The $6T Stablecoin Threat: How Interest-Bearing Digital Assets Could Disrupt Traditional Banking and Reshape Financial Markets

The stablecoin market is no longer a niche corner of crypto. By the end of 2025, the total stablecoin market capitalization had surged to $306 billion, a 49% increase from January 2025, with U.S. dollar-denominated stablecoins accounting for 99% of this growth. Interest-bearing stablecoins have exploded in popularity, growing 300% year-over-year as new projects emerged to challenge Tether and Circle. This rapid expansion, fueled by regulatory clarity under the GENIUS Act, has positioned stablecoins as a $500–750 billion market by 2025-and some analysts project it could reach $2 trillion by 2028. For institutional investors, the question is no longer whether stablecoins matter, but how they will reshape traditional banking and financial infrastructure.

The Regulatory Catalyst: GENIUS Act and Market Legitimacy

The U.S. GENIUS Act, enacted in 2025, has been a game-changer. By mandating that stablecoins be fully backed by high-quality, liquid assets (e.g., U.S. dollars, short-term Treasuries) and requiring monthly reserve disclosures and independent audits, the Act transformed stablecoins from speculative tokens into regulated financial products. This clarity has spurred institutional adoption, with 80% of jurisdictions reviewed by TRM Labs reporting digital asset initiatives in 2025. However, the Act also introduced new complexities. For example, while it prohibits stablecoins from paying interest directly, exchanges can still offer indirect incentives, creating a regulatory gray area that could double stablecoin demand if interest payments were permitted.

The Act's reserve requirements have also forced institutional investors to scrutinize the quality of stablecoin collateral. Major issuers like Tether and Circle still hold a mix of cash and short-term Treasuries, but some maintain less liquid assets. This has led to portfolio diversification strategies, with investors spreading exposure across multiple issuers to mitigate redemption risks. For instance, the stablecoin MIM leveraged reserve funds in October 2025 to recover from a hack, demonstrating the importance of robust liquidity buffers.

Competitive Threats to Traditional Banking

Stablecoins are not just a regulatory story-they're a competitive one. Traditional banks, particularly mid-sized and community institutions, face existential risks as stablecoins displace deposits. According to the Federal Reserve, if stablecoin reserves are held outside the banking system (e.g., in Treasuries or repurchase agreements), U.S. bank deposits could shrink by up to $1.3 trillion. This would force banks to rely on more volatile wholesale funding, increasing liquidity costs and reducing credit availability for small businesses and real estate.

The GENIUS Act exacerbates this by allowing stablecoin issuers to bypass banks entirely. For example, JPMorgan's Onyx division now supports euro-denominated stablecoin payments, while PayPal's PYUSD has been used for blockchain-based invoicing. These moves signal a shift in the payments ecosystem, where stablecoins compete directly with traditional banking services. Community banks, which lack the scale to innovate, are especially vulnerable. A 2025 FIS survey found that 74.8% of consumers would use stablecoins if their bank offered them, suggesting that banks that fail to adapt could lose market share.

Institutional Investor Strategies: Balancing Opportunity and Risk

Institutional investors are navigating this landscape with a mix of caution and opportunism. The GENIUS Act's transparency requirements have made stablecoins more attractive for institutional portfolios, but risks remain. Technical vulnerabilities still pose threats. To mitigate these, investors are adopting strategies like overcollateralization (e.g., maintaining a 1:1.01 reserve ratio) and diversifying across stablecoin types (e.g., fiat-backed vs. algorithmic).

Regulatory arbitrage is another concern. While the U.S. has strict rules, jurisdictions like Hong Kong and the EU are implementing their own frameworks (e.g., MiCA), creating a fragmented landscape. Investors must now evaluate stablecoins not just by their collateral but by their regulatory environment. For example, Société Générale's EURCV stablecoin complies with MiCA, making it a safer bet for European investors.

Case Studies: Banks Adapting or Suffering

Some banks are proactively integrating stablecoins into their models. Bank of America's CEO has stated the bank is prepared to launch its own dollar-backed stablecoin as soon as regulations allow. Others, like Wells Fargo, are piloting blockchain-based networks for faster cross-border payments. These moves reflect a recognition that stablecoins are not a threat but a tool for modernization.

However, not all banks are adapting. A 2025 study estimated that stablecoin-induced deposit outflows could reduce community bank lending by $850 billion, crippling their ability to support local economies. This highlights a stark divide: large banks with resources to innovate will thrive, while smaller institutions that fail to act risk obsolescence.

The Road Ahead: A $6T Future?

While the stablecoin market is still a fraction of traditional finance (8–11% of crypto assets generate yield vs. 55–65% in traditional markets), its trajectory is undeniable. If current trends continue, stablecoins could reach $6 trillion in market size by 2030, driven by cross-border payments, remittances, and institutional adoption. For institutional investors, the key will be balancing the disruptive potential of stablecoins with the need for risk management.

The GENIUS Act has provided a foundation, but the next phase will test its resilience. Will regulators allow stablecoins to pay interest, accelerating their growth? How will banks adapt their balance sheets to compete? These questions will define the next decade of finance-and institutional investors must be ready.