Stablecoins are real digital currency. While there are many types of digital assets ranging from highly volatile investments like Bitcoin to collectibles like NFTs and meme coins (e.g., the Trump coin), stablecoins are the most boring segment -- coins backed by real world holdings of the asset being tracked. US dollar stablecoins are backed by insured deposits, treasury bills or other short term money funds. Stablecoins are structured much like open end mutual funds – more can be created by buying more T-bills and they can be liquidated into the underlying assets. Gold stablecoins hold gold; euro stablecoins hold euro deposits and so on. Transfers of stablecoin balances from one holder to another are recorded on a blockchain.
When the GENIUS Act passed in July 2025, it provided the necessary guardrails for the stablecoin business. With the GENIUS Act, stablecoin issuers will be regulated like banks -- by either the OCC or state bank regulatory agencies (depending on the charter of the issuer), provided that all large issuers (>$10B) will have OCC oversight. Like banks, stablecoin issuers must perform know your customer activities and comply with Bank Secrecy Act/Anti-Money Laundering regulations (KYC and BSA/AML). Stablecoins must hold reserves of 100% of the amount outstanding. Those reserves must be invested in short-term treasuries, treasury repos, insured bank deposits and money market funds invested solely in approved investments¹. Issuers must submit monthly reports of stablecoins issued and reserves held. Issuers may only perform stablecoin related activities (i.e., issue, redeem and custody). Issuers are prohibited from paying interest on their stablecoin.
With the GENIUS Act’s prohibition on paying interest, stablecoin issuers should be very profitable – all interest earned on the reserves held is retained by the issuer and should exceed the cost of posting transactions. This design feature probably occurred because most existing stablecoins were devised by tech entrepreneurs seeking to break away from traditional finance (i.e., interest rates, discount rates, etc.) Besides, existing stablecoins attracted a lot of volume without paying interest, albeit at that time the Fed was following a zero interest rate policy, so there wasn’t much interest to worry about.
The First Use Case – Crypto Investments
In the current environment, stablecoins are primarily used as a medium of exchange for investors to buy other digital assets. For example, an investor may seek arbitrage profits by buying a digital asset on one exchange and selling the same asset on another exchange – paying for the purchase with a stablecoin and receiving the same stablecoin in payment. Stablecoins dramatically reduce the counter-party risk associated with crypto investing. Gone are the days of wiring fiat currency to an intermediary and trusting/hoping that your purchase would be recorded on a blockchain.
Banks play a critical role in crypto investments by serving as a gatekeeper to the US financial system. In order for someone in the US to buy crypto, they first need a way to send fiat dollars to the seller. In practice, this means they need a US bank account. They need to satisfy their bank’s KYC and BSA/AML compliance² requirements. Once approved and on-boarded, the customer has a mechanism to fund a trading account and buy crypto investments or stablecoins. Upon liquidation, the customer also has a mechanism to access the proceeds from selling their crypto investments in fiat currency. This role is known as the on-ramp/off-ramp for crypto.
Banks’ Role in Existing Stablecoins
Since stablecoins must be invested in banks or treasury bills, the primary role banks are currently playing in the stablecoin business is serving as the depository for reserve balances. For example, 10% of Circle’s reserves are held at banks; the other 90% is in a special purpose short term treasury fund managed by Blackrock. The bank component is critical because Circle uses bank reserves to issue/redeem its stablecoins. Banks are well positioned to manage counterparty risks associated with payment transactions.
Credit Risk. Banks normally think of credit risk from their loan portfolio. In fact, credit risk also emerges whenever the bank sends out funds in excess of customer funds – aka an overdraft. Further, even when receiving funds, the bank has credit risk if the funds are withdrawn and then the credit is reversed (returned by the sending bank as in a bounced check). As systems³ have improved, banks have been able to offer “on us” transactions 24x7 without credit risk because the bank knows the balances in each customer’s account. If the account balance exceeds the funds sent, there is no overdraft. Hence, the bank can write rules to instantly process transactions between accounts without the bank taking on any credit risk. Expanding from intra-bank to inter-bank follows the same logic – the originating bank knows its customers’ balances, so it can send funds 24x7 – effectively expanding “on us” transactions across institutions. For example, when the seven largest banks in the US formed Zelle, they effectively expanded the universe of “on us” transactions so that Zelle customers could transfer funds immediately among any participating bank with no credit risk.
Liquidity Risk. “On us” transactions don’t impact bank liquidity because funds move from account-to-account and do not leave the bank. When expanded through a bank network, liquidity risk is only the net amount due between the banks which is always well within Reg F limitations. Further, the funds don’t move instantly; they follow the normal interbank payment rails (typically ACH).
Ledger Balances. The key feature of all digital assets is use of a decentralized, public ledger. That is, instead of one bank managing the account balances of all of its customers, those balances are stored on a blockchain. While the ownership of each account is anonymous, its balance and existence is available for all to see. This way, when someone pays with a stablecoin, there is no risk that the transaction will be reversed. It’s impossible for the “check to bounce.” Many forms of bank payments are equally secure (e.g., wires). When banks agree that certain transactions cannot be reversed for non-payment, those payments are just as secure as a stablecoin payment.
