Impact of Stablecoins on Banks and Central Banks, the Upside for V/MA.

Stablecoins took many amazing leaps in the last 2 weeks. Key developments include

1. PayPal’s new Stablecoin (PYUSD) earning 3.7% (in PYPL wallet). 
2. Circle Launches Cross-Border Payment Network:- Circle Payments Network (CPN) – see CPN whitepaper
3. Paxos and Coinbase, as well as Circle, are pursuing bank charters
4. Visa to join Paxos and Robinhood in USDG
5. EU banks are creating a new consortium around stablecoin with the involvement of ING and others.
6. ECB flags risk of contagion from US crypto push in new policy paper, similarly the Bank of International Settlements (BIS) also published a paper outlining how Crypto and DeFi may destablize finance. 
7. Italy’s finance minister warns that the attractiveness of US stablecoins poses a bigger risk to Europe than Tariffs.
8. Regulatory – The STABLE Act has advanced through the House Financial Services Committee, increasing the likelihood of Congress passing legislation to regulate stablecoins (and New Bank Formation Act). Fed Chairman Powell voiced strong support at the Economic Club of Chicago.

Settlement 101

Different people will explain Stablecoins differently. I start from a settlement perspective. As I outlined in Settlement: the Core of Banking, Visa and Mastercard are just messaging networks with each member of the network operating as a bank that is vetted and regulated. These members send and receive payment messages. At the end of the day, member banks perform net settlement which represents the total of the transaction messages and may also include netting from other payment networks and systems. The net amount exchanged between banks is done at the Fed’s National Settlement Service. 

Internationally, settlement is much more complex. While the Bank of International Settlements (BIS)  serves other central banks, it does not provide the bi-lateral netting, as a result regional settlement networks are used with Correspondent banking model (when necessary).  12 yrs ago I posted a video overview of this insane complexity

Stablecoin 101

Stablecoins are tokenized representations of fiat currencies (most commonly USD) issued on public or permissioned blockchains. They are designed to maintain a stable value by being fully (or partially) backed by reserves, typically in the form of cash, short-term Treasuries, or other liquid assets.

Unlike volatile cryptocurrencies, stablecoins serve as settlement assets for blockchain-based payments, providing price stability, 24/7 transferability, and interoperability across ecosystems. In the context of payments, stablecoins represent a convergence of Distributed Ledger Technology (DLT), smart contracts/programmable money, real-time gross settlement (RTGS), and open-loop systems, all without requiring central bank infrastructure.

Bank Challenges

Where V/MA are a bank messaging network that provide bank with flexibility in settlement, stablecoins have a centralized ledger and master account for every holder. Exchanging a USDC from Tom to Susan is just a ledger entry where both Tom and Susan have an account.  There is no net settlement process as all funds are held within a single entity (ie Tether or Circle).  Banks are concerned that Stablecoins enable an alternate banking model, for example Coinbase offers 4.1% interest (they call reward rate) and PayPal is 3.7%. Banks certainly don’t want to own the dross of compliance and on//off ramp fraud while Stablecoins deliver the value. 

Total stablcoin value today is around $200B, a rounding error in V/MA combined volume of $5T, but over 20% of $905B in total remittance volume , with PCMI estimating Stablecoin’s current take at 15%. See a list of the top 6 stablecoins by Market Cap. 

​Stablecoins present a significant challenge to Tier 2 banks by potentially undermining their liquidity positions and deposit bases. Italian Economy Minister Giancarlo Giorgetti has highlighted this concern, suggesting that U.S. policies promoting dollar-pegged stablecoins could pose a greater threat to European economies than trade tariffs.

Key Risks to Tier 2 Banks:

1. Deposit Disintermediation: Stablecoins offer an alternative to traditional bank deposits, especially for cross-border transactions. Their ease of use and stability can lead customers to prefer holding funds in stablecoins rather than in bank accounts, reducing the deposit base of Tier 2 banks.​
   
2. Liquidity Coverage Ratio (LCR) Impact: The European Central Bank (ECB) notes that when banks receive deposits from stablecoin issuers, these are treated as wholesale deposits with a 100% outflow rate under LCR calculations. This treatment requires banks to hold equivalent high-quality liquid assets, potentially weakening their liquidity positions European Central Bank.​
   
3. Competitive Pressure from Non-Bank Entities: Entities like Poste Italiane, which are expanding into digital payments, can leverage stablecoins to offer services traditionally provided by banks. This expansion intensifies competition, particularly affecting Tier 2 banks that may lack the resources to innovate at the same pace Reuters.​
   
4. Regulatory Challenges: The evolving regulatory landscape around stablecoins adds complexity for banks. Tier 2 banks may face difficulties adapting to new compliance requirements, especially if they lack the infrastructure to support digital asset transactions.

