On February 25 at the Economic Club of Washington, D.C., in a public conversation with club chairman David Rubenstein, Bank of America CEO Brian Moynihan delved briefly into the subject of stablecoins. If legally permitted, he said, “We’ll go into that business,” presumably issuing a “Bank of America coin,” in practice “no different than a money market fund with check access, no different than a bank account, really.”
In retrospect, Moynihan’s seemingly offhand digression was more like a watershed, or part of one.
Momentum is evident in the growth of the market-leading Tether USDT – not available in the United States, though like most stablecoins denominated in dollars – and Circle USDC; pending U.S. legislation cheered on by the White House (a Trump family venture, World Liberty Financial, is touting its own USD1 stablecoin); and Bank of America and its top-tier peers exploring a joint offering similar to the Zelle person-to-person payment service.
Timothy Massad: Underline “stable.”
“Stablecoins are the most useful application of blockchain and digital asset technology to date,” Timothy Massad, director of the Digital Assets Policy Project at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government, declared in Senate subcommittee testimony on February 26. The so-called GENIUS Act was just beginning its journey.
Beyond stablecoins’ use in crypto-asset trading, continued Massad, a former Commodity Futures Trading Commission chairman, “they could become important as a general means of payment, and could facilitate the tokenization and settlement of real-world assets on chain. They could also be helpful in maintaining the dominant role of the dollar in international trade and finance . . . But it will only happen if we create a regulatory framework that puts the ‘stable’ into stablecoins.”
Source: Bain & Co.
Distinct from other cryptocurrencies in that they are pegged to a par value, e.g. $1 or €1, stablecoins are seen as better suited for payments than is bitcoin, which despite being introduced as an alternative payment system has attributes of a speculative investment or asset class. An April Citi research report, “Digital Dollars: Banks and Public Sector Drive Blockchain Adoption,” identified as stablecoin use cases retail payments, crypto trading, decentralized finance (DeFi) and remittances.
Bain & Co., in From Niche to Utility: Stablecoins Move Toward the Financial Mainstream, said, “Regulatory clarity will open the door to broader opportunities, notably around asset transfers and settlements. Reconciliation of business payments, for instance, could be done almost instantaneously at any time, instead of taking days for clearance or being limited to certain windows of availability such as bank working days.”
A clearer regulatory outlook has “triggered offerings in private blockchain projects or public stablecoins from regulated entities such as PayPal, Stripe and other major financial firms,” the Bain team noted, as the U.S. Congress was considering rules for “reserve backing, liquidity requirements, consumer protections, and anti-money laundering and know-your-customer (AML/KYC) provisions.”
“Retailers such as Overstock, Chipotle, Whole Foods and GameStop now accept [stablecoins], though their impact is minimal,” said a January blog by Federal Reserve Bank of Atlanta payments expert Chris Colson. Payments processor Stripe was facilitating merchants’ acceptance of USDC, Regal Cinemas gave 10% discounts on USDC-purchased tickets and concessions, and Travala.com took USDC and USDT for travel bookings.
Chris Colson: “Digital-first world.”
“So why are businesses suddenly embracing stablecoins?” Colson wrote. “They reduce transaction fees, settle almost immediately and attract crypto-savvy customers, helping businesses stay competitive in a digital-first world.”
Digital-asset ecosystem provider Fireblocks concluded from a recent survey that stablecoins are past “pilot mode” and “are becoming the financial core of modern payments infrastructure.” For 90% of senior executive respondents in banks, fintechs and crypto-native firms, stablecoin payment programs were live, piloting or planned. The leading application: “cross-border B2B.”
Fireblocks said roughly half of its platform’s volume is stablecoin transactions, reaching $40 billion per quarter.
“Stablecoins’ future is far from certain at this point,” said Bain’s report. “But they can flourish if regulatory support and private investment combine to create a market structure for products that improve customers’ financial lives.”
On the flip side of new and expanded business opportunities are risks associated with the management of the products, their liquidity, and reserves, which are typically in Treasury securities; regulatory and compliance issues; and, for central banks, money supply, financial market and systemic-stability implications.
Add to that litany the ever-critical priorities of cybersecurity and operational resilience.