Stablecoin Counterparty Risk. Since stablecoins are on a public ledger, counterparties can enable, the risk-free “on us” transaction is broadened to anyone holding a stablecoin. There is no credit risk from either an overdraft or returned item, and there is no liquidity risk from honoring a customer transaction since the stablecoins are backed 1:1.
Of course, liquidity risk for the depository holding reserves for the stablecoin issuer does exist. Stablecoin “minting” operations that create or liquidate stablecoins are accomplished by increasing/decreasing their deposits at the bank. Any bank must be prepared to lose reserve deposits at any time, so liquidity risk to the issuer is a material issue.
The Second Use Case – Lowering the Cost of Payments
Most stablecoin proponents point to the cost, risk, and slow processing of using Swift for international payments. Stablecoins could do it better. By definition, international payments cross regulatory jurisdictions. Transactions allowed in the sending country may draw red flags in the receiving country. In many cases, international payments activity is a red flag for a bank’s KYC process and triggers enhanced due diligence and aggressive transaction monitoring. While it is easy to say that small transfers from immigrants to their families abroad is low risk, in practice it may be hard to differentiate those payments from high-risk transactions (money laundering or terrorist financing).
While the cost of domestic payments is low compared to international, financial services firms have built in a lot more cost than is necessary to process payments. Interchange fees vary by type of retailer and type of card; some include a cost per swipe in addition to a percentage of the purchase amount. Interchange fees are about 2% on average for credit transactions. Average cost of other payment platforms are about the same – in 2024, PayPal’s average cost was 172 bps, Block was 260 bps and Toast was 255 bps. Interchange is so high that credit card companies compete for customers by offering “rewards” that transfer a portion of the interchange back to the cardholder.
Some retailers try to lower their cost of payment processing by offering discounts for cash. But even cash isn’t free. First off, there’s the discount. After that, the retailers have lockbox, security and other fees.
With current technology, transactions cost pennies to process but retailers often pay dollars in swipe fees or other costs. As a result, credit card issuers (and now some debit cards) offer “rewards” as a way of sharing the revenue with their customers. Stablecoin payments may enable customers and retailers to save money, but existing payment rails have a significant competitive advantage.
The Third Use Case – Stablecoin Issuer
The GENIUS Act contemplates competition among numerous stablecoin issuers. Currently, Tether and Circle dominate stablecoins outstanding. Tether is widely known as one of the most profitable companies in the world when measured as profit per employee. Over the past year it has doubled from about 100 employees to 200 (mid-2025), but those employees manage about $160 B in outstanding balances. At a 4% yield, that amounts to over $30 million in interest revenue per employee. That said, it is likely that Tether will need even more staff to adequately comply with US banking law and the GENIUS Act. By contrast, Circle has about 1200 employees managing about $65 B in stablecoin.
As a start-up without the scale of billions in outstanding stablecoin and with a strong compliance culture, most banks would not be as profitable as the incumbents. Moreover, a bank would likely face significant challenges to build adoption of its stablecoin, especially considering its inability to compete on price (i.e., no interest allowed) and its unwillingness to compete by offering lax compliance.
As the stablecoin market shifts from primarily a tool for crypto-investing into a new payment rail, banks are likely to have competitive advantages over Tether and Circle. At that point, many of the largest banks will likely enter the business.
The Fourth Use Case – Banking the Unbanked
Financial services transactions fees for low-income Americans are very high in percentage terms, in part because the average transaction size is small. Many of these Americans do not have access to credit or debit cards and cannot pay/receive funds electronically. Hence, most of their economic activity must be conducted with physical currency. Moving from currency to plastic and/or digital dollars has the potential to lower costs. Further, if stablecoins become a low cost payment rail, serving the low-income community may become economically feasible – especially if revenue remains linked to Visa/MC interchange fees.
In 2021, the Fed formed a working group to evaluate a Central Bank Digital Currency (CBDC). A CBDC could create a default account that only held positive balances (no overdrafts). It could be like an expanded Zelle network – incorporating all checking balances held at any bank. The problem, of course, is privacy: the fear that the government would thereby have access to transaction details for every payment in the entire economy. Currently, this payment data is more widely disbursed – at Visa and Mastercard and the bank sponsors for those credit and debit cards and at other payment providers, and no one sees all cash transactions. The Visa/MC concentration of information should raise privacy concerns but not as much as direct government control. It is unlikely that a CBDC will be launched in the US in the near future.
¹ The rules are designed to limit the amount of interest rate risk borne by the stablecoin issuer. By keeping the duration of reserve assets very short, there is a very low probability that market movements would result in the market value of the reserves being worth less than the notional amount outstanding. Consequently, the stablecoin would not “break the buck.”
² Banks operating in or near crypto companies need to carefully consider their compliance risk. For example, the FinCEN travel rule requires a bank sending funds to know the recipient of the funds. A bank serving as an on/off ramp needs to know its customers and their counterparties.
³ Satisfactory core processing systems are necessary to manage the bank’s operating risk. If the bank is unable to track account balances in real time (either with a real-time core or by using transaction journals to track balances in pseudo-real-time, it will be unable to process transactions without the risk that some of those transactions are reversed.
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