Are Stablecoins the Future of Payments? Mizuho Analyst Shares Insights - WSJ's Take On the Week

Wall Street Journal

2 days ago

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This is WSJ's Take On the Week where co-hosts Gunjan Banerji, lead writer for Live Markets, and Telis Demos, Heard on the Street's banking and money columnist, cut through the noise and dive into markets, the economy and finance—the big trades, key players and business news ahead.
The episode continues with Telis and Dan Dolev, a senior financial-technology analyst at investment firm Mizuho Americas, exploring the burgeoning world of stablecoins. Dolev offers insights into Circle's revenue streams, whether stablecoins can disrupt Visa and Mastercard's payment network, and their broader implications for international money transfers.
In this week's episode of WSJ's Take On the Week, co-host Telis Demos and guest co-host Miriam Gottfried analyze the implications of a weak jobs report and the removal of Erika McEntarfer, the top official from the U.S. Department of Labor's Bureau of Labor Statistics, examining how investors are grappling with the prospect of less-reliable economic data in the future. The discussion also covers this week's key CPI, PPI and business inventory reports. Plus, Telis offers a stablecoin primer before crypto firm Circle Internet's upcoming earnings announcement.
Full Transcript
This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.
Telis Demos: Hey, everyone. Welcome back to another episode of WSJ's Take On The Week. I'm Telis Demos.
Miriam Gottfried: And I'm Miriam Gottfried. Today's show, a big conversation about stablecoin.
Telis Demos: That's right. Stablecoins the boring part of crypto, though not so boring lately if you look at the stock market. Before we get to that though, I think we need to have a very serious conversation about the labor market. So there was a recent government Jobs Report that showed that in July the U.S. economy only created 73,000 jobs, which was running below where it had been in prior months. People had been expecting or wondering if there was going to be some sort of after effect of tariffs and other just big economic changes that have been happening. They started to see it there. And probably even more significantly, there was a revision to the prior couple of reports showing that the economy had created 258,000 fewer jobs than had previously been estimated. And that has really changed the conversation about what the impact of tariffs might be on the economy, how the U.S. economy is doing, it's changed the way we talk about the Federal Reserve's next move. Miriam, how has it changed conversations you've been having in recent days?
Miriam Gottfried: Well, I think a lot of people were looking at the jobs market as a sign of health for the overall economy, and now that it's a little bit less healthy than we thought, I think expectations for a rate cut have changed. More people are expecting the Fed to act at its next meeting. I think a lot of people are re-examining the process by which we collect these estimates. There's a whole series of surveys that go out to businesses that they must respond to in order for the government to tabulate payrolls. And if businesses don't respond, they don't get the data. And if the survey trickles in late, then the data comes in late and the revisions happen. And that's the explanation for the degree of this revision. But President Trump thought there was another explanation. He believes that the head of the BLS somehow politicized the report in order to make him look bad and that that's the real reason behind the revision. Of course, he offered no evidence of that, but this has created attention and it led to the firing of the head of the BLS.
Telis Demos: And economic data is something that Wall Street really relies on. Big institutional traders as well as individual traders look at those reports. The Journal had a big story talking about how Wall Street economists really are thinking hard about what this means and whether they can look at economic data the same way that they had in the past if there is wholesale changes to how the data's collected. Now, obviously, we will see what changes are made.
Miriam Gottfried: And I think there's a fear among investors going forward that the data will actually be become less reliable because the new person who will be put in charge of the BLS will be someone who will be expected to not "politicize the data" and that person will have a spotlight shown on them. And what will that mean in terms of reporting accurate and reliable data?
Telis Demos: It is a reminder, too, that coming up with opinions about what's going on in the economy, whether you have government data that everybody agrees is the gold standard or isn't, is it very tricky and difficult thing. Investors struggle to come up with narratives to lay on what's happening in the economy. You look at earnings reports, you get very different perspectives. We had a recent earnings report from McDonald's, and that report was talking about how they were selling more food, but they were also doing a lot of discounting. And from that people took away, well, the consumer's doing okay. Then we had another report recently from Shopify, a big e-commerce company. It was a blowout report and they said that people are spending and doing great. That stock surged. So which of them is telling the real story about the economy? We don't want to take away from this that government data tells us exactly what we need to know about the economy each week, because a lot of it too depends on what happens.
