Banks must abandon stablecoin plans and focus on blockchain rails

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Since last year, banks have been falling over themselves to get involved in the stablecoin gold rush. Standard Chartered already made its first foray in February, while Bank of America's CEO Brian Moynihan said the bank can't wait to issue a stablecoin as soon as it's "legal." When the STABLE and GENIUS stablecoin bills pass in the U.S., we will likely see a huge flurry of competing stablecoins launched by some of the biggest banks.

This will be a huge mistake.

It's understandable that financial institutions want a piece of the stablecoin pie — it's a lucrative business. Tether — the issuer of the world's largest stablecoin by market cap, USDT — reported $13 billion in profits in 2024, on par with the earnings of Goldman Sachs. With trust in blockchain-based payments continuing to increase and stablecoins acting as the de facto currency of the growing crypto ecosystem, last year, stablecoins saw transaction volumes outpace those of Visa and Mastercard combined at $27.6 trillion.

However, the efforts by banks to rival the incumbents in this space are misguided at best and, at worst, a monumental waste of time because these plans are doomed to failure. For several years now, the stablecoin space has been dominated by two key established players: Tether and rival Circle, the parent company of the USDC stablecoin. With $144 billion and $60 billion in market cap, respectively, these two stablecoins make up the lion's share of the total stablecoin market cap of around $234 billion. And so far, any attempt to dethrone these two leaders has been spectacularly unsuccessful.

Look at PayPal's venture into stablecoins with its PYUSD token. Launched in August 2023 as a fully regulated and compliant rival to existing offerings, PYUSD's market cap reached just $1 billion a year after launch, and has since declined to $781 million — even as USDC and USDT have seen their own market caps grow exponentially in that time. PYUSD simply struggled to gain traction and compete meaningfully against its larger rivals. And stablecoins issued by banks will suffer the same fate unless they can offer something that no other stablecoin has offered before.

Apart from the stiff competition, the retail investors that would most likely experiment with stablecoins first haven't really trusted banks since the global financial crisis. It's even worse when this stablecoin is issued by an entity owned by a politician, like the USD1 coin being launched by World Liberty Financial — it sparks concerns about censorship and surveillance in the same way the idea of a central bank digital currency does — and a bank-issued stablecoin looks awfully like a CBDC.

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The idea of launching stablecoins within separate silos also negates the benefits of these assets: a simple, interoperable and cost-effective way to transact in the digital world. Instead, these products would most likely be available only to the banks' customers, like "a money market fund with check access or a bank account," according to BofA's CEO.

A look at J.P. Morgan's stablecoin experiment provides clues as to how other banks may approach this. Its JPM Coin, launched in 2020, was designed specifically as a private, permissioned tool for its institutional clients. And while J.P. Morgan claims it has had huge success, I don't see it being integrated into payment solutions like Revolut or used widely by the public — and this is exactly what will happen if other banks attempt to compete in the stablecoin market. If fintech PayPal couldn't crack it, a traditional bank shouldn't even try.

What banks should be focusing on instead are blockchain rails to make it easier and cheaper for cryptocurrency users to get their money in and out of the digital asset ecosystem. If you speak to anyone involved in crypto, they'll tell you that on- and off-ramping into traditional bank accounts is the biggest pain point. It's expensive, unreliable, and often cumbersome and slow. It isn't integrated with the decentralized finance ecosystem, so users must follow a convoluted journey to off-ramp through centralized exchanges. And, if you're a small crypto business? Prepare to jump through hoops to get a traditional bank account.

If banks truly want to integrate with the blockchain ecosystem and move into the future, they should abandon their plans to issue new stablecoins that no one wants or needs. Instead, they should embrace their role as the bridge between DeFi and traditional finance by making it easier, quicker and cheaper to transact between the digital and traditional financial ecosystems seamlessly.

This means upgrading their infrastructure so that users can on- and off-ramp crypto directly, without using intermediaries like MoonPay, which would make it much cheaper for everyone involved. Building API-based integrations for crypto wallets like MetaMask would streamline the process immensely. On top of this, banks must figure out how to comply with know-your-customer and anti-money-laundering regulations while granting users the privacy of DeFi. Offering crypto custody and other tools for small businesses would also help the whole ecosystem flourish.

The reality is that crypto needs banks. It's extremely difficult to function entirely outside of the established financial ecosystem. But, equally, banks must embrace digital assets fully if they don't want to be left behind as the world moves on. And the way to do this is not by trying to compete with the stalwarts of the digital asset ecosystem that have already had more than a decade's head start, but rather by offering complementary services to support its growth and development. That's what a win-win situation looks like.