Why have foreign exchange stablecoins never been able to take off?

Author: Nico

Compiled by: Jiahua, ChainCatcher

Stablecoin digital banking is the next major growth frontier for retail adoption, with foreign exchange (FX) becoming a core component.

Tether and Circle have spent over a decade building liquidity, distribution channels, and network effects around USDT and USDC, which are extremely difficult for new FX stablecoin issuers to replicate.

Rather than competing by issuing spot FX stablecoins, a better path is synthetic FX: users continue to hold USDT/USDC at the base layer, while account balances are denominated in their preferred local currency.

Stablecoin digital banking is transcending the crypto-native community, disrupting the way global consumers and businesses transact. In the past year, approximately $6 billion in venture capital has flowed into this frontier.

However, in terms of the current on-chain FX infrastructure, stablecoin digital banking is essentially just a bank with dollar accounts. This limitation creates a huge opportunity, as 95% to 99% of accounts globally are not denominated in dollars.

24x Growth in Less Than a Year

A smart friend from Tether once told me that diversifying the holder base is one of the three most important North Star metrics for the company. A holder structure dominated by large whales can bring unnecessary volatility to the total value locked (TVL) of USDT.

All stablecoin issuers want to win over retail and businesses that use stablecoins for everyday transactions and banking, rather than attracting more traders and whales.

In short, a billion people holding 10 USDT each is far better than one whale holding 10 billion.

Stablecoin digital banking provides an excellent opportunity for stablecoins to reach everyday retail and businesses. Beyond trading, the mass market will experience the convenience and superiority of stablecoins as a means of payment, savings, and investment, thus surpassing the currently dominant trading use cases.

A snapshot of the rapid growth of stablecoin digital banking: crypto card spending is projected to surge 525% by 2025, jumping from $14.6 million to $91.3 million, with EtherFi leading at $55.4 million.

Yesterday, the single-day spending on the @ether_fi card just surpassed $3.7 million. This equates to an annualized stablecoin spending of $1.35 billion, a 24-fold increase from last year.

When something grows 24 times in less than a year, you have to pay attention. Meanwhile, @ether_fi launched their euro product last week. I will elaborate on this later.

Digital banking stablecoins are a new battleground, and there is currently no clear leader. Since 2018, stablecoins with fiat exchange liquidity and widely accepted by centralized exchanges have been seen as the best stablecoins, capturing the largest growth space.

How to win this new battle? What kind of stablecoin is truly suitable for digital banking?

Why Stablecoin FX Matters

Historically, single-currency digital banks have universally failed to gain market recognition. Major fintech giants like @Wise, @Revolut, and @airwallex all started as FX companies. When PayPal went public in 2002, FX accounted for over 40% of its revenue.

International fund transfers are much more challenging than domestic transfers, giving these successful digital banks the opportunity to shine in the FX space and establish market dominance in specific payment corridors or consumer/business groups.

Therefore, if a stablecoin digital bank only has dollar accounts, it will face significant barriers to growth and differentiation, not to mention competing with existing fiat digital banks. 95% to 99% of regions account in non-dollar currencies.

Currently, stablecoin digital banks cannot serve any of those businesses or consumers.

$600 Million vs $400 Billion

Despite many excellent teams and public chain ecosystems (especially @base and @CodexFX) eyeing opportunities in the FX space, the harsh reality is that the total amount of all FX stablecoins is a tiny fraction of the size of dollar stablecoins. Approximately $600 million compared to $400 billion presents a staggering 700-fold gap.

If @tether's success has taught us one thing, it is that stablecoins are a business with extreme network effects. @Tether is the highest quality stablecoin due to the vast network built around it.

Given the limited TVL of FX stablecoins, unfortunately, most FX stablecoins face the following dilemmas:

• Limited liquidity leads to weak anchoring (for example, the de-pegging event of Paxos Gold on October 10 could happen to any FX stablecoin with limited liquidity and TVL; PAXG has a TVL of $1.2 billion, almost three times the size of the largest FX stablecoin EURC)
• Not accepted by fintech platforms or centralized exchanges
• Even if accepted, the liquidity of fiat exchange channels is very limited
• Limited liquidity with important trading pairs (including with USDT/USDC)
• Almost no yield opportunities
• Compliance and licensing issues across different regions are very complex
• Most importantly, due to the untested anchoring mechanism, stablecoin digital banks and the broader fintech space find it difficult to adopt recklessly before reaching a certain scale. This is a chicken-and-egg problem that may take a long time and significant resources to resolve.

What Makes a High-Quality Stablecoin?