Central Bank Macro Implications

First not that $200B is not a meaningful number to prompt a fire alarm at any central bank. However If U.S. dollar-denominated stablecoins (like USDC, USDT, and PYUSD) achieve widespread global adoption, it could significantly reshape the international currency landscape, with potentially destabilizing effects on other national currencies. It could be the equivalent of Dollarization without boarders.

Stablecoins could accelerate a phenomenon known as digital dollarization, where individuals and businesses in foreign countries start using U.S. dollar stablecoins for payments, savings, and trade instead of their local currencies. This can happen especially in regions with:

• High inflation or volatile currencies (e.g., Argentina, Turkey, Nigeria)
• Weak banking infrastructure or capital controls
• High reliance on remittances or cross-border trade

Unlike traditional dollarization, which requires physical cash or correspondent banking, stablecoins make dollar access instant and frictionless, via mobile wallets and digital rails. When a significant portion of a country’s economic activity shifts to dollar-denominated stablecoins, its central bank loses control over: Monetary policy (e.g., setting interest rates), Money supply. FX reserves and currency demand.

This weakens a government’s ability to manage its economy, potentially forcing it to “import” U.S. monetary policy, even when local economic conditions would demand something different. Thus expect Central Banks outside the OECD 20 to aggressively look for alternatives and also block flows to stablecoins (ex CBDCs in SE Asia). 

The STABLE Act – What is it

The STABLE Act—short for Stablecoin Tethering and Bank Licensing Enforcement Act—is a U.S. legislative proposal aimed at establishing a comprehensive regulatory framework for stablecoins. Introduced in December 2020 and gaining renewed attention in 2025, the Act seeks to enhance the stability, transparency, and consumer protection associated with stablecoin issuance.

Key Provisions of the STABLE Act

1. Mandatory Banking Licenses: Stablecoin issuers would be required to obtain a banking charter, ensuring they operate under the same regulatory standards as traditional financial institutions.
2. 1:1 Reserve Backing: Issuers must maintain reserves equal to the amount of stablecoins in circulation, backed by U.S. dollars or other approved high-quality liquid assets.
3. Regular Audits and Disclosures: The Act mandates monthly audits and public disclosures of reserve holdings, promoting transparency and trust in the stablecoin’s value.
4. Federal Oversight: The legislation places stablecoin issuers under the supervision of federal banking regulators, such as the Federal Reserve and the Office of the Comptroller of the Currency (OCC).

Implications for Stablecoin Issuance and Adoption

By imposing these regulations, the STABLE Act aims to:

• Enhance Consumer Protection: Ensuring that stablecoins are fully backed and redeemable at face value reduces the risk of loss for consumers.
• Promote Financial Stability: Integrating stablecoin issuers into the regulated banking system helps mitigate systemic risks associated with unregulated digital assets.
• Foster Innovation within a Regulatory Framework: Providing clear rules can encourage responsible innovation in the digital currency space, attracting institutional participation and broader adoption.

Token Issuers – Response to STABLE Act

In response to the evolving regulatory landscape shaped by the STABLE Act, major stablecoin issuers such as Circle, BitGo, Coinbase, and Paxos are proactively seeking to align with forthcoming requirements by pursuing U.S. banking licenses or similar authorizations. This strategic move aims to integrate their operations more closely with the traditional financial system, ensuring compliance and fostering broader adoption of stablecoins.​

The STABLE Act, recently passed by the House Financial Services Committee, mandates that stablecoin issuers obtain federal or state banking charters, maintain 1:1 reserve backing with high-quality liquid assets, and adhere to stringent audit and disclosure standards. By seeking banking licenses, these firms intend to meet these regulatory obligations, thereby enhancing consumer trust and facilitating the integration of stablecoins into mainstream financial services (see April 21 WSJ).​

Circle, the issuer of USDC, is reportedly leading this initiative by actively pursuing a federal bank charter. This would enable Circle to offer services akin to traditional banks, such as deposit-taking and lending, while ensuring robust regulatory oversight. Similarly, Paxos, which received preliminary approval for a national trust bank charter in 2021, is exploring further licensing opportunities to solidify its position within the regulated financial ecosystem. Coinbase and BitGo are also considering applications for banking licenses, reflecting a broader industry trend toward regulatory compliance and institutional integration.