A potential downside mentioned in the Citi Institute GPS (Global Perspectives and Solutions) report: “The migration of bank deposits to stablecoins could impact banks’ ability to lend. This reduction in lending capacity could constrain economic growth, at least during a transition period while the system adjusts.”
“As users chase more attractive products and better experiences, we have seen deposits rotate out of the banking system,” Matt Blumenfeld, global and U.S. digital assets lead, PwC, stated in the GPS report. “With stablecoin technology, banks have the opportunity to create better products and experiences while retaining deposits in the banking system – where users often prefer them to be secured – simply on new rails.”
“A supportive U.S. regulatory stance on blockchain is expected to be the driver of what could be a game changing year,” Citi GPS asserted. “This could lead to greater adoption of blockchain-based money and spur other use cases, financial and beyond, in the U.S. private and public sector.”
Total stablecoin market capitalization (source: DeFiLlama).
From today’s total stablecoin market capitalization of nearly $250 billion, per Citi GPS, the “outstanding supply of stablecoins could grow to $1.6 trillion by 2030 in our base case and to $3.7 trillion in our bull case,” with the USD share remaining around 90%. “That said, the number could be closer to half a trillion dollars if adoption and integration challenges persist.”
The “all crypto” market cap currently exceeds $3 trillion; about two-thirds of it is bitcoin.
Nellie Liang, senior fellow in the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, brought stablecoins into a May 20 panel discussion on “the evolving market for bank funding” during the Federal Reserve Bank of Atlanta Financial Markets Conference.
Brookings’ Nellie Liang
Liang, who was the Federal Reserve Board’s Division of Financial Stability director from 2010 to 2017 and Treasury under secretary for domestic finance during the Biden administration, pointed out that the President’s Working Group on Financial Markets (PWG) made recommendations regarding stablecoin risks and the need for legislation in 2021. The group cited concerns “related to the potential for destabilizing runs, disruptions in the payment system, and concentration of economic power” – when this crypto market segment was valued at $20 billion.
Even today, at 12 times that market cap, it is equal to little more than 1% of the $18 trillion in U.S. bank deposits, Margaret Tahyar, partner and head of the Financial Institutions practice, Davis Polk, said at the Atlanta Fed conference. Still, she observed, stablecoins’ transaction volume rivals that of the Mastercard and Visa networks, so congressional action is timely.
Economics professor Lawrence White of New York University’s Stern School of Business insisted that as “runnable liabilities,” stablecoins will require bank-like supervision and capital and liquidity standards. Tahyar suggested allowing time for initial regulations to settle in before revisiting or tightening them – they won’t be “perfect right away” – or going so far as to extend deposit insurance coverage, which would be complicated when non-depository entities such as retailers or Big Techs issue stablecoins.
The 2024 annual report of the Financial Stability Oversight Council (FSOC), the super-regulatory body chaired by the Treasury secretary, reiterated positions taken since the PWG in 2021 that stablecoins “represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards. This run risk is amplified by issues related to both market concentration and market opacity.”
Failure of a dominant firm – Tether accounted for 70% of market cap then (July 2024 data), 60% today – “could disrupt the crypto-asset market and create knock-on effects for the traditional financial system,” FSOC cautioned.
As issuers operate outside of a comprehensive federal prudential framework, and “a few are subject to state-level supervision requiring regular reporting, many provide limited verifiable information about their holdings and reserve management practices,” the FSOC went on. “This opacity poses a challenge for effective market discipline and increases the risk of fraud. Regulatory requirements for reserves, capital and reporting would help mitigate these risks.
“The council recommends that Congress pass legislation creating a comprehensive federal prudential framework for stablecoin issuers to address run risk, payment system risks, market integrity, and investor and consumer protections, including for entities that perform services critical to the functioning of the stablecoin arrangement.”
In the absence of federal legislation, the regulatory agencies “remain prepared to consider steps available to them to address risks related to stablecoins.”
Henry J. Farrell of Johns Hopkins University, co-author of “Underground Empire: How America Weaponized the World Economy,” and Dan Davies of the Back of Mind newsletter questioned in a New York Times opinion article whether existing authorities and proposed safeguards for stablecoins will be adequately enforced, ensure financial stability and continued dollar dominance, and prevent illicit transactions or non-compliance as has been alleged of Tether.
