Stablecoins Changed the Rails but Haven’t Captured the Economics

Stablecoins spent years trying to prove they could move money better than banks, and they have succeeded.

Announcements this week from banks, card networks, cryptocurrency exchanges and central banks show why that capability reveals more about stablecoins than it does about the banks themselves.

In the span of several days, SoFi Technologies began using its own stablecoin to settle transactions across a card program expected to process more than $25 billion annually, PYMNTS reported. Binance invested $100 million in Circle while signing a five-year agreement to expand USDC. The European Central Bank and the European Union’s national central banks pushed for changes to the way stablecoin reserves interact with commercial banks. Thredd expanded its issuer processing platform to include stablecoin-powered money movement capabilities.

Meanwhile, Canada’s six largest banks announced plans to explore their own tokenized deposit network, according to a Tuesday (Sept. 22) press release.

Individually, the week’s headlines look like different stories about payments, regulation and tokenization. Collectively, they reveal how and where stablecoins are moving from being a crypto product toward becoming financial infrastructure. Stablecoins no longer need to displace cards, bank accounts or familiar payment interfaces. They can become an internal settlement technology beneath them.

As that happens, the industry’s central question is changing from whether digital dollars can scale to who gets to issue, distribute, settle and ultimately control them.

Read also: 5 Crypto Launches That Bet on Clarity but Are Still Going

Stablecoins Turn Payment Infrastructure Into Competition for Control

The obvious conclusion is that digital money is moving into mainstream finance. The more consequential one is almost the opposite. Stablecoins are becoming important enough that the financial system is starting to absorb their best features without necessarily surrendering the economics to stablecoin companies.

SoFi and Mastercard, for example, said Tuesday that SoFi is migrating its entire debit and credit card program, expected to process more than $25 billion in annualized volume, to blockchain-based settlement using SoFiUSD. Transactions are already live, and the initiative essentially turns stablecoins into middleware. Once that happens, consumer adoption stops being the constraint; distribution does.

That creates a potentially uncomfortable reality for issuers. The scarce asset may not be the stablecoin. It may be the customer relationship.

There can be many regulated dollar tokens. There are fewer exchanges, wallets, banks, merchant platforms and payment networks capable of putting one in front of hundreds of millions of users or routing trillions of dollars through it.

Still, the June installment of PYMNTS Intelligence’s Credit Union Tracker Series, “The Wallet Effect: How Credit Unions Can Close the Digital Currency Access Gap,” a collaboration with Velera, revealed that stablecoin awareness falls short for 70% of credit union members.

See also: What Stablecoins Can Learn From the $12 Trillion Repo Market

Europe is already looking one level deeper. Under existing Markets in Crypto-Assets Regulation (MiCA) rules, stablecoin issuers generally must hold 30% of reserves as bank deposits, rising to 60% for significant issuers. But the ECB and the EU’s national central banks this week recommended eliminating that requirement and replacing it with liquidity requirements based on short-maturity assets.

If issuers become enormous depositors, their balances could replace relatively sticky consumer deposits with institutional money capable of leaving quickly during market stress. A run on a stablecoin could therefore become a funding shock for the banks holding its reserves.

The PYMNTS Intelligence and Citi report “Chain Reaction: Regulatory Clarity as the Catalyst for Blockchain Adoption” found in January that regulation will shape blockchain’s next leap. The regulatory debate around stablecoins often appears novel. In reality, however, many policy decisions reflect lessons drawn from centuries of monetary history.

Read also: Fed’s SVB Report Exposes Old Bank Risks in Digital Assets

Banks Don’t Need to Beat Stablecoins Because They Can Copy Them

Banks appear to understand the threat. Canada’s six largest banks, including BMO, CIBC, National Bank, RBC, Scotiabank and TD, announced this week that they are exploring a system allowing tokenized Canadian-dollar deposits to move between financial institutions.

Unlike stablecoins, tokenized deposits represent regulated bank deposits held on blockchain infrastructure. The economic relationship remains fundamentally unchanged, but the settlement mechanism does not.

As PYMNTS CEO Karen Webster wrote in January, the long-term winner may not be stablecoins at all. It may be tokenized deposits that preserve the regulatory structure and economics of commercial banking while delivering the programmability and around-the-clock settlement associated with blockchain-based money.

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