These efforts signify a pivotal shift in the stablecoin sector, as Stablecoin issuers recognize the importance of regulatory alignment to ensure the stability and scalability of digital currencies. By obtaining banking licenses, these firms aim to bridge the gap between decentralized financial technologies and the established banking system, promoting innovation while safeguarding financial integrity.

Bank Response – Create a Bank Stablecoin

As stablecoins continue to gain momentum, and crypto firms begin to enter the banking “club” traditional banks are responding with a mix of defensive and strategic innovation. These digital assets—fiat-referenced tokens issued on blockchains—pose a direct challenge to bank deposits and payment rails. In response, the banking sector is working to preserve trust within the regulated financial system while offering credible alternatives that retain their role in money creation, distribution, and compliance.

One significant development is the move toward bank-issued stablecoins. ING, the Dutch financial giant, is reportedly collaborating with other traditional finance (TradFi) institutions and crypto-native firms to issue a euro-backed stablecoin. These efforts are designed not only to counteract the dominance of dollar-based stablecoins but also to ensure that any digital currency solution remains embedded within the regulated banking system. By issuing their own tokenized euros, banks can maintain the customer relationship, ensure full reserve backing, and apply rigorous anti-money laundering (AML) and compliance controls that crypto-native issuers may lack.

At the same time, central banks are exploring digital currency models that preserve the traditional two-tier monetary system. In one such model, commercial banks are designated as issuers of central bank digital currency (CBDC), while the central bank remains responsible for interbank settlement and monetary policy enforcement. This structure preserves the function of commercial banks as the primary interface with consumers, even as the underlying infrastructure shifts to programmable money and real-time settlement. This hybrid two-tier model offers a future where digital cash operates with the speed and flexibility of stablecoins, but with the full backing, compliance infrastructure, and trust of the traditional financial system (see 2023 CBDC blog and BIS Whitepaper).

Ultimately, both bank-issued stablecoins and CBDC collaborations aim to deliver the benefits of digital currency—faster settlement, programmability, and cross-border utility—without fragmenting the trust architecture that supports global banking. By keeping digital money within the regulatory perimeter, banks can modernize payments while reinforcing their role in safeguarding liquidity and systemic stability (see excellent article Chartering the Co-existence of Stablecoins and CBDCs).

Impact to Visa and Mastercard (not a threat at all)

The emergence of stablecoins is often framed as a threat to traditional payment networks. In reality, Visa and Mastercard are structurally insulated—and may even emerge stronger—as stablecoins seek relevance in everyday commerce. These networks are uniquely positioned to serve as the off-ramp for stablecoin adoption, bridging blockchain-native value with merchant acceptance, consumer trust, and bank infrastructure.

The challenge facing stablecoins is not just regulatory or technical—it’s commercial. Digital currencies must become useful at the point of sale, where consumers spend and merchants operate. Visa and Mastercard already provide this bridge. Their networks are globally integrated, with built-in compliance, fraud management, and dispute resolution frameworks that make them ideal platforms for integrating stablecoin transactions at scale.

Visa’s recent entry into the Global Dollar Network (USDG) stablecoin consortium reflects a clear strategy to support dollar-backed stablecoins as part of its core settlement architecture. This builds on its earlier initiatives to enable stablecoin settlement for merchant acquirers, allowing transactions to flow through its network with finality and speed—even when denominated in digital dollars.

Mastercard has similarly advanced its engagement through wallet partnerships and tokenized payment pilots, demonstrating a strategy not to compete with stablecoins, but to run them over its rails. These moves transform potential disruption into partnership, preserving network economics while expanding the utility of stablecoins within existing infrastructure.

Importantly, Visa and Mastercard’s stablecoin strategies also enable small and mid-sized banks—those without in-house crypto capabilities—to participate in the digital currency ecosystem. Just as these banks rely on network partners for issuing and processing physical and virtual cards, they can similarly use Visa and Mastercard to manage stablecoin distribution and acceptance. Stablecoin activity becomes embedded in the familiar operational model of issuing, authorization, and settlement (just denominated in tokenized dollars).