Miriam Gottfried: But that being said, despite all this controversy around this one set of data, we do have more government data coming out in this coming week...
Telis Demos: Yep. It doesn't stop.
Miriam Gottfried: ... that people are going to be looking closely at. We have CPI.
Telis Demos: Yeah, the Consumer Price Index. The last reading was a little hot. It was 2.7%, inching toward 3% that I think starts to spook everyone. We'll see what the next report says. Also, the Producer Price Index, which is a measure of wholesale prices, (inaudible).
Miriam Gottfried: It looks at the components of the prices that we ultimately pay as consumers.
Telis Demos: Similarly, that has not been too hot. It's been running in the 2%. So again, not seeing necessarily the inflation there. And then we have business inventories, which I think that's one I think people will be interested in because the narrative about what's happened with tariffs is that everybody bought up stuff earlier in the year worrying that the price of it might go up later. And so now everyone's sitting on a big inventory pile.
Miriam Gottfried: But they may be working it down and we may start to see prices increase by the end of the year.
Telis Demos: Whether or not that's going to play out in this next report, we will see. But what's interesting from a market point of view though is. Despite the, I would say very dramatic discussions we're having about the economy and data, the market, it went down a little bit after the Jobs Report. It went back up. I think we're still in the neighborhood of all time highs for the S&P and there are certainly some stocks that the market still seems to love.
Miriam Gottfried: It's been really surprisingly resilient.
Telis Demos: The animal spirits have not been calmed, have not been soothed by what's going on with the economy conversation. And maybe even a Fed cut has reawakened some of that.
Miriam Gottfried: And one particular company that people have gotten really excited about is Circle.
Telis Demos: Yes. Getting now to the meat of our episode here, Circle is a stablecoin company. They went public earlier this year. The IPO market is hot. People are ready to buy companies they think are hot growth companies. There was an IPO recently of Figma, a software company, that did gangbusters. The stock went up so much, the Journal wrote an article about, did it go up too much?
Miriam Gottfried: They left much on the table.
Telis Demos: They could do a bad job pricing it. That's the kind of market we're in, in the IPO market. Circle debuted in early June. They're a $36 billion company that wasn't in the public markets a couple of months ago.
Miriam Gottfried: Okay. Tell us, before we go on, I have an embarrassing admission, which is that my eyes glaze over when I read about stablecoins. And I don't really know what they are. Can you explain it to me again?
Telis Demos: Sure. Miriam, that is not a dumb question. There are no dumb questions. Stablecoins are meant to be the glue of the crypto ecosystem. What they are is a token or coin that represents a fixed amount of a traditional fiat currency. So obviously the U.S. dollar is the major one, and there are companies that issue stablecoins in exchange for you give them $1, they give you back essentially a stablecoin that is worth $1 and always meant to be $1. Stablecoin's the pick and shovel of the crypto verse. As people move around between currencies and countries are stablecoins in the middle of that and, more importantly, are stablecoins something that we could all be using in the near future? So to dive deeper into all of this, I had a conversation with Dan Dolev. He's a stock analyst, he's a senior analyst at Mizuho Americas, and he covers the crypto, FinTech, payments realm across all those companies. We talked about Circle, a company that he actually has an underperform rating on, as well as other businesses related to that and just what the prospects are and how investors should think about this stuff. And we're going to have that conversation when we come back after the break. So there's a topic on my mind. It's both something that's about the big picture future, digital banking, the future of payments and commerce, and it's also about some things in the here and now like, what's the Fed's next move? And that's the business of stablecoins. Obviously, it's been a hot topic during the Trump administration and there's a lot going on in Washington and now in corporate earnings. And so we've got an analyst, well, Dan, you cover a wide world. You've got payments, FinTech, crypto, so you're right in the middle of lots of things. Dan Dolev from Mizuho Americas. He's a senior analyst there. Thanks for joining us.
