Why banks worldwide can’t ignore stablecoins

Why should banks care about stablecoins? As stablecoin adoption grows worldwide, their impact on payments, compliance, and banking models can no longer be ignored.

During a live webinar, organised by The Paypers and the Acronym Foundation, Douwe Lycklama, Vice President at Oliver Wyman/INNOPAY spoke with Daniel Lee, Head of Web 3 at Banking Circle, Nicole Sandler, Chief Ecosystem Officer at Ubyx, and Varun Paul, Senior Director, Financial Markets at Fireblocks to explore how stablecoins are reshaping the global financial landscape. Mirela Ciobanu, Lead Editor at The Paypers, reports on why stablecoins matter for banks today and how the market is maturing.

Introduction

Stablecoins are rapidly reshaping global finance. In 2024 alone, stablecoin transfers reached an astonishing USD 27.6 trillion - surpassing Visa and Mastercard’s combined volumes by nearly 8%. Today, the stablecoin market stands at around USD 270 billion, with USDC projected to grow at a 40% CAGR between 2024 and 2027. From cross-border payments and remittances to real-time payouts, stablecoins unlock transformative capabilities: fast, cheap, transparent, programmable, and secure transactions that legacy payment systems struggle to match.

This shift isn’t just about fintech innovation. Traditional financial institutions are also entering the race. Several major US banks, including Bank of America and Citibank, are actively exploring their own stablecoin initiatives. Payments experts now say that ‘every business should have a stablecoin strategy’ - highlighting how quickly this technology is becoming essential. The implications are clear: banks that delay adoption risk being left behind as customers migrate to more agile, innovative providers. As one analysis put it, ‘the choice facing traditional financial institutions is stark: develop a coherent stablecoin strategy or risk being sidelined’.

The inevitability of stablecoin adoption

Nicole delivered a clear message when asked if banks can still ignore stablecoins: ‘No’. She stressed that the real shift we’ve seen is in their use cases. Stablecoins are no longer sitting at the margins; they’re moving toward the core of what banks could be doing. Take cross-border payments: the G20 has already highlighted the potential for stablecoins to play a role there, and there are also opportunities in remittances and in the settlement of tokenised assets. From her vast experience, which includes 12 years at Barclays heading up digital policy, she has observed retail, wealth, and corporate clients increasingly asking for digitally native equivalents. Overall, the question isn't whether banks should participate, but how quickly they can adapt.

The panel highlighted a crucial shift in perspective. As Varun Paul from Fireblocks noted, when Tether began generating massive profits from its reserve management (achieved by a team of just 50 people), banks worldwide took notice. This wasn't just about a new technology; it was about a fundamental disruption to traditional revenue models in financial services.

David Lee, from Banking Circle, emphasised that stablecoins are still in their infancy, mainly used in exchanges and DeFi today. But looking ahead, as trillions of dollars in assets become tokenized, they will require tokenized money to enable instant, atomic settlement on blockchain rails. In this sense, stablecoins will evolve into the digital rails of future finance and banks, as part of the ecosystem, will need to grow with them.

Understanding the digital money landscape

One of the panel's most valuable contributions was clarifying the distinction between stablecoins and tokenized deposits. Varun from Fireblocks briefly explained to our audience what stablecoins and tokenised deposits are, and how they differ.

A stablecoin is a digital asset designed to maintain a stable value, usually pegged 1:1 to a currency like the US dollar or euro. It is meant to act as a bearer asset: anyone with a blockchain wallet can hold or transfer it, without needing a direct relationship with a bank. The trust in stablecoins comes from their reserves, which are (ideally) fully backed - 100% of the issued tokens should be supported by equivalent assets. Without that proof of backing, confidence quickly disappears.

By contrast, a tokenised deposit is a representation of a traditional bank deposit on the blockchain. Only regulated banks can issue them, since they are legally tied to the bank’s existing deposit liabilities. In essence, holding a tokenised deposit means you hold a claim against the issuing bank, just like with money you keep in a current account. As recent examples like Silicon Valley Bank or Credit Suisse showed, deposits are subject to the risks of fractional reserve banking: not all money is available if everyone withdraws at once, though regulation and deposit insurance provide safeguards.

