Stablecoins and the Bank Funding Model: A Structural Reassessment

The narrative around stablecoins has shifted from speculative promise to tangible infrastructure. The inflection point is clear in the payment layer, where a parallel system is maturing. Annualized volume from stablecoin-linked payment cards now stands at roughly $18 billion, a figure that approaches the on-chain peer-to-peer stablecoin volume of about $19 billion. This is not a niche experiment; it represents a material displacement of traditional bank intermediation for a specific, high-volume transaction type.

The mechanism is straightforward and efficient. Instead of merchants accepting crypto directly-a path hampered by compliance and tooling-the value flows through established card networks. Visa dominates this rails, carrying more than 90% of on-chain crypto card volume. This gatekeeper role is critical, providing the global merchant acceptance and dispute frameworks that crypto startups leverage. The growth driver is the verticalization of the issuer stack. New, crypto-native full-stack issuers like Rain and Reap are collapsing the traditional model, issuing directly and managing settlement to capture more of the economics. Rain scaled to over $3 billion annualized, while Reap reported more than $6 billion, skewing toward corporate spend. This shift has pulled in significant capital, with Rain raising a $250 million Series C last month at a valuation near $2 billion.

Yet this efficient payment layer operates within a constrained ecosystem. The primary friction for corporate treasury use remains the dependency on crypto exchanges for on- and off-ramping. As Deutsche Bank notes, less than 1% of global stablecoin transaction volume currently relates to actual payments, with the market dominated by industry transfers. For treasurers, converting bank deposits to stablecoins and back creates a costly, non-bank dependency that undermines the promised efficiency. This infrastructure gap is the key barrier to stablecoins materially impacting core bank funding models, which rely on the seamless movement of deposits and the provision of liquidity services. The payment layer is innovating, but it is still tethered to legacy financial rails for its entry and exit points.

The Core Bank Vulnerability: Deposit Disintermediation

The most direct threat to banks is not a new payment rail, but the potential erosion of their most stable funding source: deposits. The GENIUS Act, signed into law in July 2025, was designed as a firewall. Its cornerstone provision explicitly prohibits stablecoin issuers from paying interest on their tokens. The intent was clear: to prevent a direct "deposit flight" where savers would move money from interest-bearing bank accounts into stablecoins for the same yield, thereby undermining the lending capacity that fuels local economies.

Yet the regulatory guardrail faces a persistent challenge. In a letter to the Senate, the American Bankers Association's Community Bankers Council states that some crypto companies are exploiting a regulatory loophole, using indirect payments via affiliates and partners to incentivize users. They argue this undermines Congressional intent and could put up to $6.6 trillion in deposits at risk. This creates a regulatory and competitive risk that is not yet fully resolved, leaving a vulnerability in the system's design.

The scale of any potential disintermediation is, however, materially limited by the structure of the stablecoin market itself. The vast majority of these tokens are fiat-backed, with approximately 99% pegged to the U.S. dollar and roughly 90% of usage falling into this category. The key point is what issuers do with the reserves backing these tokens. Instead of parking funds in traditional bank deposits, major issuers like Circle and Tether hold their reserves primarily in short-term U.S. Treasuries, cash equivalents, and reverse repos. As of late 2025, Tether was even the 17th largest holder of Treasuries on the planet. This allocation means that even if demand for stablecoins grows, the capital is not directly siphoning off from bank balance sheets. It is being recycled into other parts of the money market.

This dynamic introduces a layer of pro-cyclicality risk. During a financial crisis, if stablecoin holders rush to redeem for cash, issuers would need to liquidate their reserve assets. If those assets are concentrated in short-term, liquid instruments like Treasuries, the process could be orderly. But if the crisis triggers a broader flight to safety, the simultaneous pressure on these markets could amplify volatility. The system is not a simple drain on bank deposits, but a parallel liquidity channel that could become a new source of instability if not properly monitored. The GENIUS Act provides a crucial baseline, but the real test will be whether regulators can close the loopholes that allow indirect incentives to persist.

