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Banks reverse course on stablecoins as regulatory clarity meets existential threats

Updated: Oct 13

Teramy Academy

Major financial institutions are racing to issue their own stablecoins in 2023-2025 after years of skepticism, driven by regulatory frameworks like Europe's MiCA and the U.S. GENIUS Act that provide clear rules for digital dollar tokens. This dramatic reversal reflects banks' recognition that stablecoins pose an existential threat to their deposit bases and payment revenues, estimated at $6.6 trillion in deposits at risk and $187 billion in annual payment fees potentially flowing to competitors. JPMorgan launched its JPMD token on Coinbase in June 2025, while Société Générale, Banking Circle, Citibank, and Goldman Sachs either deployed or announced stablecoin initiatives. However, experts warn that the market likely cannot support dozens of competing bank stablecoins due to powerful network effects, creating a strategic paradox where banks must participate but most individual efforts face near-certain failure.


The transformation comes after Bitcoin ETF approval in January 2024 catalyzed institutional adoption, followed by regulatory agencies withdrawing restrictive guidance in March through April 2025, removing barriers that had prevented bank participation.


The era of outright hostility and justified concerns

Banks maintained deep skepticism about cryptocurrencies throughout 2015-2022, with JPMorgan CEO Jamie Dimon becoming the most vocal critic. In 2017, Dimon called Bitcoin "a fraud" and "worse than tulip bulbs," threatening to fire employees trading it. As recently as January 2023, he labeled it "the pet rock" and a "hyped-up fraud," promising that statement would be his last on the topic with CNBC.


The banking industry's concerns extended beyond executive rhetoric to fundamental business risks. Federal regulators explicitly flagged reputational risk, operational complexity, and criminal activity associations as examination components. Banks worried about volatility making crypto unsuitable for serious finance, lack of intrinsic value, and regulatory uncertainty creating legal exposure. The Terra/Luna collapse in May 2022, erasing over $40 billion, and FTX's November 2022 bankruptcy validated many warnings about inadequate risk management and fraud potential in unregulated crypto markets.


Yet these spectacular failures paradoxically accelerated rather than prevented institutional entry. The collapses demonstrated what not to do, providing banks a blueprint for proper institutional approaches: full reserve backing, transparent auditing, regulatory compliance, and professional risk management that crypto-native firms lacked.


Bank stablecoins: regulatory clarity opens the floodgates

The turning point arrived with comprehensive regulatory frameworks eliminating the uncertainty that had blocked participation. Europe's MiCA regulation, fully implemented by December 2024, established harmonized requirements for 1:1 reserve backing, regular audits, and consumer protection. The United States followed with the GENIUS Act, signed into law July 2025, mandating 100% reserves in dollars or short-term Treasuries and creating federal oversight for issuers above $10 billion.


The most dramatic shift occurred when all three major U.S. banking regulators simultaneously withdrew restrictive guidance between March and April 2025. The OCC, FDIC, and Federal Reserve rescinded requirements for advance notification and non-objection before crypto activities, with Acting FDIC Chairman Travis Hill stating they were "turning the page on the flawed approach of the past three years." This coordinated reversal signaled that banks could finally engage without regulatory retaliation.


Bitcoin ETF approval in January 2024 provided the crucial legitimacy signal. The 11 spot Bitcoin ETFs accumulated $134.6 billion in assets by Q3 2025, with institutional investors holding 26.3% of total ETF assets. This demonstrated crypto could integrate safely into regulated financial products, while reducing Bitcoin volatility by 55% through professional market participation.


Competitive pressure intensified the urgency. The stablecoin market reached $250 billion in circulation with $27 trillion in 2024 transaction volumes, surpassing Visa and Mastercard combined. Banks recognized that if they didn't offer stablecoin access, clients would migrate deposits elsewhere. Bank of America CEO Brian Moynihan admitted, "We have to have it. The industry has to have it."


Strategic imperatives driving the stablecoin rush

Banks see stablecoins as defensive weapons against disintermediation. McKinsey estimates that if banks don't issue stablecoins, "they cannot hold the deposits that constitute their reserves," with $6.6 trillion in U.S. deposits at risk of migration. By issuing stablecoins, banks at least retain custody of reserves backing the tokens, even though 1:1 reserve requirements undermine traditional fractional reserve lending.


The economics prove compelling: stablecoin issuers earn 4-5% yields on Treasury reserves while paying holders zero interest, creating profit margins traditional banking struggles to match. Tether became the seventh-largest buyer of U.S. Treasuries in 2024 with $121 billion in holdings. Banks want to capture this revenue rather than cede it to crypto-native competitors like Circle and Tether, which dominate 90% of the current market.


