tony McLaughlin, the Citi architect of the Regulated Liability Network for tokenized deposits, has launched his new venture, Ubyx. It aims to create a network of banks and fintechs to redeem stablecoins directly into recipient bank accounts. Likewise, people could convert from bank balances into stablecoins to make cross border payments. We provided a brief write up a couple of months ago, but Mr McLaughlin has now completed his gardening leave.
This is a key piece of the stablecoin puzzle that is currently missing. Two stablecoin infrastructure firms have been recently acquired – Stripe bought Bridge for $1.1 billion and MoonPay bought Iron. Both provide APIs to enable businesses to use stablecoins for payments – whether it’s SpaceX repatriating money for foreign Starlink sales, or a freelancing platform making mass payouts to contractors.
The challenge is once the stablecoin reaches its destination – SpaceX HQ or the freelancer – what do they do with the stablecoin? SpaceX is a little different because it might have a direct relationship with the stablecoin issuer to redeem the stablecoin to a bank account. But most people are not large enough, so they would sell their stablecoins to a crypto exchange and request the crypto exchange to make a transfer to their bank account. First time recipients have to sign up to a crypto exchange first. Wouldn’t it be better to cut out the crypto exchange, and go directly from the stablecoin to the bank?
That’s what Ubyx aims to do. One could provide an analogy between Ubyx and the card networks of Visa and Mastercard. An alternative comparison is with the likes of Western Union, especially because stablecoins tend to get used for cross border payments.
Ubyx addresses stablecoin weaknesses
Stablecoins are more efficient than bank payments for international payments, but they have weaknesses. Many worry about the potential negative impact on financial stability.
One of the reasons is the volatility of stablecoin prices. If the ability to off ramp is more ubiquitous, then this helps to stabilize prices and retain the so-called singleness of money. That said, in a crisis, it means banks are more closely connected to the crypto ecosystem. However, Ubyx also has plans to address crises with a lending facility operated by a DAO.
Given stablecoins benefit from network effects, even if the number of stablecoins is currently proliferating, over time there are more likely to be a handful. Provided banks are willing to support a diverse range of stablecoins, Ubyx could help to sustain smaller stablecoins, because people wouldn’t care so much about which stablecoin they receive. A more diverse range of stablecoins ensures more competition and a lower risk of monopoly stablecoins starting to add charges. Hence, Ubyx could be providing a public good, although this side effect remains to be seen.
All in all, Ubyx is a brilliant concept, and Tony McLaughlin is the right person to do it.
Stablecoins and incentives
However, the key is to be able to provide the appropriate level of incentives to all parties, particularly banks. Frankly, they should be incentivized without getting paid because this is the only way they are going to postpone losing deposits to stablecoins and other tokenized assets like money market funds.
Without a bank off ramp, you encourage stablecoin recipients to use crypto wallets and exchanges, which is like a gateway drug. Once they use stablecoins, why not tokenized Treasuries? Deposit holders will start to realize that perhaps a bank isn’t the optimal place to store so much extra cash. (Okay, there is the not-so-small issue about custody to keep your tokens safe).
Given banks are businesses, they might want additional incentives. Ubyx will not set the fees for banks, but it suggests a 1% fee for redemption and another 1% for foreign exchange. Ubyx will take 0.2% itself and the stablecoin issuer 0.5%. That means the consumer could be charged 2.7% for redemption. This is starting to look awfully like card level fees. And stablecoins are meant to be cheaper. Of course, Ubyx is still young, so the current paper and thinking is likely to evolve.
Banks won’t provide stablecoin off ramp services in isolation. Crypto exchanges and cards are competition. Today off ramping via crypto exchanges is cheap and they offer superb foreign exchange rates. These level of charges from banks will not be competitive.
How to incentivize banks
There are alternative solutions. For example, new stablecoins, like the M stablecoin and the Global Dollar, share most of the revenue on reserves with distribution partners. If that becomes more of the norm going forward, that could help Ubyx in rejigging the model.
In fact, Ubyx could encourage the migration to this revenue sharing approach if it offers a dual model. Banks could take the 2% fees for stablecoins that don’t share revenues. Or instead, some (or all) of the redemption fees could be replaced by the issuer sharing revenues. If I were a consumer and the option was a 0.5% or 1% fee using stablecoin A and a 2.7% fee using stablecoin B, I’d tell the person sending me stablecoins to use stablecoin A. If people do this en masse, the stablecoin A model will become the norm. And Ubyx will have influenced the adoption of a stablecoin model that’s better for users of stablecoins.