Some differences between stablecoins and tokenized deposits are related to:

• Issuer: Stablecoins can be issued by a variety of players, provided they have credibility, while tokenised deposits can only be issued by licensed banks.
• Reserves: Stablecoins rely on being fully backed, while banks operate under a fractional reserve model - deposits are lent out, creating credit in the financial system. Tokenized deposits follow that same principle, though banks can also choose to back them one-to-one (as Banking Circle did with its euro tokenised deposit for Ant Group, which was made bankruptcy-remote by using a fiduciary estate).
• Redemption: With tokenised deposits, redemption typically means withdrawing funds via a bank channel (branch, ATM, or transfer). With stablecoins, redemption happens on-chain - you burn the token and receive the underlying asset directly.

In short, tokenised deposits are a digital extension of the traditional banking system, tied to banks and their regulatory framework, while stablecoins are blockchain-native assets designed for open, decentralised use. Both aim to serve as ‘money on-chain’, but their trust models, issuers, and use cases differ.

Adding to the existence of diverse digital money types – including CBDCs – the rest of the panel stressed the importance of interoperability – Nicole mentioned that the future requires seamless interaction between stablecoins, tokenized deposits, and potentially CBDCs.

And Daniel Lee from Banking Circle added practical context, noting that tokenized deposits are often easier for banks to implement initially because they fit within existing risk management systems and regulatory understanding. However, stablecoins offer greater market reach and customer acquisition potential, a critical advantage in an increasingly competitive landscape.

Navigating the regulatory landscape

Regulatory clarity emerged as both an enabler and a challenge. When asked to comment on how regulation is viewed across the globe,  from Europe and the US to Asia and the Middle East, the speakers offered valuable perspectives.

Europe: MiCA

Nicole, drawing on her experience with the European Commission’s Regulatory Obstacles to Financial Innovation Expert Group, reminded us that to understand regulation, you must first look at its purpose. Many complain about MiCA, and while she acknowledges the criticism, she also stresses: ‘go back to why it was created. MiCA set out to stop regulatory fragmentation across Europe by providing the first comprehensive framework for crypto-assets’. For large banks, MiCA is an enabler, offering regulatory clarity on what they can and cannot do. For smaller firms, however, the heavy compliance costs can act as a brake, making it harder for them to compete. Ultimately, MiCA is both an enabler and a constraint, depending on who you ask.

United States

By contrast, Nicole described the US as taking a more openly pro-innovation approach, with political will to advance regulation on stablecoins. However, she cautioned that if a regime under-regulates and something goes wrong, it risks eroding market confidence. The result could be a pendulum swing toward very strict rules (similar to what happened with Basel requirements), which might stifle innovation instead of encouraging it. For her, the key is that regulation must evolve, balancing innovation with trust.

United Kingdom

Nicole also noted that the UK has a unique opportunity: to position itself somewhere between MiCA’s structured framework and the US’s more innovation-driven stance. How the UK moves forward in shaping its rules could determine whether it becomes a global leader in this space.

Asia

Daniel provided insights into Asia, focusing on Singapore. The Monetary Authority of Singapore (MAS) has already developed a regime for issuing single-currency stablecoins. While the draft bill has not yet been passed in Parliament, the rules for how issuance should take place are already clear. Licenses have been granted to firms like Paxos and StraitsX, with the legal framework expected to take full effect next year. This reflects Singapore’s typically proactive and structured approach to financial regulation.

UAE

Varun highlighted the UAE as a jurisdiction to watch. Unlike Europe, the US, or Asia, the UAE does not have legacy regulatory frameworks holding it back. Combined with significant financial resources and the ability to attract global talent, the UAE could carve out a distinctive role as an innovative and flexible hub for digital asset regulation in the coming years. Overall, the panel acknowledged that regulatory approaches vary significantly by jurisdiction, with the US pushing for innovation leadership while Europe takes a more protective stance. This creates both opportunities and challenges for global banks operating across multiple regulatory regimes.

Real-world applications driving adoption 

When asked about the usage, the use cases, and the demand side for the coming year and beyond, the speakers mentioned different utilities:

