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, 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. Under the 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 above $10 billion will have OCC oversight. Like banks, stablecoin issuers must perform know-your-customer activities and comply with Bank Secrecy Act and anti-money-laundering regulations. Stablecoins must hold reserves of 100 percent of the amount outstanding, and those reserves must be invested in short-term treasuries, treasury repos, insured bank deposits, and money market funds invested solely in approved investments. Issuers must submit monthly reports of stablecoins issued and reserves held, may only perform stablecoin-related activities, and are prohibited from paying interest on their stablecoin.
With the 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 technology entrepreneurs seeking to break away from traditional finance. Besides, existing stablecoins attracted a lot of volume without paying interest, though at that time the Federal Reserve was following a zero interest rate policy, so there was not 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. An investor may seek arbitrage profits by buying a digital asset on one exchange and selling the same asset on another, paying for the purchase with a stablecoin and receiving the same stablecoin in payment. Stablecoins dramatically reduce the counterparty risk associated with crypto investing. Gone are the days of wiring fiat currency to an intermediary and hoping that the purchase would be recorded on a blockchain.
Banks play a critical role by serving as gatekeeper to the US financial system. For someone in the US to buy crypto, they first need a way to send fiat dollars to the seller. In practice that means a US bank account, and satisfying that bank's know-your-customer and anti-money-laundering requirements. Once approved and onboarded, the customer has a mechanism to fund a trading account and buy crypto investments or stablecoins, and on liquidation a mechanism to access the proceeds in fiat currency. This role is known as the on-ramp and off-ramp for crypto.
The role banks play in existing stablecoins
Since stablecoin reserves must be invested in banks or treasury bills, the primary role banks currently play is serving as the depository for reserve balances. Ten percent of Circle's reserves are held at banks; the other 90 percent sits in a special-purpose short-term treasury fund managed by BlackRock. The bank component is critical because Circle uses bank reserves to issue and redeem its stablecoins. Banks are well positioned to manage the 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, an overdraft. Even when receiving funds, the bank has credit risk if the funds are withdrawn and the credit is then reversed. As systems have improved, banks have been able to offer transactions between their own accounts around the clock without credit risk, because the bank knows the balance in each customer's account. Expanding from intra-bank to inter-bank follows the same logic. When the seven largest banks in the US formed Zelle, they effectively expanded the universe of internal transactions so that customers could transfer funds immediately among any participating bank with no credit risk.
Liquidity risk. Internal transactions do not affect bank liquidity, because funds move account to account and never 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 Regulation F limitations. The funds also do not move instantly; they follow the normal interbank payment rails, typically ACH.
Ledger balances. The key feature of all digital assets is the use of a decentralized public ledger. Instead of one bank managing the account balances of all its customers, those balances are stored on a blockchain. While the ownership of each account is anonymous, its balance and existence are available for all to see. When someone pays with a stablecoin there is no risk the transaction will be reversed. It is impossible for the check to bounce. Many forms of bank payment are equally secure, wires among them. Where banks agree that certain transactions cannot be reversed for non-payment, those payments are just as secure as a stablecoin payment.
Stablecoin counterparty risk. Because stablecoins sit on a public ledger, the risk-free internal transaction is broadened to anyone holding a stablecoin. There is no credit risk from either an overdraft or a returned item, and no liquidity risk from honoring a customer transaction, since the stablecoins are backed one to one.
Liquidity risk for the depository holding reserves does exist. Minting operations that create or liquidate stablecoins are accomplished by increasing or decreasing 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, and transactions allowed in the sending country may draw red flags in the receiving country. In many cases international payment activity is itself a red flag in a bank's know-your-customer process and triggers enhanced due diligence and aggressive transaction monitoring. While it is easy to say that small transfers from immigrants to families abroad are low risk, in practice it can be hard to differentiate those payments from money laundering or terrorist financing.
While the cost of domestic payments is low compared with international, financial services firms have built in far more cost than is necessary. Interchange fees vary by type of retailer and type of card, and some include a cost per swipe in addition to a percentage of the purchase amount. Interchange averages about 2 percent for credit transactions. Other payment platforms average about the same: in 2024, PayPal's average cost was 172 basis points, Block 260 basis points, and Toast 255 basis points. Interchange is so high that credit card companies compete for customers by offering rewards that transfer a portion of it back to the cardholder.
Some retailers try to lower their processing cost by offering discounts for cash. But cash is not free either. Beyond the discount, retailers carry lockbox, security, and other fees.
With current technology, transactions cost pennies to process while retailers often pay dollars in swipe fees. Stablecoin payments may enable customers and retailers to save money, but existing payment rails have a significant competitive advantage.
The third use case: becoming an issuer
The GENIUS Act contemplates competition among numerous stablecoin issuers. Currently Tether and Circle dominate balances outstanding. Tether is widely known as one of the most profitable companies in the world measured by profit per employee. Over the past year it has doubled from about 100 employees to 200, and those employees manage roughly $160 billion in outstanding balances. At a 4 percent yield that amounts to over $30 million in interest revenue per employee. Tether will likely need more staff to comply adequately with US banking law and the GENIUS Act. By contrast, Circle has about 1,200 employees managing roughly $65 billion 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. A bank would also face significant challenges building adoption, given its inability to compete on price and its unwillingness to compete by offering lax compliance.
As the 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
Transaction 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 or receive funds electronically, so most of their economic activity must be conducted with physical currency. Moving from currency to plastic or digital dollars has the potential to lower costs. If stablecoins become a low-cost payment rail, serving the low-income community may become economically feasible, especially if revenue remains linked to interchange fees.
In 2021 the Federal Reserve formed a working group to evaluate a Central Bank Digital Currency. Such a currency could create a default account that only held positive balances, with no overdrafts, functioning like an expanded Zelle network incorporating all checking balances held at any bank. The problem is privacy: the fear that government would have access to transaction details for every payment in the economy. Currently that payment data is more widely dispersed across the card networks, their bank sponsors, and other payment providers, and no one sees all cash transactions. The concentration of information at the card networks should raise privacy concerns, but not as much as direct government control. It is unlikely that a Central Bank Digital Currency will launch in the US in the near future.
Notes
The reserve rules are designed to limit the 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 leave the market value of reserves worth less than the notional amount outstanding, so the stablecoin would not break the buck.
Banks operating in or near crypto companies need to consider their compliance risk carefully. The FinCEN travel rule requires a bank sending funds to know the recipient. A bank serving as an on-ramp or off-ramp needs to know both its customers and their counterparties.
Satisfactory core processing systems are necessary to manage operating risk. If a bank cannot track account balances in real time, either with a real-time core or by using transaction journals to track balances in near real time, it will be unable to process transactions without the risk that some are reversed.
