The Institutional Stablecoin Nexus – Convergence of TradFi, Regulation, and Crypto-Native Innovation

This report provides an in-depth analysis of the institutional stablecoin market, which is being shaped by a multi-front contest among traditional financial institutions, regulated fintechs, and purpose-built crypto-native infrastructure.

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Executive Summary

• The stablecoin market is undergoing a significant transformation, evolving from crypto-native origins to a core component of global financial infrastructure.
• The market value of stablecoins has reached approximately US$300 billion, with monthly transaction volumes surpassing Visa’s.
• The US GENIUS Act is the first comprehensive federal law regulating stablecoins, aiming to position the US as a leader in digital currency, provide regulatory clarity, and preserve US dollar dominance.
  • A key provision of the GENIUS Act prohibits Permitted Payment Stablecoin Issuers (PPSIs) from paying interest or yield to stablecoin holders, creating a distinction between regulated transactional stablecoins and yield-generating decentralised finance (DeFi) products.
• Stablecoins are becoming a crucial strategic necessity for traditional financial institutions due to their potential to improve efficiency, create new revenue streams (e.g., transaction fees, custody services, asset digitisation), and enhance financial accessibility.
• Challenges for banks include securing licenses, complying with anti-money laundering and counter-financing of terrorism (AML/CFT) protocols, and systemic risks such as potential ‘runs’ on stablecoins impacting bank deposits and market liquidity.
• The report discusses the ‘narrow-bank’ effect and ‘deposit disintermediation’ as potential risks for banks due to stablecoin reserve requirements.
• Competition in the stablecoin landscape is intensifying, with new entrants from DeFi protocols, fintech companies, and traditional financial institutions, alongside the rise of specialised blockchains.
• Future success in the stablecoin market will depend on distribution and network effects, regulatory compliance, and optimised unit economics.
• A ‘dual-rail future’ is envisioned, with deposit tokens for closed-loop institutional use cases and stablecoins for open-loop retail and merchant payments.
• Stablecoin adoption is expected to fragment across multiple issuers and networks, with distribution capabilities and compliance being key determinants of success.

1. Introduction

The stablecoin landscape is undergoing a profound transformation, moving beyond its crypto-native origins to become a core component of global financial infrastructure. This report provides an in-depth analysis of the institutional stablecoin market, which is being shaped by a multi-front contest between traditional financial institutions, regulated fintechs, and purpose-built crypto-native infrastructure.

The total market value of the stablecoin market reached around US$300 billion, and the adjusted monthly transaction volume reached over $2.8 trillion in August 2025, surpassing Visa’s $1.3 trillion and just after Automated Clearing House (ACH)’s $7.5 trillion.

Stablecoins are entering the mainstream as an increasing number of traditional financial institutions, like banks, issue their own stablecoins, and jurisdictions around the world explore stablecoin regulation following the US. A new era for stablecoins is coming. In this report, we mainly focus on three questions surrounding stablecoins:

• What are the key implications of the US GENIUS Act?
• Why are traditional financial institutions, such as banks, strategically entering the stablecoin market?
• How are new specialised blockchains and strategic partnerships competing with existing crypto-native players to drive institutional adoption and liquidity?

2. Implications of the GENIUS Act

The Guiding and Establishing National Innovation for US Stablecoins Act, or GENIUS Act, is the first comprehensive US federal law regulating stablecoins, and its implications are far-reaching. 

Global Leadership Positioning

President Trump campaigned on the promise of making America ‘the crypto capital of the world’. By signing the GENIUS Act, his administration aimed to fulfill that promise and position the US as a leader in the digital currency revolution. Trump himself stated the bill ‘is going to make America the undisputed leader in digital assets and that the US would ‘show the World how to WIN with Digital Assets like never before’.

Regulatory Clarity

The Act defines a ‘payment stablecoin’ and strictly limits its issuance to Permitted Payment Stablecoin Issuers (PPSIs), such as bank subsidiaries and federally-licensed non-bank entities. It provides essential legal clarity by explicitly stating that a stablecoin issued by a PPSI is not a security or a commodity, placing its regulation under banking authorities rather than the Securities and Exchange Commission (SEC) or Commodity Futures Trading Commission (CFTC).

No Yield

A particularly impactful provision is the prohibition on PPSIs from paying any form of interest or yield to a stablecoin holder. This regulation has a profound and immediate consequence: it creates a clear distinction between regulated, transactional stablecoins and yield-generating DeFi products. By removing the incentive of passive income from regulated on-chain dollars, the law effectively channels capital seeking yield into DeFi protocols that are not subject to these rules. This legal bifurcation is a critical development that separates stablecoins into two distinct use cases: a compliant settlement layer and a risk-on, yield-generating investment.

US Dollar Dominance

A central and strategic motivation was to protect and strengthen the US dollar’s global role as the world’s reserve currency in the digital age. The GENIUS Act requires stablecoins to be 100% backed by US dollars and short-term US Treasuries. This provision is expected to drive demand for US government securities, which is seen as a tool to alleviate the national debt crisis and solidify the dollar’s financial sovereignty on the blockchain.

