The stablecoin frenzy can be compared to a banking foil that resurged around stored value cards (like the eponymous Starbucks Card) almost 10 years ago. Banks, however, have quickly evolved their thinking around whether to address stablecoin as a gamble or a gamechanger much more quickly.
In 2016, a wildly popular thread that postulated that Starbucks is a bank made the rounds in popular Fintech circles. Its popular stored value card, also accessible via the Starbucks app, appealed to its built-in customer base of over 12 million loyalty members.
Today, it’s estimated that Starbucks carries a $1.9 billion stored value card liability– the amount of money customers have “deposited” on their Starbucks card, which can be likened to a bank’s deposit base. According to latest figures, more than 80% of the banks in the US have less than $2 billion in total assets (bank deposits equate to an amount less than total assets).
Another stored value vehicle that banks have addressed more proactively is stablecoins. Stablecoins, once viewed as a radical threat to the established order of traditional finance have dominated the banking conversation at shows like the annual fintech extravaganza, Money 20/20, and LinkedIn fintech threads.
In February, Tether (USD₮) announced a record $13 billion in annual revenue while Circle Internet Group announced a 78% year-on-year growth rate for USDC. Together, USDC and USD₮ comprise roughly 82% of the $315 billion global stablecoin market cap. Since then, total stablecoin market cap has grown 35%.
Banks Get Involved With Stablecoin
Over the past month, a series of significant announcements, including a ten-bank multinational bank coalition and the recent joint issuance of JPYC, the first yen-denominated stablecoin by Japanese megabanks, have made headlines. The traditional banking sector is no longer resisting stablecoins—it’s preparing to issue them.
This sudden and concerted global effort by regional and international coalitions signals a major shift. Like stored value cards, banks are taking a more proactive stance to better understand their place in the stablecoin ecosystem and how their existing business can evolve with it.
Banks are realizing that regulated, bank-issued stablecoins may be the engine they harness to modernize their core business. This embrace, however, is not without immense risk, as stablecoins possess the power to fundamentally alter one of the most bedrock principles of consumer banking: fractional reserve lending.
Faster Payments
The most immediate and compelling positive impact of stablecoin adoption on traditional banking is the potential for faster, cheaper, and more efficient payments, particularly for cross-border transactions.
Traditional international transfers often rely on a chain of intermediaries and outdated systems like SWIFT, leading to high fees, lack of transparency, and settlement times measured in days. Stablecoins, by leveraging blockchain technology, promise to facilitate 24/7/365, near-instant settlement on a digital ledger, reducing counterparty risk and unlocks real-time treasury management for corporations.
Beyond speed, the “programmable” nature of stablecoins allows for the creation of smart contracts that can automate payments, manage escrow, and execute complex financial transactions with greater precision and lower operational costs. For banks, integrating this technology would appeal to customers who demand modern, digital-native financial services.
By offering a low-cost, real-time settlement layer, bank-issued stablecoins allow traditional institutions to compete with the speed and innovation of the broader digital economy, transforming a pain point of banking—cross-border payments—into a competitive advantage.
The Existential Threat: Undermining Fractional Reserve Banking
While the benefits for payments are clear, the widespread adoption of stablecoins—especially those that adhere to strict full-reserve requirements—poses an existential threat to the centuries-old fractional reserve banking model.
In a fractional reserve system, commercial banks only keep a fraction of their customers’ deposits on hand and loan out the rest.This lending process is “creates” money that provides a core source of bank revenue.
Ever wonder how a bank makes money? The difference between what the bank pays consumers for deposits and what they charge the same consumer for a home loan is the bank’s net interest margin, a popular metric to gauge a bank’s efficiency and profitability.
Stablecoin History And Design
Early stablecoin formats included algorithmic (see TerraUS in May 2022), hybrid, and fully collateralized versions. Most established and regulated stablecoins are designed to be fully collateralized on a 1:1 basis by safe, liquid assets like cash, short-term government bonds, or bank deposits. The fully collateralized versions of stablecoins introduce a form of narrow banking that distinguishes them from the deposits needed for fractional reserve banking.
Every stablecoin issued would have a corresponding asset in reserve, ensuring that redemptions can be met instantly. The reserves backing the stablecoins are held in segregated, highly liquid accounts, which takes them out of the pool of money available for fractional reserve lending.
As stablecoins become a more popular, low-cost, and secure vehicle for holding and transacting money, businesses and consumers may move their funds from traditional, interest-bearing bank deposits to non-interest-bearing stablecoins for the utility of instant settlement–think money movement from cross-border remittance to accounts payable.
Financial institutions have postulated that a deposit flight (from savings accounts to stablecoins) would shrink the core funding base they rely on for lending, forcing a dramatic restructuring of their balance sheets and business models.
If bank-issued stablecoins gain mass adoption, they could lead to a two-tiered financial system: one for money creation (traditional lending) and one for stable, digital payments (full-reserve stablecoins). This would fundamentally change the way banks generate profit and manage liquidity, leading to a complete overhaul of their operating structure.
Banks vs. Non-Bank Issuers
The final crucial dynamic is the looming battle for market share between the incumbent financial institutions and the original stablecoin pioneers like Circle (USDC) and Tether (USD₮). Together, USDC and USD₮ hold roughly 82% of the $315 billion global stablecoin market cap. While impressive, this pales in comparison to the roughly $11 trillion held in US savings accounts .
Historically, non-bank technology companies and crypto-native firms were the first to leverage blockchain for stablecoin issuance. These entities—often operating in a regulatory grey area—were seen as a disruptive threat. However, the landscape has shifted with global regulatory clarity, such as the new frameworks in the US and EU that specifically authorize and encourage regulated financial institutions to issue stablecoins.
The Incumbent Advantage
The new bank coalitions enter the stablecoin market armed with significant advantages that could quickly displace their non-bank competitors.
As established, globally regulated entities, banks hold a trust and regulatory advantage. Their stablecoins would inherently carry the institutional trust of their jurisdictions, minimizing the counterparty and reserve-transparency risks that have plagued early stablecoin issuers. But remember, the distrust in financial institutions can be seen to be the catalyst for the cryptocurrency revolution, of which stablecoins are a main character.
Along with an incumbent regulatory advantage, banks possess massive existing customer bases, established compliance and Anti-Money Laundering (AML) infrastructure, and deep integration with global payment and settlement systems. However, the main appeal to stablecoin infrastructure is its ability to address the latency and flaws seen in legacy system.
Governments and central banks are far more comfortable with stablecoins issued by domestic, regulated banks than by offshore, non-bank entities. The emergence of the JPYC by Japanese megabanks, for example, is a clear move to reduce the reliance on US dollar-pegged stablecoins and protect monetary sovereignty. Unlike, CBDCs though, this initiative is one driven by the private sector and not a Central Bank.
The market may be moving toward a future where a few heavily-regulated, bank-backed stablecoins—likely denominated in major, highly liquid global currencies (USD, EUR, JPY)—will dominate. This evolution suggests that the initial non-bank pioneers, like Circle and Tether, may find themselves sidelined or forced into partnership as the world’s largest banks capture the institutional market with their own compliant, licensed offerings. What was once a disruption to banks is now a weapon for banks, leveraged to consolidate control over the future of digital money.
Stablecoin 2.0
The global banking industry’s strategic embrace of stablecoins is a defining moment. Driven by the need for faster, cheaper payments, the industry is stepping onto the blockchain, but not without grappling with the potential for its own core business—fractional reserve lending—to be profoundly changed. The formation of these regional and international coalitions is a clear sign that traditional finance is actively shaping the future of money, potentially outmaneuvering the very innovators who first introduced the concept.