There are not many topics that have attracted as much attention as stablecoins lately. At the same time, not a day goes by without new developments in the space.

That is why we have invited Panagiotis Kriaris – Senior Advisor in Fintech, Payments and Banking – to explore what they are and what they aren’t from a few different angles in his column at The Paypers, Beyond the Headlines.

Beyond the Headlines aspires to be a column out of the ordinary. One where you won’t find the typical news and announcements you can find elsewhere. Beyond the Headlines takes a step back and unpacks the hows, the whys, and the real-world implications – in plain language, without the jargon. One topic at a time.

Stablecoins are upending the status quo in financial services. Whether you like them or not, whether you believe in them or not, hardly a day goes by without a new announcement, partnership, or launch. At conferences and major industry events, they are lately the number one topic of discussion, even ahead of AI.

For banks, stablecoins challenge the role they have traditionally played in holding and moving money. But they also give them an opportunity to rethink how they perform those roles. And what they can offer customers as a result.

The background

Banks have long been the cornerstone of financial infrastructure. Companies have depended on them to hold cash, make payments, settle transactions, and manage liquidity - even when accessing those services through other providers.

Stablecoins introduce an alternative way for companies to hold and move money. A company can hold stablecoins in a digital wallet and send them directly to another company’s wallet, including across borders. Transfers are recorded on a blockchain (a shared digital record of transactions) and do not need to pass through a chain of banks.

This allows companies to:

• Hold digital dollars in a wallet.
• Send and receive payments globally, 24/7/365.
• Settle transfers in seconds or minutes.
• Access financial services built around stablecoins, e.g., currency conversion and tools for managing funds across markets.

What is at stake for banks?

Banks’ business model benefits from a close connection between deposits, payments and lending. Customers keep money in their accounts, use those accounts to transact and turn to their bank for financing and other services. Each activity supports the others: deposits provide funding, payments generate fees and data, and regular interactions help banks win more business.

Stablecoins create a way to separate those activities. Customers can continue borrowing from a bank but hold part of their cash elsewhere, move international payments to another provider, and manage their finances through a different platform. The bank retains the lending relationship but loses deposits, payment revenues, and opportunities to serve more of the customer’s needs.

1. Deposits and the economics of lending

Moving money from bank accounts into stablecoins changes how banks fund themselves. Banks losing customer deposits need to replace a source of relatively inexpensive funding, either by offering higher rates to attract deposits or by borrowing through more expensive channels. Higher funding costs put pressure on lending margins and make it harder to offer competitive loan rates.

Stablecoin reserves can include bank deposits, so the money does not necessarily leave the banking system altogether. Instead, it can shift from customers’ banks to a smaller number of institutions serving stablecoin issuers. The deposits remain in the system, but the funding benefit moves to different banks.

2. Payment revenues and pricing power

Cross-border payments generate income from transfer fees, currency conversion, and the services banks provide to other banks along the payment chain. Stablecoins give customers a way to bypass some of those steps, reducing the number of institutions involved and the fees available to them.

Even when banks do not lose payments, their revenues can still be affected. Stablecoins give companies greater negotiating power to secure lower fees, better exchange rates, and faster execution from their existing banks. Stablecoins can thus reduce bank revenues even on payments that continue to run through traditional banking channels.

3. Control of the customer relationship

A provider that helps a company collect revenue, pay suppliers, and manage cash gains a central role in its daily operations. That gives it insight into the company’s financial needs and an opportunity to offer additional services or direct business to other providers.

Moving those activities to a stablecoin platform puts that platform in a position to identify financing needs and introduce competing lenders or treasury providers. The bank loses regular contact, valuable information, and opportunities to win additional business.

4. Competition built into existing platforms

Technology companies, marketplaces and payment providers already serve large numbers of businesses. Stablecoins give them a way to let those customers hold and move money within their platforms, using specialist issuers and infrastructure providers. Customers can then manage more of their finances through platforms they already use to run their business, reducing their reliance on banks. Banks then compete with providers that already have customer access and can bundle financial services with their broader offering.

The impact is not the same for all banks. Banks that rely heavily on transaction deposits, cross-border fees or corporate cash management are more exposed. Banks serving stablecoin issuers and platforms have opportunities to attract reserve deposits and earn revenue from custody, payments and other services.

The strategic question for banks is how they can respond as stablecoins give customers greater flexibility to separate deposits, payments and financing, leaving banks competing for each part of a relationship they previously served as a whole.

Banks’ options

Banks have five broad options. They can pursue more than one, depending on their customers and business model. The choice has direct consequences for deposit funding, fee income, and ownership of the customer relationship.

1. Distribute stablecoins issued by somebody else

A bank integrates an existing stablecoin into its payment and treasury services, giving customers access to digital money through their banking relationship. Customers buy, hold, transfer, and redeem the stablecoin through the bank; the external issuer remains responsible for issuance and reserves.

The bank combines its customer relationships and distribution with a coin already accepted across other providers and markets. This meets customer demand without requiring the bank to establish its own coin and build acceptance from scratch.

