Stablecoins has enjoyed its most successful period in the sun this year, but there are still a plethora of traditional financial institutions that remain cautious over the risk management implications of settling users’ digital currencies.
Jason Delabays, Ecosystem Lead at Zama, explores how confidential stablecoins could finally make them practical for business use, closing the gap between efficiency and trust.
As most in the digital finance space will know, stablecoins have already won the approval of many fintechs and payment giants. PayPal, Visa, Mastercard and Stripe all now either use or support them, whether in pilot programmes or live transactions.
Earlier this year, PayPal announced that it’s using its PYUSD stablecoin – launched back in 2023 – to enable payments in over 100 cryptocurrencies. According to PayPal, the move is “helping every business of every size achieve their goals” through benefits including near-instant settlement, seamless international transactions and transaction fee savings of up to 90%. And all without being directly exposed to the downsides of public transparency.
However, PayPal’s ‘Pay with Crypto’ achieves these benefits not by introducing on-chain confidentiality, but by acting as the privacy layer itself. Transactions between buyers and sellers are recorded within PayPal’s closed system, while only aggregated transfers are settled publicly on-chain.
In other words, PayPal reintroduces traditional, centralised trust to mask blockchain transparency, with the benefits of efficiency and interoperability achievable only through intermediaries, not natively on-chain.
Why cryptographic confidentiality is needed at protocol level
While the above is certainly an effective model for small businesses that already rely on PayPal’s custody and compliance framework – and also demonstrates the usefulness of stablecoins today – it comes with limitations. Limitations that highlight why most enterprises and financial institutions still hesitate to use stablecoins directly, and why a digital payments gap still exists.
Larger enterprises in particular need privacy integrated directly into the blockchain or token protocol without relying on a third party. This is because these businesses tend to operate under much stricter regulatory, audit, and governance requirements than small businesses. Relying on a third-party like PayPal introduces risks and limitations that aren’t acceptable at scale.
That being said, any business, small or large, requires secrecy to function effectively. If everyone is privy to your supplier payments or pricing strategies, you lose a fundamental competitive advantage.
Outside of offerings that mask blockchain transparency, today’s public blockchains present even more issues. Here, transaction amounts, balances, timing and counterparties are all visible to anyone on-chain. And it’s made even easier with AI, which can un-pseudonymised most transactions given enough context and data. That might be tolerable for retail use but is a dealbreaker for most enterprises, small and large.
Take payroll for example – it is impossible with public stablecoins, as salaries must stay private. Supplier and treasury flows also demand confidentiality to avoid revealing strategy.
A quick look at dashboards like Dune’s global ranking of MetaMask Card spenders also shows just how visible things already are. Here, anyone can analyse who spent what, when, and with whom. It’s a reminder that today’s stablecoins are so transparent that all payments are, in effect, public knowledge.
Without this confidentiality at protocol level, we’re seeing many back away from adoption. Just last month, in fact, reports highlighted how Hong Kong regulators and Chinese authorities are holding back on open stablecoin participation, citing the need to preserve “monetary stability” and control “cross-border risk.”
At the heart of both concerns lies the same fundamental question: who can see the transaction data? Whether for internal compliance, corporate secrecy, or monetary oversight, transparency without proper controls is a clear barrier.
Why FHE represents the next logical step
While it’s clear all enterprises need confidentiality, what’s also important — and where PayPal-type offerings ultimately fall short — is confidentiality that integrates with existing enterprise frameworks rather than replacing them. Frameworks that already include things like:
- Regulatory compliance (KYC/AML, audit trails, data retention)
- Internal governance and reporting requirements
- Established risk and trust hierarchies (e.g. who can see what, who signs off payments, etc.)
Confidential stablecoins, powered by Fully Homomorphic Encryption (FHE), make this possible. With FHE, transactions remain encrypted end-to-end (a programmable selective disclosure allows only those that have been given authorisation to view the details, which as well as the sender and receiver, may include an accountant or any third party) while the network enforces compliance rules over ciphertext.
Crucially, disclosure becomes programmable – meaning there is no trade-off between privacy and programmability. Institutions can selectively grant auditors or supervisors read-only access without exposing flows publicly, without requiring a central intermediary to hold or obscure transaction data.
The result is digital payments that are private-by-default, and auditable-on-demand, which aligns far better with AML/KYC than today’s public chains. But how does verifiable privacy built into on-chain finance actually perform in practice?
FHE has long promised privacy, but recent public testnets offer the first real performance data. And early results are encouraging: we can already reach 20 transactions per second (TPS) — faster than Ethereum today with expectations it will reach the hundreds soon— with latency the same as a normal stablecoin.
However, there are certain trade-offs. Each transaction requires you to decrypt your amount, a step that doesn’t exist with transparent stablecoins and is a new kind of transaction people are not used to. Scalability is also still evolving. While we cannot yet achieve the 1,000 TPS possible on Solana, improvements in cryptographic hardware and software suggest this will be feasible in the coming years.
These are all manageable trade-offs compared to the confidentiality requirements enterprises face, and confidential stablecoins are still in the early stages of practical deployment. With time, stablecoins will move beyond retail and trading applications into true enterprise adoption, and it may happen sooner than many think.
