Will stablecoins survive once the banks catch up?

As crypto firms and banks converge, it is fair to ask what lasting advantage stablecoins have.

For a corporate treasurer, the answer comes down to fairly ordinary things: whether money arrives reliably, what it costs and what protection comes with it. If an existing banking relationship can deliver all three, there is little reason to move the balance to a separate stablecoin issuer.

Stablecoins' head start is real. But if banks make tokenized deposits widely available and interoperable, the biggest competitive threat to stablecoins may turn out to be the banks catching up. Four issues will decide whether that happens: whether bank money can match what stablecoins do, whether banks can work together, who keeps the interest, and the harder questions of access and identity.

The technology isn't exclusive to stablecoins

Start with the technology. A tokenized deposit is a bank deposit recorded on a blockchain: still a claim on the bank, but able to support the same kind of programmable payments as a stablecoin, executing automatically once agreed conditions are met.

A reserve-backed stablecoin works differently. Its holder relies on the issuer's reserves and redemption arrangements, while an eligible bank deposit can earn interest and benefit from deposit insurance within the applicable limits.

A paper by Capgemini and Quant says banks can offer round-the-clock transfers without rebuilding their core systems.

Nor does bank money have to stay on a closed network. JPM Coin, JPMorgan's deposit token, has launched on Base and is expanding to Ethereum, though the bank still decides who can hold it. For businesses that have passed identity checks, that need not be an obstacle. On capability alone, stablecoins have no lasting edge.

The real test is whether banks can work together

Coordination is where stablecoins hold the advantage: they connect wallets, exchanges and apps across markets, while a token usable only within one bank is a limited proposition.

Conventional banking solved this long ago through clearing and settlement. Tokenized deposits need the same foundations: shared rules, compatible systems and settlement between banks in central bank money. Issuing a token is straightforward; persuading competing banks to accept one another's obligations is the hard part.

There are signs of progress. In the U.K., the seven banks in the Great British Tokenized Deposit initiative have completed pilot transactions using tokenized sterling deposits. In Germany, the Commercial Bank Money Token (CBMT) initiative completed its first live payments between banks in May. In the U.S., The Clearing House is building a tokenized deposit network backed by 25 banks.

None of the three yet connects to the others, but the coordination problem has moved from theory into practice.

Holders give up interest while issuers earn it

Then there is the question of who benefits. Major stablecoin issuers earn income from the reserves backing their tokens; holders typically receive none.

In the U.S., the law will soon require it. The GENIUS Act, which takes effect in January, bars stablecoin issuers from paying holders interest simply for holding the coins. Rewards paid through partners such as exchanges are a gray area: rules published in October by the Office of the Comptroller of the Currency, a U.S. bank regulator, say they will be judged case by case.

Tokenized deposits can pay interest, though putting a current account on a blockchain does not make a bank generous.

A business holding a substantial balance has good reason to ask why it should forgo the earnings if bank money offers comparable payment functionality. Some will judge stablecoins' convenience and connectivity worth the cost; banks will have to compete on those terms.

Access and identity are the harder questions

Finally, stablecoins keep advantages that banks cannot easily copy. Self-custody, integration with decentralized finance and established pools of liquidity matter to many users.

For someone unable to obtain a suitable dollar account, especially where inflation or distrust of local banks makes saving difficult, a dollar stablecoin can be enormously valuable.

Identity is harder. Transfers between private wallets can appeal to people seeking to conceal who they are, and a public transaction record does not necessarily show who the parties are. Legitimate access and illicit use can depend on the same infrastructure.

The more thoroughly holders are verified, the more that access starts to resemble banking. That leaves stablecoins a real role, but a narrower one.

Final thought: digital money is joining the banking system

Taken together, the three networks and Kraken's purchase of a bank point the same way: rather than replacing the regulated financial system, digital money looks set to be absorbed into it.

Banks that join shared networks can keep deposits that might otherwise drift to stablecoin issuers; those that stay out may lose their corporate clients' money to competitors' tokens.

For stablecoins, convergence narrows the market rather than closing it. If exchanges accept tokenized deposits, traders and businesses that already have bank accounts lose most of their reason to hold a token that pays no interest.

Much depends on regulators. The ruling by Germany's regulator, BaFin, that CBMT tokens are deposits is encouraging, but the harder test is coordinating across borders at the pace the market is setting.

Stablecoins are likely to survive, in a role that could be substantial but specialized. Their issuers have shown that demand exists. Banks have started to coordinate. Whether they finish before those networks become too entrenched to displace, and whether regulators clear the way, will decide how much of that demand stablecoins keep.