Dan Dolev: Thanks, Telis. Always great to be with you and looking forward to collaborating on this.
Telis Demos: So stablecoins are created by private companies. There's a handful of them. Tether is the largest and one of the largest, Circle, Circle Internet Group, recently went public. They are an issuer of USDC. And when they went public, they had a hugely successful IPO. They went out at $31, they closed on the first day over $80, and now they're trading somewhere in the neighborhood of, at least at this recording, in the 160s. So we're talking about a 5X since their IPO in early June. What is their business? What exactly does Circle do to make money?
Dan Dolev: So the way Circle makes money is that they take your dollar and they put it on the blockchain, and then they mint a dollar for you, investing your dollar in U.S. Treasuries, which are making about four and change percent right now. I think to be accurate in the second quarter, it's around 4.2%. What they do is they have distribution partners. Their largest distribution partner by far is Coinbase. They have millions of users and those users are buying the stablecoin. They're buying USDC. And Coinbase is offering rewards in the form of percentage, say 4%, on some of that. But they're not offering it on all of them. Circle doesn't offer it on all of them, and that's how you're basically getting some sort of a revenue, but also for the users there is yield. So it's a game between how much are you giving back to the users versus how much are you keeping for yourself in terms of the Treasury yield at any point in time?
Telis Demos: So Circle takes in your dollar. They give you back a USDC. So then your dollar then sits in a reserve fund that Circle controls, and that earns interest because they buy Treasury bills and other sort of low-yielding safe things. But to your point, they don't just then keep all that money. You're saying some of that they share with partners like Coinbase. And the point of that is what? It's to essentially incentivize Coinbase to use USDC versus a different stablecoin?
Dan Dolev: Correct. And not only that, there is also a regulatory thing here. Because under the Genius Act, which we're probably going to get into in a second...
Telis Demos: That's the recently passed legislation that's meant to lay down the rules of the road for stablecoins. And it's part of the reason that everybody's so excited. Now there's this framework for stablecoins.
Dan Dolev: Correct. So you need basically, under the Genius Act, the mentor of the coin cannot offer rewards. They cannot offer yield, so they need a partner.
Telis Demos: It's different from a money market fund, which pays you a yield. Circle can't pay you directly a yield for holding a coin with them.
Dan Dolev: They need a partner that basically lets you distribute the coin. So they're using Coinbase, but recently they've also started using Binance and there's going to be a lot more partners.
Telis Demos: So then what has the market gotten so excited about when it comes to Circle? What do you think is driving the market enthusiasm here?
Dan Dolev: So we're not part of that. We haven't underperformed and I think our price target is more than half less of where it's trading right now.
Telis Demos: As an analyst, you think that their stock has gotten a little over its skis?
Dan Dolev: 100%. Stablecoins are hot. This is the only way to play stablecoins in a U.S. public market sense. There's no other pure play stablecoin. The float is very small. So just to explain to your viewers, the float is basically the percent of shares that is actually trading. So they went out with a very small float, low double-digit float as a percent of the total market cap. So it's very hard to buy in and buy out. So every dollar that you're buying into the stock drives it up. So what we think is there's a lot of retail excitement that drove up the stock to more than 200 initially.
Telis Demos: Is it a meme stock? Would you call it a meme stock?
Dan Dolev: I would put it in that category.
Telis Demos: Okay.
Dan Dolev: It definitely fits very well within that category. If you're like a retail investor, you're like, "Okay, I've heard stablecoins are great. This is the way to play stablecoin." So there's definitely a lot of FOMO here. As you know, on our team, we're betting against it. So we're bearish on Circle specifically. Not bearish on stablecoins, but bearish on Circle at this price level.
Telis Demos: What's the concern for the business of stablecoins versus the use of stablecoins? Where do those two things diverge? Why don't they just both go up together?
Dan Dolev: They diverge because the business of stablecoin is pretty much a creature of high interest rates. So the way to get you to buy the stablecoin on Coinbase is to incentivize you as a retail customer to give you the so-called reward, which is basically yield. But the interesting thing there is, once the rates start getting cut and this is not getting priced into the stock, once the rates are getting cut, the business model is going to be challenged because it's harder to incentivize someone to mint a coin when there's no adequate reward on the other side.
