Stablecoins Challenge Banks as Regulators Step In

Stablecoin fundraising accounted for 25% of total financing in the cryptocurrency industry in the third quarter, according to Cointelegraph. This shift underscores the growing importance of stablecoins in the evolving crypto ecosystem. As stablecoins gain traction, they are increasingly being leveraged for broader financial applications, including cross-border payments and remittances.

One of the notable developments in this space is the launch of USDm, a yield-bearing stablecoin by MegaETH, an Ethereum layer-2 protocol backed by Vitalik Buterin. USDm, developed in partnership with Ethena—a protocol with $13 billion in total value locked—is built on Ethena’s USDtb infrastructure, which channels reserves into BlackRock’s BUIDL tokenized US Treasury bill fund. The stablecoin aims to use its yield to subsidize Ethereum sequencer fees, potentially offering a more cost-effective model compared to traditional layer-2 protocols that rely on transaction fees for revenue.

The regulatory landscape for stablecoins is also evolving, particularly in the United States and Europe. On July 18, President Donald Trump signed the GENIUS Act into law, establishing a regulatory framework for stablecoin issuers. This legislation marks a significant step toward formalizing stablecoin oversight in the U.S. Meanwhile, the European Union enacted the Markets in Crypto-Assets (MiCA) Regulation on December 30, 2024, which aims to unify crypto guidelines across member states and promote investor protection and financial stability. The EU's approach emphasizes the development of a digital euro as a potential counterbalance to privately issued stablecoins, with European Central Bank President Christine Lagarde highlighting the risks posed by dollar-backed stablecoins to European monetary autonomy.

The growing appeal of stablecoins is also raising concerns among traditional banks, particularly community and regional lenders, which rely heavily on customer deposits for local lending. Similar to the rise of money-market funds in the 1970s, which drained deposits from savings accounts, stablecoins are now viewed as a potential threat to the traditional banking model. With the supply of major dollar-pegged stablecoins having surged over 50% in the past year to nearly $250 billion, and projections indicating a possible $2 trillion market by 2027, stablecoins could significantly impact the banking sector.

In Canada, the stablecoin market is also expanding. Tetra Digital Group, a digital asset custodian, has raised $10 million to develop a regulated stablecoin pegged to the Canadian dollar, which will be backed 1:1 with Canadian dollar reserves. The firm, supported by major financial institutions like Shopify and Wealthsimple, aims to launch the stablecoin in early 2026, pending regulatory approval. The project underscores the global trend toward regulated stablecoins as an alternative for payments and remittances.

As stablecoins continue to evolve, their potential to reshape the financial landscape remains significant. With growing adoption and regulatory clarity, the market could see further innovation and competition. However, the challenge for traditional banks will be to adapt and remain relevant in a world where digital alternatives offer speed, cost efficiency, and, in some cases, competitive yield.