V/MA also dramatically accelerate distribution and user experience through existing partnerships with digital wallets like Apple Pay and Google Pay. A stablecoin issued by a bank or fintech can be tokenized and provisioned into iOS, instantly enabling NFC payments, secure element storage, and biometric authentication (without rebuilding an entirely new payments stack).

By combining digital asset innovation with existing trust infrastructure, Visa and Mastercard are not threatened by stablecoins—they’re positioned to be their primary conduit into global commerce. Far from being disrupted, they are defining the architecture that will govern the next era of programmable money.

Disruptive Innovations

Settlement is the core of banking and payments. Legacy settlement systems, particularly in cross-border contexts, is hindered by layers of intermediaries, settlement latency, high fees, and limited transparency. Stablecoins offer an alternative: real-time, low-cost transfers that maintain can parity with fiat money (ie, auditing and transparency). 

Stablecoin Innovations:

• Real-Time Settlement: Eliminates delays and batch clearing. USDC, for instance, settles in ~5 seconds on many chains.
• Cross-Border Efficiency: Bypasses traditional correspondent banking networks, reducing FX costs and settlement time.
• Programmability: Enables conditional logic directly on funds (e.g., escrow, streaming payments, auto-reconciliation).
• Interoperability: Functions across wallets, networks, and DeFi ecosystems, potentially even bypassing card rails.
• All holders are verified with the issuer. Whereas Visa and MA verify banks, it is the banks responsibility to verify consumers. Within stablecoins the identity of all parties are managed (ie KYC).  Thus it is possible to authenticate both sender and receiver and to receive authorizations from both (in debit and credit). 

Key Challenges of Stablecoin in Payments

• On/Off Ramps into banking. Converting stablecoins into fiat and transferring them to the banking system. Visa and MA serve as the primary off ramps today. To be clear, banks certainly understand how to settle with stablecoins, the issue is why would they want to? Stablecoins circumvent much of the banking system (ie Zelle, RTP, …etc). Thus banks wrap their reluctance in regulatory and risk concerns. Typically they are much more concerned with money coming in (AM), than money going out. 
• Stablecoin Issuer Trust and Reputation. Not all stablecoins are created equal. Institutional and consumer adoption depends on issuer transparency, reserve integrity, and auditability.
• Regulatory/AML. Who holds the stablecoins? How are sending and receiving reported? How is Tax reporting done?
• Acceptance at a Point of Sale or by 3rd Party. Note that requirements for reporting of  eCommerce payments are low to non-existent globally while remittance is regulated. 
• Auditing of the Stablecoin Issuer. A stablecoin must be as trustworthy as the money behind it, or it defeats its purpose: 1) Transparent reserve disclosures 2) audits or attestations, 3) asset quality, 4) Clear governance and regulatory compliance
• Regulation (and lack thereof)
• Monetary Policy (Impact on M1/M2)
• Tier 2 Bank Liquidity and Capital Ratios (run off to Stablecoin)

Top Consumer Use Case – Remittance (see Sling Money Blog)

International remittance, the transfer of funds across borders, stands out as an ideal initial application for stablecoins due to the acute pain points in this sector. Traditional remittance services often impose high fees and involve multiple intermediaries, resulting in delays and reduced value for the recipient.  

• Lowering Costs: By minimizing intermediaries and leveraging blockchain technology, stablecoins can significantly reduce the cost of sending money across borders.  
• Increasing Speed: Stablecoin transactions enable near real-time settlement, allowing recipients to access funds quickly.  
• Improving Accessibility: Stablecoins can potentially reach underserved populations with limited access to traditional banking services, promoting greater financial inclusion.  

Challenges and Considerations

Despite their potential, the widespread adoption of stablecoins faces challenges:

• Regulatory Uncertainty: The regulatory landscape for stablecoins is still evolving, and inconsistent regulations across jurisdictions can hinder adoption.  
• Security and Trust: Ensuring the security and stability of stablecoins is crucial for building trust among users.  

Interoperability: Achieving interoperability between different stablecoin platforms and traditional financial systems is essential for seamless integration.  Sling is issuer-independent and can hold USDC, Tether and others. In 5 min I was onboarded and capable of sending money in real time in over 120 countries! AT NO COST!