Telis Demos: So in other words, if people aren't going to be earning the high yield, you think there's not as much of an incentive for them to own stablecoins?
Dan Dolev: Exactly.
Telis Demos: And that's bad for the issuer's business? Interesting.
Dan Dolev: That's going to be a bigger hurdle to get you to buy because, at the end of the day, the consumer needs an incentive. You're not going to wake up one morning and say, "I've got mint a stablecoin," unless there's a real good offer on Coinbase or Binance saying, "Hey, here's an opportunity to make 4% risk-free."
Telis Demos: Talk about other use cases for stablecoin, because it seems to me that it can be a volume business too. Maybe they're earning a little less in yield on coins or paying it out to partners or whatever might the case for Circle or other stablecoin issuers. But if the number of stablecoins in circulation grows, that's just you're adding additional dollars. And maybe that next dollar doesn't earn as much, but you're still getting more dollars. So what are things that you think or what are you hearing about or what are people talking about as ways that we will all be using stablecoins, not just as a way to earn yield in an account, but are we going to be using them to pay for things?
Dan Dolev: Yeah, let's go back to baseball analogies because those are probably the easiest terms.
Telis Demos: I like that. You're talking my language. Okay, great.
Dan Dolev: The triple play is disrupting consumer payments. So basically, if you're able to disrupt Visa and Mastercard and able to disrupt the merchant acquirers and the whole ecosystem, we're talking about tens of trillions of dollars that you're disrupting. So the argument to be made pro that is that payments is expensive and clunky. So every time you go to the store, you're buying a Coke, the merchant has to pay what's called a merchant discount rate. They're paying it to the merchant acquirer.
Telis Demos: And they're not fans of doing this.
Dan Dolev: They don't like that. So if you can crack this machine, this ecosystem somehow, with stablecoin, that's your triple play. But that's very unlikely. It's just as unlikely as a triple play because, at the end of the day, the consumer has to show up with some sort of a stablecoin. And honestly, because the consumer, just think about your day-to-day, you still have your miles with B of A or JP Morgan Chase or Amex, and you have your points.
Telis Demos: Consumers get something out of their credit card or their debit card, even if the merchant doesn't like paying.
Dan Dolev: The merchant doesn't like that, but the merchant has one other job, which is to convert. The merchant wants to sell. Customer is King. If you show up, whatever card you show up with, typically the merchant would accept the terms.
Telis Demos: Dan, you and I have been talking about payments businesses for years now. We've seen a lot of people come along with various schemes for getting you to ditch the card and pay with a digital wallet that draws directly from your bank account. None of those things have really had traction. And I know Visa and Mastercard shares were down a little bit when Circle was going public, but Visa and Mastercard are themselves in the business of stablecoins. I know you follow those companies too. They've got some irons in that fire.
Dan Dolev: 100%. And I've asked the CEO on the public conference call, the Visa CEO, and part of their value added services is going to be revenues that they're making from the stablecoin ecosystem. So actually stablecoins are good. They're driving more business to the networks. Because at the end of the day, you have a consumer on the one hand, you have merchants on the other hand, and you need somehow to help you connect the consumer and the merchant. And that's where Visa and Mastercard come into. They already have a very efficient global network. It's like reinventing the wheel or searching for a solution for a problem that does not exist.
Telis Demos: We know that people all over the world, especially in countries where they don't really trust their currency for one reason or another, like to hold dollars. And traditionally that's difficult. You need to literally physically have a jar of dollars in your house sometimes. Stablecoins, however, that's a very simple way for you to hold U.S. dollars. So it seems like maybe on that front, and maybe there's a role for stablecoins to play in global payments. I mean, I think that's one of the most probably talked about opportunities. I mean, is that something that you think could really drive wider stablecoin adoption, is the global and cross-border use?
Dan Dolev: There's two things I want to make a distinction here. There is use cases and there is the monetization of it. So if you live in Argentina, if you live in places in Africa, if you live in countries where they're restricting access to the dollar, stablecoin is your friend.
Telis Demos: Right.