Payment fee capture provides another motivation. Cross-border transfers via SWIFT cost $25-50 and take 1-3 days, while stablecoin transfers settle in seconds for under $0.01. Banks launching stablecoins can modernize their payment infrastructure while defending $187 billion in annual payment processing revenues against fintech disruption.


Marketing advantages in the modernization narrative

Stablecoin initiatives position banks as technologically sophisticated and forward-thinking, contrasting sharply with their reputation for legacy systems. For corporate clients engaged in cross-border trade and treasury management, stablecoin capabilities demonstrate understanding of modern business needs. Real implementations include Siemens using JPMorgan's programmable payments for automated treasury transfers and Maersk deploying Citi's tokens for bank guarantee automation.


Bank-issued stablecoins benefit from established brand trust versus crypto-native competitors. In jurisdictions with clear regulations, bank tokens signal regulatory compliance and institutional backing. Banks can integrate stablecoin functionality into familiar online banking interfaces, reducing adoption friction compared to crypto platforms requiring "unfamiliar tools like wallets."


The regulatory advantage carries pricing power. Current stablecoin conversion fees on platforms like Coinbase reach 0.1-0.2% for business clients, significantly higher than bank foreign exchange spreads of 0.01-0.1%. Early-moving banks can shape client expectations around access and pricing while maintaining healthy margins.


The fragmentation trap and competitive dangers

Yet the stablecoin rush contains a fundamental strategic contradiction. McKinsey warns bluntly: "The adoption case for a stablecoin issued by a single bank is not strong and is challenged further by the fragmentation this could create in the digital ecosystem." Issuing individual bank stablecoins resembles returning to an era when each bank printed its own paper currency, creating friction that undermines seamless payment value propositions.


Network effects in payments favor dramatic consolidation. USDT (Tether) and USDC (Circle) already control nearly 90% of the market, and their circulating volumes "grow faster in one month than the combined value of all other stablecoins." Research consistently identifies "winner-takes-all dynamics" where liquidity, trust, and acceptance infrastructure create self-reinforcing advantages for established players. Each merchant integration, exchange listing, and payment processor adoption requires technical work, making broad support for dozens of competing tokens economically impractical.


Fireblocks predicts "as many as 50 more stablecoins by the end of this year," creating customer confusion about which tokens to accept and trust. This proliferation fragments liquidity pools essential for efficient conversion and exchange. Multiple stablecoins require businesses to manage different wallets across various blockchains, introducing complexity that contradicts the simplification promise.


Reputational hazards when the music stops

Banks face asymmetric risk where stablecoin success provides modest brand benefits but failure inflicts massive reputational damage. If a major bank's stablecoin de-pegs or encounters technical problems, it undermines the institution's broader credibility. Stablecoins "have exhibited a pattern of being hacked, losing investor confidence, underselling operational issues or counterparty credit risk, or otherwise 'de-pegging' and tumbling in value."


Legal ambiguities compound marketing risks. Most stablecoin holders "do not own or hold a legal claim to the underlying assets" and "in the event of a bankruptcy, holders may be treated as unsecured creditors." The GENIUS Act notably "does not appear to include meaningful fraud protection measures," creating uncertainty about liability for errors and theft that could expose banks to litigation and regulatory scrutiny.


Banks also risk cannibalizing their own products. Facilitating near-zero-cost stablecoin transfers destroys lucrative cross-border payment fees. The fundamental paradox persists: issuing stablecoins preserves deposits but undermines fractional reserve lending, while higher deposit rates needed to compete compress interest margins.


Conclusion: coordination problems and consolidation realities

Expert consensus suggests the market can support perhaps 3-5 major stablecoins: incumbent crypto-natives like USDT and USDC, one or two bank consortiums achieving sufficient scale through collaboration, and major fintech platforms like PayPal leveraging existing user bases. McKinsey recommends that tier-two banks "collaborate through consortiums to achieve scale with a common stablecoin while retaining their deposits" rather than pursuing doomed individual efforts.


The strategic dilemma proves acute. Individual action creates market fragmentation and likely failure. Collective action through consortiums requires competitor coordination and delayed time-to-market. Inaction means losing deposits and payment revenues to non-bank issuers. Banks betting on proprietary issuance may find themselves in a costly race most cannot win, with stranded investments in ultimately worthless tokens as network effects consolidate around a few dominant platforms. The rush to issue stablecoins reflects competitive panic more than sound strategy, with the market ultimately determining whether this transformation creates opportunities or expensive lessons in the power of network effects.


Disclaimer: The content on this website is for marketing innovation and education purposes only and should not be considered investment advice.


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