Stablecoin impact on banks, payments yet to be determined

Stablecoins are poised to become a fixture in the regulated banking space at some point this year, but just what that means for the broader banking and payments landscape is far from clear.

Two bills establishing a legal framework for dollar-pegged digital assets are making their way through Congress. This week, the Senate voted to wind down the debate over the GENIUS Act, putting it a step closer to finalization. A companion bill in the House, the STABLE Act, recently emerged from the Financial Services Committee. 

The legislation would create a sanctioned process for banks and other companies to issue payment stablecoins. It also sets parameters around how those coins maintain their dollar pegs, subjects them to anti-money-laundering rules and establishes other requirements. Proponents say these regulated stablecoins would serve as digital dollars that enable faster and cheaper transactions. 

“Like the internet revolutionized the way business is done, the blockchain — and now the stablecoin — will let you take to the next level everything that’s done in financial transactions,” said David McIntosh, a former congressman and current co-chair for the Blockchain Innovation Project.

Skeptics, meanwhile, say banks already can and do transact digitally. They also point to instant settlement systems such as The Clearing House’s RTP network and the Federal Reserve’s FedNow rail as evidence that transaction speeds are accelerating. 

Without a clear need to be met, the benefits of widespread stablecoin adoption do not outweigh the risks, namely that it could facilitate illegal activity and jeopardize financial stability, said Bartlett Naylor, a financial policy specialist with the consumer advocacy group Public Citizen. 

“I don’t know why I, with a bunch of cash around, would not put it in something with FDIC insurance, something that pays interest. That is why the banking industry, from what I can tell, has been unafraid of it draining deposits,” Naylor said. “The reality is, the legislation gives the imprimatur of U.S. law to a sector only truly useful for illicit finance.”

READ MORE: How stablecoins work

Stablecoins make use of a budding technological practice known as tokenization, in which underlying assets — in this case currency, Treasury securities, central bank reserves and repurchase agreements, among other things — are represented digitally. These digital assets are transferred through shared online ledgers, known as blockchains, rather than traditional payments systems.

Blockchain transactions are jointly and automatically authenticated by all participants on the ledger. Because of this, token transfers are said to eliminate various settlement risks that come with traditional methods, thus making payments more efficient. 

In theory, stablecoins could be used for everything from small daily purchases to homebuyer down payments to multimillion-dollar transactions between global corporations. In practice, however, it remains to be seen how much demand there will be for stablecoin adoption in any use case. Some payment senders enjoy the current settlement delay, which gives consumers a buffer for reporting fraud and businesses time to manage their liquidity. 

Jennifer Schulp, director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives, said that for consumers to migrate away from existing payment methods to stablecoins, they would need to see some kind of cost savings or improved convenience. 

“It’s hard to predict what grows up and what patterns emerge in terms of people’s usage and uptake,” Schulp said. “If it remains difficult to use a stablecoin to buy anything other than crypto, or difficult to use a stablecoin to do anything other than a remittance, then this is not going to be a huge market. If your stablecoin is easily acceptable at Whole Foods, it’s a different story.”

Growing interest

Currently, most stablecoin transactions are used to purchase cryptocurrencies such as bitcoin. Some are used for peer-to-peer transfers, including cross-border remittances, but payments experts and officials say stablecoins are a small slice of this market. In testimony in front of the House Financial Services Committee in February, Jose Fernandez da Ponte, PayPal’s head of blockchain, crypto and digital currencies, said the percent of remittances sent via stablecoins was in the “low single digits.”

While the role that stablecoins will ultimately play in the financial services sector remains to be seen, many banks and payments companies are not waiting on the sidelines to find out. Fifth Third Bancorp is leaning into stablecoins to bolster its burgeoning crypto business. Visa and Mastercard are also ramping up their capabilities in the space, through both direct product launches and partnerships with existing stablecoin issuers. JPMorganChase CEO Jamie Dimon — a longtime crypto skeptic — said this week that the megabank will now facilitate purchases of bitcoin.