• Payments and licensing under MiCA - Daniel highlighted that, under Europe’s MiCA framework, many EMIs and payment service providers (PSPs) cannot yet use stablecoins for payments because they lack a CASP licence. Over time, as more of these firms obtain licences or regulators bring clarity, stablecoins will expand beyond trading and DeFi into mainstream payment activities.
• Trade finance and escrow - Stablecoins also show promise in trade finance. Traditionally, tools like letters of credit are used to mitigate counterparty risk. But with stablecoins, companies can use multi-signature wallets to hold funds in escrow, releasing them only once goods are delivered. This reduces reliance on intermediaries while maintaining trust. Some oil and gas firms are already experimenting with this model.
• Cross-border payments and treasury management - Varun pointed out that cross-border payments are one of the clearest applications. Today, correspondent banking can take days, cost significant fees, and often fails in difficult corridors. Stablecoins enable near-instant settlement at much lower cost. Increasingly, corporates and multinationals are adopting them to manage global treasuries, shifting funds across subsidiaries and markets 24/7.
• Shipping and logistics - linked to cross-border flows, stablecoins add efficiency in shipping and logistics. For example, if payments clear instantly when goods arrive at a port, companies can unload cargo without costly delays. At scale, this can save millions for industries like oil, gas, and container shipping.
  Inflation hedge and dollar access - In regions with volatile currencies, stablecoins provide access to US dollars as a store of value and hedge against inflation. This is especially relevant in parts of Latin America. Even in countries with advanced instant-payment systems (like Brazil’s Pix), stablecoins are valuable because they enable international dollar transactions and integration into global supply chains.
• On-ramp to digital assets - Finally, stablecoins serve as an entry point into the broader digital asset ecosystem. Some Latin American banks are even issuing local currency stablecoins (such as Banco de Bogotá’s Colombian peso stablecoin) to help clients move between traditional finance and blockchain-based services more seamlessly.

The revenue opportunity banks cannot afford to miss

Banks can monetise stablecoins in several ways: by capturing FX fees when facilitating cross-border flows, by earning net interest margin on the reserves backing stablecoins, and by expanding their customer base through new digital products. Stablecoins also enable programmable payments, for example, escrowed funds that settle instantly on delivery, which reduce costs and unlock efficiency across areas like ecommerce, mortgages, or trade finance.

Importantly, banks that don’t engage risk losing clients to new entrants, making stablecoins not just an opportunity for revenue but also a defensive necessity.

Liquidity: a key challenge for stablecoin adoption

Liquidity remains one of the main hurdles for the stablecoin ecosystem. The market is currently fragmented, with redemptions occurring bilaterally between different players, creating uneven demand and potential stress on individual institutions. While stablecoins can speed up cross-border payments and settlement, they still require deep liquidity pools on both ends to enable efficient on- and off-ramping. Solutions such as many-to-many clearing networks with pre-funded settlement accounts can help stabilize flows, mutualize risk, and reduce the impact of sudden redemptions. For these systems to function effectively, stablecoins must be recognised as cash-equivalent, universally accepted across participants, and supported by consistent monetary standards, ensuring a resilient and scalable infrastructure for widespread adoption.

Audience engagement

The audience of our webinar was highly engaged and eager to explore the opportunities ahead in the stablecoin market. Some participants asked whether there could be a battle over who keeps the profits generated by the billions of dollars sitting in stablecoin reserves. Others were curious about how new stablecoins might differentiate themselves. Our speakers explained that, at present, issuers like Tether and Circle retain most of these profits. But competition is intensifying, with challengers already sharing revenue with exchanges and distributors in what looks like a profit-sharing price war. At the same time, not every new entrant is trying to win that same fight. Instead of competing for the existing slice of the pie in crypto trading, some are ‘baking new pies’ altogether, using stablecoins for entirely new financial functions such as payments, commodity financing, or margin management. This expansion could make the stablecoin market far bigger and more diverse than it appears today.

Conclusion

The message from the panel was unequivocal: the time for debate about whether banks should engage with stablecoins has passed. As Varun emphasised in his closing advice, ‘This is happening. Blockchains are transforming financial systems, and therefore, you need to get up to speed quickly.’ The transformation ahead mirrors the internet revolution of two decades ago - a backend infrastructure change that ultimately delivered faster, cheaper, and better services to end users. Banks that recognise this parallel and act decisively will position themselves to capture new revenue streams, defend existing business lines, and meet evolving customer expectations in an increasingly digital financial ecosystem.

For bank leadership teams, the path forward requires clear long-term strategy, strategic partnerships with technology providers, and the courage to innovate within regulatory frameworks. The stablecoin revolution isn't coming; it's already here, and banks that fail to adapt risk becoming obsolete in the digital economy.

 

About author

Mirela Ciobanu is Lead Editor at The Paypers, specialising in the Banking and Fintech domain. With a keen eye for industry trends, she is constantly on the lookout for the latest developments in digital assets, regtech, payment innovation, and fraud prevention. Mirela is particularly passionate about crypto, blockchain, DeFi, and fincrime investigations, and is a strong advocate for online data privacy and protection. As a skilled writer, Mirela strives to deliver accurate and informative insights to her readers, always in pursuit of the most compelling version of the truth. Connect with Mirela on LinkedIn or reach out via email at mirelac@thepaypers.com.