An outstanding digital banking stablecoin must excel in all of the following areas:

• Liquidity of fiat exchange channels
• Strong anchoring stability independent of overall market liquidity
• Yield opportunities
• Liquidity of major trading pairs
• Wide acceptance in CeFi, TradFi, and payment sectors
• Strong influence on low Gas chains
• Brand and token name recognition

The Answer from Traditional Finance

According to data from the Bank for International Settlements (BIS), only about 31% of global FX trading volume comes from spot trading, while about 69% comes from the derivatives market. This indicates that the modern FX market is primarily driven by synthetic exposures, hedging, and financing activities, rather than physical currency conversions.

As a result, the notional amount settled daily in FX swaps reaches as high as $4 trillion.

One of the most important non-spot FX tools is non-deliverable forward (NDF) foreign exchange trading: this is a cash-settled FX forward contract that does not involve physical currency delivery. The parties do not deliver the underlying currency but only settle the profit and loss difference, usually in dollars.

NDFs are particularly common in the following situations: when currency convertibility is restricted, offshore access channels are fragmented, or offshore liquidity is insufficient for efficient physical delivery, making synthetic exposures settled in dollars operationally easier than directly obtaining and settling local currencies.

Example:

• A company wants to gain exposure to Swiss francs (CHF) in the next three months.
• It does not go to obtain and settle physical francs but instead enters into a CHF NDF, effectively holding dollars while pricing its account in francs.
• Upon maturity, only the profit and loss difference compared to the agreed exchange rate is exchanged, priced in dollars.

Many modern NDF structures are also mark-to-market (MtM), meaning that unrealized profits and losses are periodically collateralized or settled throughout the contract's lifecycle, thereby reducing counterparty risk and improving capital efficiency.

Mark-to-market NDFs can effectively keep accounts denominated in dollars while economically pricing balances and profits and losses in another currency.

The Optimal Solution for On-Chain FX: Go NDF, Not Spot

For currencies lacking depth or efficient spot liquidity, mark-to-market NDFs are a powerful solution that has been widely applied in traditional finance for trading pairs like USD/CHF, USD/KRW, USD/INR, USD/BRL, and USD/TWD.

Corporations, banks, and offshore investors typically use them to gain synthetic FX exposure without the need for physical delivery of local currencies.

The crypto space also faces similar structural issues:

• Not all currency pairs have deep spot liquidity
• Maintaining fully collateralized local fiat stablecoins is operationally very difficult

Therefore, mark-to-market NDF structures are very suitable for crypto-native FX systems.

Users can:

• Fully keep their funds in USDT/USDC
• Simultaneously synthesize shorting dollars and going long on foreign currencies through mark-to-market NDF structures
• Effectively convert account value and profits and losses into target currency pricing without leaving the dollar settlement network

Advantages include:

• Oracle-based strong anchoring: Exposures track reliable FX reference rates without relying on fragmented local spot liquidity.
• Retain dollar stablecoin network and yields: Users continue to hold USDT/USDC, thus able to access the deepest on-chain liquidity and yield opportunities.
• Excellent liquidity and channels: USDT/USDC has the strongest global fiat exchange channels, exchange integrations, and trading liquidity across the entire crypto market.
• Cross-currency scalability: Any currency with a reliable dollar oracle can receive synthetic support without needing to establish local banking infrastructure, local custody, or sovereign bond reserves like traditional fiat stablecoin issuers.
• Capital efficiency: Only periodic settlement or collateralization of FX profit and loss differences is required, without the need for full spot conversions.

This perfectly mirrors how today's institutional FX market operates off-chain: layering synthetic exposures and cash-settled risk transfer on top of a dominant dollar financing and collateral system.

On-Chain NDF FX, Who Will Use It?

A simplistic narrative or the belief that "FX is obviously the next step" will not work. Details determine success or failure, and creating an FX stablecoin with a TVL reaching ten to twelve digits (i.e., hundreds of millions to hundreds of billions) is no easy task.

Teams committed to this direction cannot expect holders to automatically flock in once the product is launched. At @SupernovaLabs_, we are extremely clear on three simple questions:

• Who are your holders?
• Why would they want to hold?
• How will you distribute to them?

1. Digital Banks, Custodians, Wallets: Multi-Currency Accounts Are Essential

Total deposits are one of the most important metrics for digital banks and the public chains where stablecoins reside. Without native FX infrastructure, multinational corporations cannot securely hold operating funds on-chain and are forced to transfer funds back to local banking systems.

As a result, many stablecoin digital banks and public chains face the risk of becoming mere conduits for fund transfers, unable to become true financial operating systems.

Mark-to-market NDF infrastructure changes this situation.

