Will Stablecoins Upend Banking? Watch Consumers for the Answer
By Adam Shapiro, partner at Klaros Group
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Executive Summary
- The GENIUS Act — Guiding and Establishing National Innovation for U.S. Stablecoins — gave a federal blessing to a class of digital currencies. But will banks face dire challenges as stablecoins take root?
- Author Adam Shapiro argues against that grim outlook. He sees stablecoins becoming a useful tool for many banks in the near term.
- In the longer-term, the ripple effects of stablecoins may be stronger, changing more. So pay attention, and don’t snooze.
There’s a certain crypto worldview that says: “People don’t trust banks. They want control. They’ll self-custody stablecoins, earn interest in DeFi, and manage their own risk.”
Maybe these ideas hold in crypto-crazy Miami Beach.
But the notion that you don’t need banks fundamentally misses the point that 99% of people don’t want to manage the security risk for huge chunks of cash. They want someone else to look after their money. In fact, they value that as a key service that they’re getting from a bank today.
Ask yourself how many people would feel comfortable walking around the street if they had $5,000 in cash in their wallet? Not many. That’s exactly why stablecoins don’t have to be a major threat to banks.
Even if stablecoins take off as a payments rail, banks that are on the ball will be able to connect to them to process payments. This can potentially give customers the best of both worlds — the security and deposit insurance offered by bank deposits, along with the opportunity to use the efficiency and programmability of stablecoins.
Best of all, banks won’t even have to hold the stablecoins. They can have them minted on demand and immediately send them. Conversely, they can instantly redeem them for fiat currency upon receipt.
For all of these reasons, direct involvement in stablecoins is not yet table stakes for banks.
Yes, stablecoins have certain theoretical advantages over current domestic payment systems, but those advantages aren’t relevant to every bank — yet.
If your bank aspires to having a serious payments or partner banking business, or support a clientele that has heavy international transaction and transfer needs, you should be thinking about infrastructure issues now. You should be finding test use cases to work with, getting comfortable with how to do that and how to expose that to customers or clients.
If none of those are in your bank’s scope right now, it’s probably fine to wait. But it’s not too early to learn.
Read more: Are Stablecoins the Future of Banking? Q2 Earnings Calls Expose Divisions
Banks and Stablecoins: A Cold Bucket of Reality
When we talk about banks and stablecoins, it’s important to put some definition around what we’re discussing.
What we’re not talking about is each of our 10,000-plus depository institutions minting their own stablecoin or putting deposits on the blockchain. That would be endlessly confusing.
In addition, in relation to tokenized deposits, I’ve yet to see a good theory of the case about how to handle know your customer and customer information program responsibilities.
So in the short term, it’s best to think of stablecoins as a payments integration that will first manifest as a cheaper international alternative to the correspondent banking system.
In some ways, it wouldn’t be that different from the way banks move money today.
Let’s say you’re Company X and you want to pay Company Y $20,000 through the automated clearinghouse. You instruct your bank to pay Company Y at this account number with this routing number. Your bank will take the $20,000 out of your account and move it into a suspense account so that you can’t double-spend the money.
At the end of the day, the money in the suspense account will be part of a net settlement through the Federal Reserve with all of the other banks, and they will credit it to Company Y’s bank. That institution also receives a file telling them that they should credit $20,000 to Company Y’s account. At some point (maybe that day, maybe the next day), the bank will do that.
That’s today’s process. In a world in which all banks have adopted stablecoins and one was being used effectively as a payments network, bank transfers would look very similar to the way they look today.
Company X — you, again — would tell its bank to take $20,000 out of its account and pay Company Y. To send the funds, the bank would either have a stock of stablecoins that it could use or, more conveniently, it could just instantly mint them, perhaps through a stablecoin provider that has an account at the bank for this purpose. In the latter case, your bank would deposit $20,000 into that account and trigger a process to automatically mint $20,000 of stablecoin that the bank then directs where it’s supposed to go.
In this scenario, banks don’t need to issue their own stablecoins and don’t have to deal with crypto security risks — there will be service providers that do that for them.
They can hold dollars in stablecoins for a time if they want to, but they can also mint and burn them close to instantly, using the stablecoins only as a means of exchange.
Especially for international payments, the benefit is taking something that’s a manual, difficult process that only the correspondent banks can make good money on today and turning it into an automated process that’s not only competitive but automated, relatively immediate, and live 24/7.
Is this a product or service that is going to single-handedly transform a bank’s fortunes? No.
But it is part of a toolkit that allows them to be more competitive — to keep internationally active customers in-house instead of sending them elsewhere.
It also points to a world where even if this does take off and becomes a common payment technology domestically, it is not in itself going to be a death knell for banks.
Read more: Stablecoin and AI Agents Will Reinvent Banking, According to a Crypto Pioneer
Signals to Watch For as the Economy Assimilates Stablecoins
Bill Gates’ famous saying that we always overestimate the change that will occur in two years and underestimate the change that will occur in 10 years relates here.
We’re already seeing some serious movement on the cutting edge of international payments, and there’s a compelling reason to move there if you want to build, or protect, a business that directly or indirectly supports that. In terms of domestic payments, we have entrenched payment networks that work well enough. But that could change.
One thing that might signal increased momentum would be some of the bigger banks adopting some of this technology. The most likely case would be a larger payments-oriented bank choosing to use a stablecoin rail.
But I think it’s equally, if not more, likely that the signal will come from below, as we saw with Venmo and other payments apps, which quickly became the equivalent of cash for consumers doing small transactions.
If significant numbers of consumers develop who want to use stablecoins for smaller transactions, you’re also going to see merchants want to accept them, especially if it’s cheaper than card interchange. They will just need to see that there’s demand there.
And if both sides want to use it, someone’s going to build a UX or a platform that provides incentives for using it. And if it’s cheaper for merchants than interchange, they’re going to push adoption, and you could start to see the viral network effects that you got from PayPal, Venmo or CashApp.
That’s why international, person-to-person, and small-dollar merchant transactions could be the canaries in the coal mine.
It’s hard to put a time frame on it, but the one thing that we can be sure of is that if a payments technology takes off, the curve is fast. Just look at how quickly Venmo went from virtually unknown to ubiquitous.
Smart banks will want to reach any such tipping point with service providers already in place and tested. The only way to do that is to watch the canaries closely.
In short, don’t panic, but keep your eyes wide open.
Read more: Will the GENIUS Act Revolutionize Banking and Payments? Absolutely. Here’s How