Structural Impact: Credit Creation and the Payments Ecosystem

The implications for banks extend beyond deposit flows to their core functions: credit creation and payments intermediation. The structural shift is not about replacing banks entirely, but about altering their liability structures and liquidity risk profiles. The key determinant is whether stablecoin issuers can access the central bank's balance sheet. Issuers with direct access to central bank accounts, like some large stablecoin platforms, can hold reserves in a form that is functionally equivalent to bank deposits. This blurs the line between traditional bank liabilities and new digital money, potentially compressing the funding spread that banks rely on for profitability.

The competitive shift in the payments ecosystem is already underway. For global businesses, the cost and speed advantages of stablecoins are decisive. Traditional bank transfers, often reliant on the SWIFT network, can incur fees of 3-5% and take days to settle. In contrast, stablecoin transactions settle in minutes with fees typically between 0.1-0.3%. This efficiency is a direct challenge to banks' role as gatekeepers for cross-border and real-time transactions. The payment layer is not just a parallel system; it is a superior one for a growing segment of the market, pulling volume away from traditional rails.

This dynamic introduces a new layer of pro-cyclicality risk. If stablecoin adoption accelerates, the concentration of reserves in short-term, liquid assets like Treasuries could create a new channel for systemic volatility. During a crisis, a rush to redeem stablecoins for cash would force issuers to liquidate these assets. If that happens simultaneously across multiple issuers, it could amplify stress in the very money markets that banks also rely on for liquidity. The system is not a simple drain on bank deposits, but a parallel liquidity channel that could become a new source of instability.

The geopolitical dimension adds significant complexity. The Chinese experience with Alipay and WeChat Pay offers a stark precedent. These platforms achieved over 1 billion monthly users, disintermediating the banking system and becoming tools for state influence and geopolitical leverage. The United States, by contrast, has been slow to adapt, with its regulatory framework still evolving. As financial systems determine geopolitical leverage and the global role of the dollar, the U.S. risks ceding ground. The GENIUS Act was a step, but it may not be enough to ensure U.S. leadership in the next generation of financial infrastructure. The bottom line is that stablecoins are not just a payment innovation; they are a structural force that could reshape banking's liability mix, its competitive landscape, and the very geography of financial power.

Catalysts and Scenarios: What to Watch

The path to structural change is now defined by a handful of near-term catalysts. The primary battleground is regulatory enforcement. The warning from community banks is stark: up to $6.6 trillion in deposits could be at risk if the loophole allowing indirect incentives via affiliates and partners remains open. The coming months will test whether Congress acts to close this gap in the GENIUS Act's intent. Without stronger legislative clarity, the competitive pressure on bank deposit pricing could accelerate, directly impacting the funding costs for local lending.

Simultaneously, the market must resolve its core infrastructure friction. The fact that less than 1% of global stablecoin transaction volume currently relates to actual payments underscores the dependency on crypto exchanges for on- and off-ramping. The critical development to watch is the emergence of non-exchange on-ramps. If corporate treasury operations can integrate stablecoins seamlessly without this costly, non-bank dependency, the efficiency gains become real and scalable. This is the linchpin for stablecoins to move from a niche payment rail to a material funding alternative.

The scale of the potential impact is immense. The stablecoin market is already a $300 billion ecosystem, with bullish forecasts pointing to a $4 trillion market by 2030. The competitive landscape in payment-intensive sectors will be the first to show stress. As banks lose pricing power on transaction fees and see their role as liquidity intermediaries challenged, we should monitor for widening credit spreads and rising funding costs, particularly for smaller, community-focused institutions.

The pro-cyclicality risk remains a latent threat. If adoption accelerates, the concentration of reserves in short-term assets like Treasuries could create a new channel for systemic volatility during a crisis. The bottom line is that the next phase of change hinges on regulatory clarity and technological integration. The catalysts are clear, and the timeline is short.