Bankers View: Stablecoins, Deposits, and the Future of Payments
Summarizing my 20 odd tweets yesterday. Note that I don’t necessarily agree with the banks’ strategy, but I do understand it. Given that most of the press is focused on how Stablecoins will destroy banking, I thought a banker’s view would be a useful counterbalance.
The buzz around stablecoins continues, often painting a picture of banks demise. As a former banker I thought I’d share my view on the topic and explain the bank strategy (as I see it). While stablecoins present novel tech, the notion that they will supplant established retail banking relationships is a bunch of “hooky”. Big banks aren’t just watching from the sidelines; they are best positioned to integrate this new rail, much like they’ve absorbed countless payment innovations before.
Let’s be clear: major financial institutions are among the most powerful institutions in any industry. Their brands embody customer trust (build over decades), built on customer support, compliance, risk management, operations and tech that always delivers. They are payment hubs which connect to virtually every network and underpin the millions of daily interactions.
As I outlined, the first stage of any new technology typically surrounds efforts among existing competitors to create competitive advantage. For customer of US banks this means stablecoins will likely operate as just another option within the existing payments toolkit. Why would the average U.S. consumer shift their core banking to a stablecoin issuer? Today US banks offer FDIC-insured deposits (up to $250,000), interest, and Reg E protections for most retail payment fraud. It’s a compelling value proposition that stablecoin will struggle to match. Speed and FINALITY are not consumer value propositions. Stablecoin will win where is delivers differential value to all stakeholders within a transaction. These are edge UCs.
From a bank’s operational perspective, stablecoins introduce different considerations around settlement operations and risk. If a bank were to on an external stablecoin, it would inherently face both settlement risk (the risk that the final transfer of a fund fails to occur as expected) and counterparty risk (the risk that the stablecoin issuer itself could fail or be unable to meet its obligations).
BAC, WFC, and JPM (US Bank consortium stablecoin) mitigates counterparty risk and provides a pathway for banks to retain stablecoin balances as liabilities on their own balance sheets, either through real-time conversion mechanisms or specific legal structuring. For any consumer or business contemplating the use of stablecoins, understanding the risk associated with the issuer is paramount. The failures within the stablecoin market, notably the collapse of Terra (UST) as detailed by Blockapps, serve as a stark reminder of these risks and underscore the absolute necessity for robust regulation.
Stablecoin “growth” will be at the edge as no new dollars are being printed, and consumers aren’t buying more. From a bank perspective, this is moving total payment volume (TPV) from one system to another. The grand strategy for top U.S. banks entering the stablecoin space isn’t about chasing growth; it’s centered on deposit retention and exploring new edge use cases. Think of streamlined foreign remittance or even opportunities in facilitating dollarization where banks might choose to onboard foreign nationals seeking stable currency options.
Stablecoin Regulation Will Change Everything
The largely unregulated environment in which stablecoins have historically operated is set to change dramatically. Two key pieces of U.S. legislation, the STABLE Act and the GENIUS Act, are poised to bring comprehensive regulation. Both aim to establish federal licensing and supervisory regimes for stablecoin issuers, clarifying their legal status, operational requirements, and mandating robust consumer protections.
Today, a stablecoin can theoretically be stored in a “cold wallet” disconnected from the internet, with value transfers occurring outside of traditional financial oversight. The STABLE and GENIUS Acts propose to change this significantly. Agencies like FinCEN, the OCC, the Federal Reserve, and the U.S. Treasury are expected to treat stablecoin transfers with a level of scrutiny similar to Real-Time Payments (RTP), including full Know Your Customer (KYC) requirements for every holder and comprehensive reporting of transfers and account “balances.”
Both acts will significantly impact stablecoin issuance and self-custody from an Anti-Money Laundering (AML) compliance perspective. Issuers will need to establish systems for monitoring transactions, reporting suspicious activity, and adhering to the Bank Secrecy Act. Guess who knows how to manage all of this? Yep existing banks.
While the GENIUS Act might not directly regulate users of self-custody wallets, it will heavily influence the on-ramps and off-ramps connecting these wallets to the traditional financial system. The global reach of these U.S. legislative efforts cannot be overstated; any stablecoin issuer allowing U.S. customers or businesses will likely be required to comply, effectively implementing U.S.-level KYC standards globally. For example, if these acts become law, USD stablecoins could likely only be transferred to account holders who have undergone KYC with a compliant organization.
It’s no surpris, then that major stablecoin issuers are actively working to obtain bank licenses or similar charters. While new regulatory structures for non-bank entities might emerge, securing a bank license often presents the most straightforward and quickest path to full compliance.
So, why would U.S. consumers want to hold significant balances in stablecoins? As mentioned, FDIC insurance and Reg E protections offer substantial security for typical bank deposits. If U.S. banks issue their own stablecoins (let’s call this hypothetical coin $USDB), customer deposits could simply be tokenized or converted to $USDB on demand. From the bank’s perspective, this makes stablecoin functionality look like just another payment type, integrated into their existing secure infrastructure. Given that only banks can typically offer interest on deposits and provide federal deposit insurance, the incentive for a U.S. consumer to hold large stablecoin balances outside of the banking system remains weak.
The calculus changes for non-U.S. residents. For individuals in countries with volatile local currencies or those seeking to transact in USD without incurring hefty foreign exchange costs, holding USD-backed stablecoins issued by reputable, regulated entities could be highly attractive. If they can be paid in USD stablecoin and make payments in the same, the need for a local bank account for those specific transactions diminishes.
However, the idea that stablecoins are inherently “cost disruptive” needs a reality check, especially once full compliance obligations are factored in. Most regulators will likely view a bank’s role in stablecoin issuance and transmission through a lens similar to that of real-time payments. As experiences with Zelle and the UK’s Faster Payments system demonstrate, developing, maintaining, and securing these systems, along with the requisite compliance and monitoring, is very costly for banks. Anyone claiming that stablecoins will operate at a significantly lower cost fundamentally misunderstands the operational and regulatory realities of banking. There are no grand, immediate efficiencies for banks simply by adopting stablecoins or RTP without a broader strategic play. Disruptive economics in payments will likely only be unlocked if and when regulatory frameworks evolve to place greater responsibility on consumers for actions taken with digital assets, a shift not currently on the horizon.
Ultimately, banks make money by managing risk – not just transactional risk, but also account risk, compliance risk, credit risk, and a myriad of others. This risk and compliance management is typically handled by product and by geography. It’s crucial to remember that all people globally will NOT have access to USD stablecoins. Access will be determined by regulated institutions willing to take on the risk of onboarding a customer and having an economic model that supports that account.When viewed through “a bankers” lens, stablecoins are indeed a unique innovation, but they represent just another rail. They may offer a better way to manage settlement risk in certain contexts, but settlement is just one piece of a much larger, more complex puzzle that regulated financial institutions are built to manage.