U.S. Banks Embrace Stablecoins? A Landmark Shift in Financial Services
In a milestone moment for the industry, some of the largest U.S. banks (JPMorgan Chase, Bank of America, Wells Fargo, Citigroup) announced exploration of a joint stablecoin.
This shift highlights the momentum behind stablecoin use cases and just how critical they may be to money movement’s future.
The combination of global innovation in the private sector AND clarity in regulation from Washington, created an environment in which financial institutions are ready to step in and participate this newly developed infrastructure.
Stablecoins are rapidly gaining mainstream acceptance for their potential to streamline cross-border payments, reduce transaction costs, and operate outside of traditional banking hours.
With over $150B in stablecoins in global circulation, legacy banking infrastructure is at risk of losing market share to blockchain-based financial groups.
Its apparent that top US banks now view this digital currency as a gateway to future growth that unlocks modern-day settlement and in-demand use cases (for B2B and global transfers).
A bank-backed stablecoin would quickly shuffle the competitive landscape for payment processors, program/tech providers, and fintech companies.
Let’s explore the triggers behind this strategic play, regulatory & market effects, and the broader impact for global finance.
Refresher on Stablecoins
Stablecoins are digital tokens pegged to the value of fiat currencies (e.g. the U.S. dollar) and backed by liquid reserves such as Treasury bills or short-term debt.
Known for de-risking the volatility from cryptocurrencies (i.e. Bitcoin, Ethereum), these coins deliver price stability — a critical value proposition in global money movement (payments, remittances, settlements).
Since 2020, stablecoins are on the rise — become one of the most adopted blockchain products. Top coins in circulation include USDT (thru Tether), USD Coin (Circle), and DAI.
Early adoption was mostly exclusive to crypto-native platforms, however, usage has now expanded traditional companies in e-commerce, remittance, and fintech as a way to deliver faster AND cost-effective transacting by eliminating intermediaries.
Example: Traditional wire transfers may take multiple days and banking partners for fulfillment — stablecoin transfers settle in minutes and are ledgered on public blockchains (for transparency).
The market concerns with stablecoins come down to: (i) reserve management, (ii) operational transparency, and (iii) systemic risk. Without a governing framework, central banks fear that continued stablecoin growth can negatively impact monetary policy and oversight of financial systems.
In response, U.S. regulators seek to ensure that stablecoin issuers hold adequate reserves (at least 1:1) and fulfill audit protocols. Similarly, non-US institutions (such as the Bank for International Settlements, Financial Stability Board) are drafting policy for reserve, disclosures, and interoperability standards.
A Strategic Move by Banks
The appeal for US banks launching a public, consortium-based stablecoin? It will be managed by fully regulated financial institutions with years of experience in risk & oversight.
Instead of waiting to enact a central bank digital currency (CBDC), stablecoins offer the government a path now to the innovation that exists outside of the traditional system. Banks would be able to deliver a solution that can already integrate with existing banking/fintech apps, cards, and processors.
Similar to how Zelle provides instant money movement between networked banks, stablecoins can unlock more functionality without impacting the experience of end-users.
Among stablecoins, a bank-issued option can offer the financial services industry a unified alternative to the various coins that exist today. It would be easier and more straightforward for payment providers and regulators to target one solution, then deliver one set of governing policies and frameworks.
If deployed properly, this type of a stablecoin can evolve into the ‘default digital dollar’ that fuels money movement across payroll, digital wallets, and cross-border B2B payment apps — directly competing with players such as Circle, Ripple, PayPal, and Stripe.
A Supportive Regulatory Front
After years of caution and high-profile enforcement actions against crypto firms, lawmakers are actively formulating legislation as a regulatory foundation for stablecoins.
The GENIUS Act (recently advanced through the Senate Banking Committee) establishes guidelines for reserves, standards for custody, and capitalization for stablecoin issuers. It’s what the industry has been looking for: clear guardrails in which banks feel comfortable entering the market.
US banks would be first in leveraging ‘regulated, digital’ dollars. Regulators can feel confident that existing compliance controls, infrastructure, and trust from financial institutions would lead to measured growth.
