Banks Embrace Stablecoins As Crypto Policy Shifts

In recent years, the banking industry has undergone a significant shift in its approach to cryptocurrencies, transitioning from debanking crypto businesses to embracing stablecoins. This transformation is evident in the experiences of crypto startup founders and companies with crypto on their balance sheets, who have faced numerous challenges in securing and maintaining bank accounts.

Over the past three years, a substantial number of debanking complaints have been directed against major American banks, including Bank of America, JPMorgan, Wells Fargo, and Citibank. However, with the repeal of policies such as “Operation Chokepoint 2.0” and the controversial accounting rule SAB 121, the finance sector is now more open to blockchain technology. This shift is crucial for the banking industry to remain competitive, as the deployment of stablecoins will differentiate the winners from the losers.

Stablecoins, while not a new concept, have traditionally been used by large institutions for specific functions like internal treasury reconciliation and interbank settlement on private blockchains. However, the true potential of stablecoins lies in their use on public networks, where they can eradicate unauthorized payment disputes and enable faster pay cycles. For instance, payroll payments, which involve a complex web of automated clearing houses, wires, and data structures, can be streamlined through the programmability of stablecoins.

Smaller banks are now recognizing the opportunity to integrate permissionless, public network stablecoins into their workflows. This trend is similar to how businesses began exploring the impact of AI on their operations following the release of ChatGPT in 2022. Custodia Bank, for example, recently issued its own stablecoin, Avit, on Ethereum, providing users with quick and cost-effective banking services. This serves as a model for other financial institutions to follow.

The adoption of stablecoins is on the rise, driven by improvements in technology and increased confidence in their security. The majority of stablecoins are fiat-backed, with a smaller portion backed by collateralized crypto assets. Riskier algorithmic stablecoins have become less popular. Additionally, incremental changes have made it easier for non-crypto businesses to use stablecoins, addressing many of the original user experience issues.

More assets are moving onchain, and payment companies using stablecoins on public networks like Ethereum are better prepared to serve the future financial system. This trend is part of a broader update to the financial system, as evidenced by BlackRock CEO Larry Fink's call for the rapid approval of the tokenization of bonds and stocks by the SEC. For banks seeking a competitive edge in a landscape dominated by powerful fintechs, shifting interest rates, and lower consumer savings, leveraging the power of stablecoins to enhance their products and internal operations could be a game-changer.