NYDIG Research noted that stablecoins have emerged as a cornerstone of the cryptocurrency ecosystem, with their market value surging to over $287 billion, a 38% increase year-to-date, according to data from DefiLlama.
The passage of the GENIUS Act has cemented their legal standing, attracting attention from fintechs, banks, and payment providers.
However, the regulatory landscape has sparked debates, particularly around interest-bearing stablecoins, revealing a misunderstanding among critics that banks are at a disadvantage.
In reality, the evolving stablecoin model offers banks opportunities to innovate and compete, while traditional finance (TradFi) continues to drive crypto’s narrative.
The banking industry successfully lobbied to prohibit interest-bearing stablecoins, fearing they would erode their deposit base, a critical component of their lending operations.
However, this ban has had unintended consequences. Crypto platforms like Coinbase have sidestepped the restriction by offering “rewards” on stablecoin deposits, such as 4.1% on USDC balances, effectively mimicking interest payments.
This has frustrated banks, as yield opportunities have shifted to crypto platforms, undermining the very deposit protection the ban aimed to achieve.
The distinction between issuers and custodians is key to understanding this dynamic.
Stablecoin issuers like Circle (USDC) or Tether (USDT) take in dollars, issue stablecoins, and invest the underlying funds in low-risk instruments, generating returns.
Under the GENIUS Act, issuers are barred from paying interest.
However, custodians like Coinbase can offer rewards, often funded through revenue-sharing agreements with issuers or supplemented by their own resources.
For instance, Circle’s IPO filings reveal that Coinbase, a co-creator of USDC, earns a share of Circle’s reserve income, enabling it to offer competitive rewards.
This model allows crypto platforms to provide attractive yields without violating regulations, leaving banks scrambling to adapt.
Critics argue that banks are disadvantaged because stablecoins cannot pay interest.
However, this overlooks a viable path for banks to compete.
Banks can custody stablecoins, treat them as insured deposits, and lend against them after redeeming for dollars.
Alternatively, they could adopt a model similar to Coinbase’s: earn revenue shares from issuers like Circle, pass a portion back to customers as rewards, and integrate stablecoins into services like real-time payments, cross-border settlements, or FX conversions.
This approach would allow banks to leverage stablecoins’ efficiency while maintaining their competitive edge.
The real challenge for banks is not regulatory restrictions but a lack of creative adaptation.
The past 18 months have seen traditional finance increasingly shape the crypto narrative.
As indicated in the insights from NYDIG Research, the approval of Bitcoin ETFs, corporate bitcoin treasuries, and high-profile IPOs like Circle’s underscore this shift.
Purpose-built digital asset treasury companies (DATs), such as Forward Industries’ $1.65 billion Solana treasury, backed by Galaxy, Jump, and Multicoin, highlight TradFi’s role in digital asset innovation.
Notably, Nakamoto/Kindly’s $30 million investment in Metaplanet’s $1.45 billion capital raise signals growing interconnectivity among DATs, though direct Bitcoin purchases might have been more efficient.
Analytical focus has also shifted from blockchain data to traditional financial metrics, with SEC filings and Bloomberg terminals becoming more critical than block explorers.
Public offerings from firms like Figure and Gemini, alongside Circle, eToro, Bullish, and Galaxy, reflect a maturing U.S. regulatory environment that fosters crypto integration into mainstream finance.
Bitcoin rallied 4.2% this week, briefly surpassing $116,000, amid a broader market upswing.
The S&P 500 and Nasdaq 100 hit all-time highs, gold rose nearly 2% (with a 38% year-to-date gain), and bonds also climbed.
A weakening US Dollar Index and declining real interest rates, coupled with prospects of rate cuts, create a favorable backdrop for risk assets like Bitcoin.
Meanwhile, the SEC’s approval of increased position limits for Bitcoin ETF options has driven a 47.6% surge in open interest, though implied volatility has dropped by 10% in recent weeks, suggesting stabilized market expectations.
Stablecoin critics misunderstand the opportunities available to banks in this evolving landscape.
By embracing models like revenue-sharing and integrating stablecoins into their offerings, banks can try to compete more effectively.
As TradFi continues to drive crypto’s growth, the interplay between stablecoins, Bitcoin, and traditional markets could potentially signal a broader realignment.