Stablecoin: Friend or Foe?

by Miles Pringle, EVP & General Counsel

There has been a lot of news about stablecoin since the passage of the GENIUS Act this summer. The act explicitly names banks as having a role, so bankers do need to learn more about stablecoins and their potential opportunities (and threats). With that said, it is still early days and there is more unknown than known. 

For reference, stablecoins are a specific type of digital asset, distinct from  cryptocurrencies (like bitcoin) because they are pegged to a fiat currency – almost always the U.S. dollar. While some exult benefits of stablecoin, currently they are mostly used to facilitate cryptocurrency transactions. According to a Reuters article, “Nearly nine-tenths of stablecoin transactions are related to crypto trading while just 6% for actual payment of goods or services.” A recent survey published from the Federal Reserve Bank of Kansas City found that only 1.9% of U.S. consumers used crypto to pay for something in 2024.

Outside of crypto-trading, the most promising use case for stablecoins are cross-border payments. Theoretically stablecoin international remittances could be faster, cost less, be available 24/7, and programmable through smart contracts.  There are still many hurdles international remittances face, like the necessity for currency exchanges on both ends of the transaction, fragmented networks, and issuer risks (Do you want to accept stablecoin issued by a hostile country’s bank?). Some banks are attempting to take advantage of this space, including several large international banks (such as Bank of America, Deutsche Bank, Goldman Sachs, and UBS) who are jointly exploring issuing a stablecoin pegged to G7 currencies.

There are potential pitfalls for stablecoin issuers that bankers will be familiar with. Under the GENIUS Act issuers are required to hold reserves for their coins in highly liquid assets like U.S. Treasuries. What if rates go up, decreasing the market value of those holdings, and issuers find themselves without sufficient reserves? Issuers would need to inject more funds to account for those losses. There are real run threats to stablecoin issuers with no FDIC insurance. 

Banks can offer traditional banking services to entities involved with stablecoins. They will need all kinds of help. For example, earlier this year Chase Bank stated it will allow institutional clients to use Bitcoin and Ethereum as collateral for loans. Custody services of digital assets is a potential opportunity for banks which will require investment in tech development or finding a quality vendor. There will be competition as there have already been 11 bank charter applications with the OCC for banks intending to offer digital asset services. 

So, Friend or Foe? Today stablecoins are not much of a foe because there is very little current use of them outside of crypto transactions. It is a potential future foe if consumers actually adopt them which could move deposits or reduce transaction fees. Outside of traditional banking services, there are opportunities for those willing to invest in unproven use cases. 

As you can see, I’m mostly negative about the utility of stablecoins. With that said, we should all keep in mind the Kodak example. In the 1970s and 1980s Kodak had a virtual monopoly on the camera film industry. Despite the fact that one of its engineers (Steven Sasson) invented the digital camera, Kodak failed to embrace the product until it was too late. According to Sasson, Kodak executives took the approach that “Print had been with us for over 100 years, no one was complaining about prints, they were very inexpensive, and so why would anyone want to look at their picture on a television set?” In 2012, Kodak filed for bankruptcy during which it sold off many of its assets and patents. 

I do foresee that banks have an asset that most stablecoin issuers do not have – trust. In a world of anonymous companies issuing digital coins, community banks have real doors with people you can speak with. Community banks need to be mindful of changing technology (which they always have been). However, they should also make sure they do not lose the competitive advantages they do have.