(Tether CEO Paolo Ardoino has said that while USDT can comply with the GENIUS Act, it will stay focused on foreign markets, and the company may create a domestic U.S. stablecoin. Tether is co-founder and, with Bitfinex, majority owner of a new bitcoin investment venture, Twenty One Capital.)
Davies and Farrell see “no clear response to a critical question: Does the United States stand behind dollar-based stablecoins or not?
Fed Governor Christopher Waller: Guardrails are key.
“Specifically, if a stablecoin got into trouble or turned out to be a fraud, would it be bailed out? Doing so could create massive liabilities for U.S. taxpayers. Companies that are too big to fail are tightly regulated and supervised, and for good reason. But not bailing out such a stablecoin would pose a new source of systemic risk for international users of the dollar system.”
Federal Reserve Governor Christopher Waller conceded in a speech last fall that “safety is not assured. History is replete with cases in which synthetic dollars became subject to runs. Stablecoins thus face all of the same issues any substitute for genuine U.S. dollars faces.”
But Waller also allowed that “if appropriate guardrails can be erected to minimize run risk and mitigate other risks, such as their potential use in illicit finance, then stablecoins may have benefits in payments and by serving as a safe asset on a variety of new trading platforms.”
A report by fintech investment bank Financial Technology Partners deemed stablecoins to be “inherently less volatile than most other digital assets” when pegged to fiat currencies “or other relatively stable assets.”
There have been instances of temporary de-pegging – USDT in the 2022 run on Terraform Labs’ TerraUSD; USDC in 2023 when Silicon Valley Bank, where Circle had deposited reserves, failed. In early April, the peg of First Digital Trust FDUSA was $0.87, after cryptocurrency entrepreneur Justin Sun alleged that it was insolvent.
“The risk of de-pegging will likely decline as stablecoins become more mainstream and institutional adoption continues to grow,” FT Partners said.
The lack of a comprehensive regulatory framework did not prevent – and perhaps abetted – the rise of stablecoins to this point. U.S. issuers, however, are subject to state money transmitter regulations, and leaders such as Circle and Paxos stepped up to state trust company charters and/or New York State’s pioneering and relatively rigorous virtual currency provision known as BitLicense. The GENIUS Act and its House of Representatives counterpart, known as the STABLE Act, would require state or federal licensing along with audits and other controls.
Internationally, hospitable jurisdictions include the European Union with its Markets in Crypto-Assets Regulation (MiCA), as well as Singapore and the United Arab Emirates. With 80% of dollar-backed stablecoin flows occurring outside the U.S., emerging markets including Brazil and Hong Kong have begun developing stablecoin regulations, according to the Atlantic Council Cryptocurrency Regulation Tracker.
The council finds that cryptocurrencies are fully legal in 12 G20 countries, representing over 57% of global GDP, and regulation is under consideration in all of the G20. “The U.S. is the only advanced economy to consistently rank among the top 10 in crypto-asset adoption,” says the tracker, but when it comes to comprehensive oversight, only 28 of 75 countries studied “have regulations for taxation, AML/CFT [countering the financing of terrorism], consumer protection and licensing.”
Regulation is explicit in business plans.
Paxos co-founder and chief executive Charles Cascarilla told a House Financial Services Committee hearing on March 11 that the company was established in 2012 “as a regulated financial institution committed to re-platforming the financial system using blockchain technology. In 2015, Paxos became the first digital asset company to receive a limited-purpose trust charter from the New York State Department of Financial Services.
Circle CEO Jeremy Allaire
“Over the past seven years, we have worked closely with global regulators to advance the safe and widespread adoption of regulated stablecoins. Today, we provide stablecoin and tokenization infrastructure to some of the world’s leading enterprises, including PayPal [the PYUSD stablecoin], Mastercard, Mercado Libre, Robinhood, Stripe and Interactive Brokers, among others.”
“It shouldn’t be a free pass, right? Where you can just ignore the U.S. law and go do whatever the hell you want wherever and sell into the United States,” Circle Internet Group co-founder, CEO and chairman Jeremy Allaire said in a Bloomberg News interview, as reported by The Block.
“This is about consumer protection and financial integrity. Whether you’re an offshore company or based in Hong Kong, if you want to offer your dollar stablecoin in the U.S., you should need to register in the U.S. just like we have to go register everywhere else.”
