Stablecoins have experienced substantial growth across the globe over the past year, with a
63%
year-over-year increase in adjusted transaction volume – but U.S. banks have lagged behind this ascension.
The slow pace was due to several factors, most notably, the lack of standardized guidelines around everything from what a stablecoin is to who can issue
and regulate them. Without this guidance, banks did not have the confidence that their stablecoin investments would pay off in the long term due to lack of security and operational protections. But now, with the GENIUS Act in play, a framework has been set
to reduce the risk of launching stablecoins.
In the wake of this regulation, many banks, payments providers and other organizations are now throwing their hat into the proverbial stablecoin ring.
With risk abated many are looking to the digital currency for its many promised advantages such as faster payments and lower costs.
This marks a critical point for banks as they look to determine how stablecoins can tangibly benefit their business and how they can drive the desired
impact. Here, we will walk through key considerations for banks as they face both challenges.
Determine use cases that will drive tangible impact for the bank – and its customers.
Banks shouldn’t dive into launching a stablecoin offering just because it looks like everyone else is doing it. Jumping on the bandwagon without a clear
direction determined first, will ultimately lead to failed investments. Instead, banks need to carefully assess which business and customer use cases for stablecoins will generate value in their business.
For example, some banks like JP Morgan are already internally using digital currencies, similar to stablecoins, to move money globally for their clients,
24/7. The biggest benefit of stablecoins, compared to traditional rails, is that they are faster and, in some cases, more cost-effective. Additionally, stablecoins are stable by design since they are pegged to reserve assets and can be redeemed at a 1:1 ratio.
This internal treasury management use case is one of the more immediate ways banks can demonstrate value.
There are also external use cases for stablecoins, and even though widespread roll out of these functionalities is still several years away – most banks
today are already thinking that far ahead.
One potential external use is creating a B2B payments system. Most traditional payment rails today, especially those used for cross border transactions,
can take days to settle into an account and charge exorbitant fees. With stablecoins, banks can enable customers to speed up payments to anyone from suppliers to customers around the world at a much lower cost.
Another example is using stablecoins to power peer to peer transactions. Many consumers have already grown accustomed to these types of transactions due
to offerings like Zelle, that allow them to instantly transfer money into others accounts. Stablecoins can take this capability to the next level in a way that is more attractive to the banks hosting it. This can also benefit customers with low cost remittances
– or money sent to family abroad with stablecoins.
There is no one-size-fits-all approach for how banks should adopt stablecoins. There are many different ways to implement the technology so it is essential
that banks do a thorough analysis of where in their business it can be best used to drive revenue before moving forward.
Build technology infrastructure that can support stablecoin use cases.
The payments infrastructure most banks have in place today is built to support fiat currencies, like the US Dollar. For most banks, building new infrastructure
to support stablecoins, within the context of these existing technologies, is tricky because banking technology that’s built to support both fiat currencies and digital currencies is a relatively new concept – so there is not yet a tried and true blueprint.
This doesn’t mean that banks shouldn’t invest in the technology though. In order to launch stablecoins that drive a competitive edge while maintaining
compliance, there are a few steps they need to take.
First, banks need to identify the right technology components that will help them launch their selected stablecoin use cases. Every bank configures their
core differently, and uses different systems across the organization, so they need to evaluate the different technology components required to launch stablecoins and related products. Banks then need to decide whether it’s best to build the technology in house,or
outsource it to a vendor,based on their larger digital roadmap and goals. The most important part of this process is ensuring new systems can be implemented with as little disruption to current workflows as possible.
Banks also need to think about the wider regulatory and compliance considerations of launching and transacting digital currencies. The Genius Act is the
first time that the US federal government progressed law on the subject, but there is still room for additional federal regulations down the line – or for individual states to launch their own requirements. For most banks, this means that not only do the technology
systems need to meet the compliance requirements of today, they also need to be agile enough to change in tandem with evolving regulations.
Additionally, scalability needs to be top of mind when banks are spearheading stablecoin technology projects. For most banks, initial
stablecoin deployments will likely be small as they test initial use cases but eventually, as the use cases grow and there is increasing demand for higher transaction value and volume – the technology systems should be able to easily scale.
Stablecoins are at a unique vantage point as they connect traditional currencies since they are backed by a real asset, and modern blockchains and digital
currencies. Even though the hype is very much here – the banks that will pull ahead from their peers are not the ones who are just buying into the hype.
The banks that start their stablecoin investments now, identify potential use cases and start implementing the technology that will make these use cases
a reality will ultimately be the ones who differentiate themselves in the market and win market share.