Dan Dolev: If you want to send money abroad, and I've tried it. You want to send bigger chunks of money. You want to send from one bank in the U.S. to a bank in Germany, they will charge you big fees. They will charge you big conversion fees. That's where stablecoin could be your friend, even though at the end nodes of each transaction there could be someone charging you fees. So the feeple might actually just shift from one feeple to another, but there's definitely an opportunity there. And last, there's a big opportunity for migrant workers. So a lot of people are working in different countries sending money back home, and those corridors are already seeing some disruption and price pressure from stablecoins. But remember, none of this is touching consumer payments. It's disrupting the Western Unions of the world. It's disrupting the banks of the world, but not the networks, not the payment ecosystem.
Telis Demos: So Circle will have its first quarterly earnings report and call as a public company this upcoming week. What will you be looking for? Because on the one hand, obviously, we know what interest rates are. So there's no surprise there. So what are other things you'll be looking at? One thing must be just sort of the amount of coins in circulation and use cases they're seeing for it. What kinds of things will you be looking for?
Dan Dolev: It's even more nichey than that. And the reason for that is because everything you just mentioned is very public. What we're looking for is basically how much more, say, expensive are the cost of distribution. So the cost of distribution for Circle, that's the only unknown. They have been moving up. I.E. Circle always keeps a smaller part of the cake that they're baking and they have to give more slices of the cake to partners like Binance and Coinbase. Our prediction is that, that trend is going to continue, which means business is not as good or business is getting tougher. That's what we're looking for. And I think when Coinbase reported, they give you enough information to basically make a reasonable conclusion that actually in the second quarter for Circle, which hasn't reported yet, things have gotten slightly worse. This is based on the dollars that Coinbase reported that they're making from Circle. So you have to make a few assumptions, but it doesn't look good for Circle and we don't think it's priced in yet.
Telis Demos: Do you think investors might look past that though because they're thinking about this more as an, okay, so maybe they're paying more to incentivize and get stablecoins out into the world and circulating, but that in the long run, that will ultimately be good for them? Do you think that's how some people will be thinking about this business?
Dan Dolev: Potentially, that's what the stock is pricing in right now. But for what you said to happen, you'd have to really start seeing use cases materialize.
Telis Demos: We're going to take a quick pause on that for a short break and when we come back, we've got one last question for Dan Dolev of Mizuho Americas. All right, so we're back. We're talking with Dan Dolev. He is the payments FinTech crypto analyst at Mizuho Americas. And Dan, on the subject of the Genius Act, the banking industry didn't love the bill. I think there's some concern that stablecoins could essentially disrupt or replace banking, that too much of the banking business was being given to stablecoins. Do you think that stablecoins could really disrupt banking? I know we've talked about so many things that could disrupt banking. Could it be stablecoins?
Dan Dolev: It's a big disruption to the money they make off of these cross-border transactions. But remember, most of the money that the banks make is personal loans. It's mortgages. Those are unaffected by stablecoins. I mean, maybe on the margin you can do some smart contracts, et cetera. But at the end of the day, you think about it, the bank is there to take risk and to assess risk and stablecoin is not really taking risks.
Telis Demos: All right, Dan, thanks for joining us and thanks for the interesting conversation.
Dan Dolev: My pleasure.
Miriam Gottfried: And that's everything you need to know to take on your week. The show is produced by Anthony Bansie, Jessica Fenton, and Michael LaValle. Michael LaValle and Jessica Fenton are our sound designers. Michael also wrote our theme music. Aisha Al-Muslim is our development producer. Scott Saloway and Chris Zinsli are the deputy editors. And Philana Patterson is the head of news audio for the Wall Street Journal. For even more, head to wsj.com. I'm Miriam Gottfried.
Telis Demos: And I'm Telis Demos. Until next time. When we were talking about this episode, you mentioned you'd like to get shawarma for lunch sometimes.
Dan Dolev: Every day.
Telis Demos: Do you think you will ever be paying for that shawarma with stablecoins or will you still be paying for it the way you do today?
Dan Dolev: I mean, shawarma, no, but falafel, for sure. I'm just kidding.