Stablecoin digital banks, custodians, wallets, and payment platforms can integrate @SupernovaLabs_’s API to provide synthetic FX pricing services directly on top of the dollar stablecoin network. For end users, the experience becomes a simple switching operation:

• Switch the account's pricing currency from dollars to euros, Swiss francs, Singapore dollars, Hong Kong dollars, etc.
• Or hold balances denominated in multiple currencies within one account
• While the underlying settlement, collateral, and liquidity infrastructure remains USDT/USDC

Stablecoin digital banks, custodians, and wallets have highly aligned incentive mechanisms with mark-to-market NDFs:

• Unlock customer acquisition channels for international users
• Increase deposits and retained balances
• Reduce fund flows to traditional banking systems
• Support multi-currency accounts for differentiated competition

Thus, multinational corporations or individual users can:

• Keep funds entirely on-chain
• Maintain access to deep dollar stablecoin liquidity and yields
• Simultaneously hold foreign currency exposure economically through the synthetic FX market

This product benefits from macro-positive factors: the dollar has depreciated against the euro by about 10-12% in the past year, increasing demand for non-dollar-denominated assets, while users can continue to keep funds within the dollar stablecoin channel.

2. FX Carry Trade Yields: Scale and Stability Will Far Exceed Ethena

FX derivatives are also widely used for carry trades, one of the largest macro strategies globally. The classic example is the yen carry trade:

• Borrowing low-yielding yen
• Going long on high-yield currencies like the Brazilian real (BRL)
• Earning the interest rate differential, i.e., "carry"

Brazilian real interest rates often exceed 10%, making it one of the most favored carry currencies for hedge funds and macro investors. These trades are typically executed through NDFs, forwards, and FX swaps rather than spot conversions.

Compared to crypto basis trading products like @ethena:

• FX carry is linked to sovereign interest rate differentials, not the funding rates of the crypto market
• The market size is significantly larger and more institutionalized
• Due to the vast scale of the global FX derivatives market, its capacity is much deeper
• Yields are typically lower than the peaks of crypto basis trading but historically more stable and scalable

This creates an excellent opportunity for on-chain FX carry vaults:

• Users hold USDT/USDC as collateral
• Synthesize foreign currency exposure through mark-to-market NDFs
• Earn sovereign FX carry yields on-chain without leaving the dollar stablecoin channel

3. Corporate Global Payments: Stripe Has Already Validated This Path

In the past year, @Stablecoin has allowed corporate clients to receive fiat currencies such as euros, Mexican pesos, Brazilian reals, Colombian pesos, and pounds, automatically converting funds to USDC.

However, currently, FX can only be received on-chain and cannot be held on-chain. For businesses managing or accounting in currencies like Swiss francs or Singapore dollars, this means they still need to withdraw funds to local banking networks.

This limitation is particularly pronounced when servicing global enterprises, which is precisely the area @tempo is actively promoting for adoption and expansion.

Stripe provides NDF-style FX hedging support for its fiat global payments. If a merchant wants to settle in currency A while the customer pays in currency B, the merchant can hedge the FX exposure within a specified timeframe and provide the customer with a stable, locked-in price denominated in local currency.

Stripe's NDF FX API for fiat payments

Stablecoin payments can apply a similar model on-chain: users continue to hold and transact with dollar stablecoins, while merchants or wallets can synthesize hedges to the preferred local currency without relying on spot FX liquidity or local stablecoin issuance.

I want to emphasize how astonishing the profit margins of Stripe's FX product are. Despite primarily serving non-speculative and highly predictable corporate and retail payment flows, the product still charges about 20 basis points per transaction.

Annualized, this amounts to approximately 73% of the hedging costs, representing an extremely high take rate for FX risk transfer.

This not only illustrates the profitability of the business but also indicates that users are extremely price insensitive when faced with seamless global payments and exchange rate certainty.

Without Interest Rate Stability, On-Chain Economy Cannot Thrive

At @SupernovaLabs_, we are committed to bringing interest rate stability on-chain, driving DeFi into its next institutional phase by building financial infrastructure at the operating system level, serving not only crypto natives, traders, and whales but also everyday businesses and retail users.

We started with interest rate swaps and have settled over $5 billion in notional trading volume, serving top-tier full-stack prime brokers and institutional borrowers.

NDF FX is an area we are very excited about because we firmly believe it will unlock the next phase of on-chain financial transaction volume and global stablecoin adoption.

Just as centralized exchanges shaped the current stablecoin landscape, digital banking will create new waves and push adoption rates into the trillion-dollar level.

Five years from now, the approximately $350 billion stablecoin market today may seem insignificant compared to the trillions of dollars that stablecoin digital banking and global on-chain financial accounts could bring.

FX will be a core part of this expansion, and our goal is to build the infrastructure layer that can fully capture this growth.