It is the new buzz word: stablecoin.
What is it, and why should you care?
Here is a rundown of what you should know:
The GENIUS Act.
In July, President Trump signed the GENIUS Act into law. The Act creates a federal regulatory framework for stablecoins.
Back Up, What Is a Stablecoin?
A stablecoin is a cryptocurrency designed to maintain a stable value (unlike Bitcoin, Ethereum, etc.) – it does this by tying its value to something simple, like the U.S. Dollar. For example, let us pretend that I give you $1 and, in exchange, you give me 1 stablecoin. If I come back to you in a month, my stablecoin is still worth $1. And, if I want my $1 back, you (the “issuer”) must redeem the stablecoin and pay me $1.
Let us stick with this simple “$1 = 1 stablecoin” example for the remainder of this Article.
Seems Silly, Why Would I Want a Stablecoin?
Unlike other volatile cryptocurrencies, if my stablecoin is worth $1 today, then it should be worth $1 tomorrow (and beyond). If at any time I would rather have U.S. currency instead of my stablecoin, I could exchange the stablecoin with you for $1. Further, if I want to use my stablecoin to make a purchase, I could transfer the stablecoin to the seller almost immediately. And, unlike a wire or ACH transfer, a stablecoin transfer costs pennies on the dollar.
What Makes it So Stable?
Under this example, for every $1 that I give you in exchange for a stablecoin, you must hold $1 in cash or cash-like reserves (such as U.S. Treasuries). And, to address a common question from bankers: No, those funds cannot be used for lending – they must be segregated, invested, and held in reserve. This helps ensure that you have my money if I come back to exchange my stable coin.
This Sounds Like Another Fad to Me.
Not so fast. The U.S. stablecoin market is currently estimated at ~$225 billion, and the global market is expected to exceed $3 trillion by 2030. If that growth does not convince you, the Trump family holds a significant investment in an international cryptocurrency company named World Liberty Financial, which issues – you guessed it – stablecoins. So, regardless of one’s opinion, many in the industry strongly believe this Administration will support it. And, many banks are already in a unique position to participate in this growing market.
Why Banks?
This is not a bank’s first rodeo. Banks already have many of the policies and procedures needed to comply with the Act, such BSA/AML programs, risk assessments, KYC/KYB procedures, and OFAC screenings, among many others. Banks are in a unique position to lean on their payments expertise and leverage their existing policies and procedures if and when they choose to enter the world of stablecoins.
Show Me the Money!
Most participating banks that issue stablecoins will earn income through their reserve investments. For example, I give you $1 for a stablecoin, and then you take my $1 and invest it in U.S. Treasuries. When I come back for my money, you are only required to pay me the original $1. You get to keep any interest earned on the $1. As you might have guessed, scale is the name of the game.
At this time, many in the industry believe it is only a question of when banks will dive in. There are a variety of ways for banks to participate and generate income through this new space, such as issuing stablecoins themselves, investing in stablecoin issuers, and offering traditional bank products and services to stablecoin issuers, among others. The federal banking agencies are currently working together to issue the rules of the road, and the FDIC believes those rules will be ready by the end of 2025. We will be closely monitoring and tracking developments, and we encourage financial institutions to do the same.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