The challenge for banks? They will need to reconcile current risk models with new tech & operational innovation from blockchain. Smart contracts and real-time auditability are risks that continue to evolve. New personnel, along with a new set of controls and reporting, will be needed to unlock stablecoins as a new payment rail.
Outside of the operational lift, some banking leaders still remember recent events that cast a negative spotlight on crypto. A repeat of Meta’s Diem project or FTX’s collapse would be a reputational risk for financial institutions. Banks proceeding forward with stablecoins will need to think of starting with a small scope use case before a broader market launch.
Besides draft legislation, more regulatory agencies are also showing support. SEC Chair Gary Gensler signaled that fully reserved stablecoins may fall outside of securities law. The OCC has reiterated that banks can engage with crypto assets under a well-defined risk management framework.
Collectively, these indicators show a supportive backdrop for bank-enabled stablecoins that improve existing functionality in traditional banking systems.
What this Means for the US Treasury Market
Since most stablecoins are backed by short-dated government securities, large inflows into stablecoin products could increase demand for Treasury bills — directly impacting yields & market liquidity.
Tether (USDT) holds nearly $100B in U.S. Treasuries, which places it as one of top owners of American debt.
If other offerings gain comparable scale, there would an elevated need for these type of securities — driving up yield projections and impacting global markets. Conversely, heightened demand comes with better liquidity options and less volatility for these markets.
However, regulators are watching closely —especially the Treasury Department who has highlighted concerns of diminished control in monetary policy changes. If the majority of bank deposits are held as stablecoins, adjustments to interest (by the Federal Reserve) will have less of an impact.
To counter this concern, some legislators are considering for stablecoins to be classified as bank instruments — requiring capital reserves in place (similar standard to banks). The other suggestion (more of a stretch) is that the Federal Reserve directly integrates stablecoins into its payment systems.
The bank-issued stablecoin would be a quality, hybrid option — bridging regulatory oversight AND public trust in financial institutions (already holding customer funds protected by the FDIC).
Classification Matters
Should stablecoins be considered (a) bank deposits, (b) money market funds, or (c) exchange-traded funds (ETFs)?
The classification means different things when it comes to regulation, taxation, and position within the US financial system.
As a bank deposit, issuers would be subject to FDIC insurance, reserve requirements, and recurring stress testing. Banks have years of experience in this arena — a major plus for a bank-backed coin.
As a money market fund (MMF), regulation comes from the Investment Company Act of 1940 — overseeing net asset value, liquidity, and proper investor disclosures.
As an ETF, there’s more room for innovation (in comparison to bank deposits & MMFs) but at the cost of SEC oversight.
For now, there’s no clear consensus among industry players.
Fast-moving fintech companies want a break from regulatory blockers that have slowed innovation and growth over the last 5 years, which favors legacy players (banks, financial institutions). Banks cite that the fintechs are overstepping their bounds in financial innovation due to lack of oversight from regulators.
The struggle is expected to continue in the US as governance is fragmented across multiple agencies — SEC, CFTC, OCC, and Federal Reserve. Similar to the broader topic of cryptocurrency a few years back, ambiguity deters progress across the industry. The approval of the GENIUS Act would provide the necessary clarity that’s missing.
Stablecoins + Dollars Coming Soon?
The exploration of a joint stablecoin initiative and overall momentum across regulators is a welcomed sign that financial innovation is on the way.
No longer a ‘crypto solution finding a problem’, the utility & benefits of stablecoins are apparent in improving money movement, settlement, cross-border transfers, and expanding the power of the US dollar to a global & digital audience.
Banks are longer waiting on the sidelines quietly — strategic plays are in motion that can influence payments in the near-term. Participation from banks provides regulatory compliance, credibility, and scale for stablecoins becoming mainstream. Existing rails & networks (Zelle, The Clearing House) can be modified to support bank-issued stablecoins.
To be fair — multiple dependencies need to be checked off in order to make this happen (regulatory consensus of frameworks/guidance, bank’s overcoming tech & operational lift, and the bank consortium in alignment). The US can be 1 or 5 years away from making this a reality.
Who the main issuer/provider will be is unclear — banks, non-bank financial institutions, or government agencies. The final answer directly impacts how stablecoins will be available.
The main takeaway from this discussion: stablecoins are here as an easily available, reliable, and innovative alternative to legacy money movement.