Circle, prior to announcing on May 27 the launch of its initial public offering at a $6 billion valuation, reportedly received acquisition overtures from Coinbase and Ripple. There had already been a ten-figure stablecoin deal: Stripe bought Bridge Network on February 4 for $1.1 billion, aiming “to build the world’s best stablecoin infrastructure,” according to a tweet by Stripe CEO Patrick Collison.
In the wake of Stripe-Bridge, along with the Washington-fueled market exuberance and bitcoin’s again breaking the $100,000 price barrier, came a flurry of stablecoin-specific alliances, partnerships and investments.
Sumitomo Mitsui Banking Corp. joined with Fireblocks, Ava Labs and TIS in a memorandum of understanding centered on wholesale payments and settlement of tokenized financial and real-world assets such as government and corporate bonds and real estate.
Société Générale crypto subsidiary SG-Forge, which first listed its EURCV stablecoin on the Bitstamp exchange in 2023, is reportedly close to issuing a USD stablecoin.
Circle in April announced the Circle Payments Network (CPN) for regulated stablecoins, including the company’s own USDC and EURC, “to bring efficiencies to a fragmented cross-border payments system . . . a modern way to move money globally with the speed, transparency and programmability of the internet.” Banco Santander, Deutsche Bank, Société Générale and Standard Chartered were on board to advise on the network design.
“Since our founding [in 2013], Circle’s vision has been to make moving money as simple and efficient as sending an email,” CEO Allaire said in the announcement. “CPN is a significant step in making that vision a reality for businesses worldwide.”
Earlier in the year, Circle bought Hashnote and its U.S. High Yield Coin (USYC), with plans to integrate “the world’s largest tokenized money market fund” with USDC; and signed a memorandum of understanding with New York Stock Exchange parent Intercontinental Exchange to explore USDC and USYC product development. Said NYSE president Lynn Martin: “We believe Circle’s stablecoins and tokenized digital currencies can play a larger role in capital markets as digital currencies become more trusted by market participants as an acceptable equivalent to the U.S. dollar.”
In November, Paxos introduced the Global Dollar Network (GDN), with a new USDG stablecoin issued out of Singapore, and initial partners Anchorage Digital, Bullish, Galaxy Digital, Kraken, Nuvei and Robinhood. As of May 12, GDN had more than 25 members.
Nathan McCauley of Anchorage Digital
Anchorage, whose Anchorage Digital Bank is the only federally chartered crypto bank in the U.S., agreed in May to acquire Mountain Protocol, which is regulated in Bermuda and responsible for the USDM stablecoin.
“Our long-term vision is clear: Every business will be a stablecoin business,” said Anchorage Digital co-founder and CEO Nathan McCauley. The acquisition is “a significant step forward in supporting institutional stablecoin adoption and advancing a new era of safety, security and regulatory compliance in the global digital asset ecosystem.”
Enhancing what it calls an integrated, 360-degree approach, Mastercard on May 15 announced a partnership with MoonPay. That followed the latter’s acquisition of stablecoin infrastructure from Iron “to facilitate stablecoin-powered payments for businesses and transform crypto wallets into new digital bank accounts for seamless global transactions.”
Visa Ventures made a strategic investment in BVNK, a stablecoin infrastructure company that in December raised $50 million in a Series B funding led by Haun Ventures, with Coinbase Ventures, Scribble Ventures, DRW Venture Capital, Avenir and Tiger Global participating.
Also on the startup front:
- With over $20 million in funding, 1Money Co. came out of stealth early this year as a stablecoin payments protocol, with former Binance.US chief executive Brian Shroder as co-founder and CEO. In April it named as independent directors Kenneth Blanco and Michael Mosier, former director and deputy director, respectively, of the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). “We believe that licensing and compliance are a core competitive advantage for the company,” said Shroder, and the board appointments underscore “1Money’s focus on compliance-first innovation as stablecoins redefine global payments.”
- DeFi Technologies entered into a joint venture with, and made a lead equity investment in, Fire Labs, marking its entry into real-world assets “through the development of a fully regulated, USD-backed stablecoin issued directly by a U.S. chartered bank.”
- DeFi trading app True Markets, which has “stablecoin settlement at its core” and Paxos Ventures as an investor, announced an $11 million Series B round on May 20, bringing total funding to $20 million.