Scott Talbott, executive vice president of government affairs for the Electronic Transactions Association — an industry group representing banks, payment card companies and digital payments platforms — said incumbents in the space expect the stablecoin to complement their existing offerings rather than replace them.

The bills under consideration in Washington have bolstered this view, Talbott said, because they would create a regulatory regime for this segment of the crypto market that is largely aligned with existing bank policy. Doing so would prevent standalone stablecoin issuers from undercutting traditional financial institutions with greater compliance costs, he said.

“While crypto itself is transformative, once you apply the existing legal and policy framework, the changes it brings will be marginal for most consumers,” he said. “Crypto will be very similar to all other existing currencies in the payment space.”

Ripple effects of adoption

Others say the framework leaves the door open to substantial changes to the financial services landscape by allowing nonbanks to produce their own coins. In particular, some policy experts see an opening for large tech companies with digital marketplaces to issue coins and, eventually, require that those be used on their websites and in their applications.

Brian Shearer, a former assistant director at the Consumer Financial Protection Bureau, said such an outcome would blur the line between banking and commerce in a way that enables market distortions.

“Once that happens, their share of the deposit base, their share of payment transactions — and of course they’ll charge their own interchange fees on those transactions — will skyrocket and they’ll be able to gain a very large global market share,” Shearer said. “That could have tons of ripple effects, including intermediating the interchange fees that community banks rely on and substantially affecting the deposit base in the U.S. banking system.”

Shearer added that by allowing issuers to back their stablecoins with assets other than fiat currency — such as repo contracts and other short-term funding mechanisms — the legislation would integrate these nonbank issuers into the financial sector in ways that create new pockets of systemic risk. 

“When there’s instability at a bank, that’ll ripple to the stablecoin issuer, when there’s instability at a stablecoin issuer, that’ll ripple to the banks and there will be chain effects just like there are now between banks,” he said. “So, the stablecoin issuers really won’t be separate, they’ll just be a part of the banking system.”

Still, the legislation includes provisions that keep stablecoins issuers from venturing too far into banking territory without becoming banks. This includes a prohibition on paying interest on stablecoins, thus reducing the inclination for consumers to treat them as substitutes for deposits. It also requires clear disclosures about redemption policies, as well as regular reports on outstanding stablecoin volumes and reserve compositions. Regulators can also take enforcement actions against issuers and revoke their licenses. 

Cross-border potential

The largest potential growth market for tokenized transfers is the cross-border payments space, which is already considered the largest financial market in the world and is expanding rapidly. Last year, cross-border transfers totaled more than $194 trillion of activity, according to the data analytics firm FXC Intelligence. The market is projected to exceed $320 trillion annually within the next decade — though it is unclear how emerging trade policies in the U.S. might alter that trajectory.

Cross-border payments are also notoriously slow, as transactions between banking systems move through intermediaries, such as the SWIFT network. It is unclear how much of this activity could be tokenized and how much of that tokenization is done through stablecoins, but McIntosh said the U.S. legislation will enable the banking system to find out.

“It will keep the U.S. dollar in that premier place around the world as, essentially, the backbone of international commerce,” McIntosh said. “It allows highly regulated institutions to modernize everything from the SWIFT program, where money is transferred overseas, to the ACH program here in the U.S. by using this new technology on the blockchain.”

Whether stablecoins succeed in becoming the digital equivalent of cash or remain a niche offering for a narrow set of transactions will be seen in the years to come. But as banks, card issuers and fintechs position themselves for the legitimization of the technology, the ensuing changes to the financial services industry are likely to be subtle.

Paul Neuner, founder and CEO of the crypto firm Telcoin, said government-sanctioned stablecoins will have profound impacts on the movement of money in ways that benefit both financial institutions and consumers. But, he said, most will be unaware that this shift has taken place, as the new technology will blend seamlessly into existing products and practices.

“When most people end up starting to use stablecoins, they probably won’t call them stablecoins and they won’t necessarily think of it as crypto,” Neuner said. “We look at this as really just a technological advancement in banking, payments and finance that is tantamount to movement from hub-and-spoke telecommunications to the internet. It becomes less scary when you think of it that way.”