The commercial opportunity goes beyond fees generated from conversion, custody, payments, etc. Keeping stablecoin activity within the banking relationship preserves the bank’s insight into customers’ financial needs and its opportunities to provide financing, foreign exchange, and other added value services.

2. Issue their own stablecoin

Issuing a stablecoin gives a bank control over the coin, its reserves and its commercial development. The bank takes responsibility for issuance and redemption, earns income from reserve assets and builds payment and treasury services around its own digital money.

The strongest rationale lies with banks that already connect substantial flows between businesses, financial institutions or industry participants. Those relationships provide a foundation for adoption, but customers still need a reason to choose the coin over established alternatives. Société Générale, through its regulated subsidiary SG-FORGE, launched EUR CoinVertible (EURCV) in April 2023 on the Ethereum public blockchain to serve institutional clients seeking blockchain-based settlement and cash-management solutions.

When does it make sense for a bank to issue their own stablecoin?

The short answer is when demand supports the cost of running it. Income from reserves, payment fees, currency conversion, and custody must cover technology, compliance, distribution, and liquidity costs. Plus, the bank needs to account for customers moving existing deposits into the coin, i.e., money that previously funded lending then backs the stablecoin instead.

3. Develop tokenised deposits

A tokenised deposit is money in a bank account represented by a digital token on a blockchain. The token represents the customer’s deposit: it remains money owed by the bank to the customer. The funds stay within the bank’s deposit business and continue to support lending, subject to banking requirements.

Companies use these tokens to move cash around the clock, automate payments, and settle purchases of assets recorded on a blockchain. Banks add these capabilities to their accounts without moving customer funds into a separately backed stablecoin.

JPMorgan’s JPM Coin illustrates this strategy: the bank already holds customer balances and processes their payments. Tokenising deposits allows it to serve customers’ blockchain transactions and retain the deposits associated with that activity.

Banks with substantial cash-management and settlement businesses have an existing customer base for these services. But corporate clients need to pay suppliers, move funds between banks, and settle investments across different platforms. Connecting tokenised deposits to those institutions and platforms will determine how much of that business a bank is able to serve.

4. Join other banks to develop a shared stablecoin

Here, banks pool their investment and customer networks behind a single stablecoin. A jointly owned issuer manages issuance, redemption, and reserves, and each bank distributes the coin through its own payment, custody, and treasury services.

Working together addresses one of the main obstacles to issuing independently: adoption. Customers across participating banks use the same coin, giving businesses access to more counterparties and external platforms a larger customer base to serve. Banks share issuance costs and compete through the services they offer around the coin.

Qivalis is a good example of this approach. European banks (ING, BNP Paribas, UniCredit, etc.) have joined forces to issue a euro stablecoin. The participating banks provide access to customers across their markets and offer their own services around the shared coin.

The critical part in this approach for banks is to understand what they gain vs. what they need to contribute. Return depends on the ownership share, how revenues are divided, and whether the bank holds any of the coin’s reserves. These earnings, together with new customer business, need to cover the investment and compensate for customer deposits moving into the shared coin.

5. Provide services to stablecoin issuers and users

Banks do not need to issue or own stablecoins to have a stablecoin play. They can follow an infrastructure strategy, whereby they provide banking services that stablecoin issuers and users depend on: holding reserves, safeguarding assets, managing liquidity, and moving money between bank accounts and blockchain wallets.

Issuers need banks to hold reserve cash, safeguard reserve securities, manage liquidity and connect to payment systems. Businesses using stablecoins need secure custody, currency conversion and transfers between wallets and bank accounts.

Banks with custody, transaction banking or asset-management businesses already provide many of these services. Serving multiple issuers gives them access to business across different coins and customer networks.

The revenues depend on the services provided. Reserve deposits provide funding; custody and investment management generate fees, payments, and conversion brings transaction income. Securities held in custody remain the issuer’s assets and do not fund the bank’s lending.

Large issuers bring substantial balances and transaction volumes but also demand competitive pricing and support outside banking hours. They also move reserve balances between banks, creating funding uncertainty. Banks need sufficient income from these relationships to cover the cost of servicing them and managing those fluctuations.

Bottom Line:

Banks cannot afford not to have a stablecoin strategy. Their deposit funding, payment revenues and corporate relationships are already facing strong competition. Ignoring stablecoins will give competitors more time and space to win their business.

That does not mean that banks need to endorse stablecoins. This is, by the way, a misunderstanding I hear a lot. But they need to have a strategy for how they position themselves in a market where stablecoins compete for business they have traditionally controlled. Banks still have the resources and customer relationships to influence how that market develops. They also need to use them. 

About author

 

Panagiotis is a senior advisor on fintech, payments, and banking. He works with financial institutions, fintechs, investors, and technology providers on market positioning, brand, communication, strategy, innovation, and go-to-market. Panagiotis is a regular contributor to leading industry publications and podcasts and is a global keynote speaker and trainer. You can learn more about his work here: https://pkriaris.substack.com/