In the last decades, the percentage of foreign holding of US Treasury securities continued to drop from 49.3% in 2014 to 30.2% in 2024. The current USD-pegged stablecoin market size, approximately $290 billion, represents at most 3.3% of foreign treasury securities holdings, yet it accounts for a significant 73.2% of foreign official Treasury bills.

Additionally, wider adoption of stablecoins, under rigorous US-backed regulation, could entrench dollar-pegged assets in the global financial ecosystem.

The rapid passage of the Act, which became law in July 2025, underscores a political urgency to formalise the US dollar’s dominance in the digital realm.

Approaches of Stablecoin Issuers to Comply with the GENIUS Act 

Top stablecoin issuers took several approaches to meet the requirements of GENIUS Act in order to access the US market:

Circle (USDC) – Proactive Federal Charter Strategy

Circle has taken an aggressive compliance approach by applying for a national trust bank charter with the Office of the Comptroller of the Currency (OCC). Key compliance strategies include:

• Federal Licensing Pathway: Circle filed an application to establish ‘First National Digital Currency Bank, N.A.’ in June 2025, positioning itself to meet GENIUS Act requirements under direct federal oversight.
• Reserve Management Enhancement: The proposed trust bank would allow Circle to directly manage USDC’s over $62 billion in reserves rather than rely on third-party custodians like BlackRock and BNY Mellon. This provides full control over the 1:1 backing requirement mandated by the Act.

Tether – Dual Compliance Strategy

Tether has adopted a two-pronged approach to GENIUS Act compliance:

• Launch of USAT: Tether created a separate US-compliant stablecoin called USAT, specifically designed to meet GENIUS Act requirements. This new token will be:
  • Fully managed and operated within the US
  • Led by Bo Hines, former Executive Director of the President’s Council of Advisers for Digital Assets
  • Subject to strict Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance
• USDT Compliance Path: Tether plans to bring its existing USDT into compliance through the Act’s reciprocity clause for foreign issuers. This involves:
  • Meeting comparable regulatory standards in its home jurisdiction
  • Registering with the OCC for ongoing monitoring
  • Holding sufficient US reserves to meet American customer liquidity demands

3. Are Stablecoins Crucial For Banks?

Traditional financial institutions are gradually experimenting with token issuance — both stablecoins and deposit tokens — to capture efficiency gains and remain at the forefront of the evolving markets. Regulatory frameworks, including the GENIUS Act in the US and MiCA in the EU, provide stablecoins an official regulatory footing, giving both legitimacy and constraints for banks stepping into the space.

In our view, stablecoins are not just a peripheral option for banks, but have become a crucial strategic necessity. Their importance is driven by the potential to fundamentally improve efficiency, create new revenue streams, and position traditional financial institutions to compete in the rapidly evolving digital economy.

Efficiency and New Payment Rails

By leveraging distributed ledger technology (DLT) like blockchain, stablecoins reduce reliance on intermediaries while offering 24/7 settlement and efficient cross-border transfers — capabilities traditional banking rails struggle to deliver. MiCA-compliant USD CoinVertible (USDCV) and EUR CoinVertible (EURCV), backed by cash held at the Bank of New York Mellon Corporation (BNY) and Société Générale, are examples of how banks are participating in regulated token offerings on public blockchains. This shows that banks are embracing the benefits of the permissionless blockchain infrastructure, especially its speed, availability, and reach.

Unlocking New Opportunities and Revenue Streams

Beyond simply improving existing services, stablecoins open up entirely new business opportunities for banks. They can generate revenue by:

• Providing custody services for stablecoins and other digital assets
• Provisioning on/off ramp services and distribution layers for stablecoin partners
• Charging fees for facilitating stablecoin transactions and conversions
• Digitising traditional assets, such as real estate, and enabling their settlement using stablecoins

By participating in the stablecoin market, banks can capture a share of the growing digital asset economy and build on-chain financial products.

Enhancing Financial Accessibility and Market Reach

Stablecoins can help banks serve the large global population that remains unbanked. With only a smartphone and internet access, individuals can store, transfer, and manage assets using stablecoins without the need for traditional physical banking infrastructure. This makes financial services more affordable and inclusive, helping banks tap into new customer bases and expand their market reach.

Offering a Geopolitical Advantage

The adoption of stablecoins is also a geopolitical move. USD-pegged stablecoins can facilitate efficient international digital transactions and provide non-US citizens with easier access to USD as a stable asset, bypassing traditional banking, attracting global capital to dollar-denominated assets, and easing cross-border payments. However, USD stablecoins can also serve as a geopolitical instrument, solidifying the US dollar’s dominance in global trade and promoting its monetary sovereignty.

To counter such influences brought by the adoption of USD-pegged stablecoins, different regions are preparing to establish stablecoins pegged to their local currencies. For example, a consortium of nine European banks is launching a joint euro-denominated stablecoin. The stated purpose is to provide a ‘real alternative to US dollar denominated digital currencies’ and contribute to ‘Europe’s strategic autonomy in payments’. This shows that major financial institutions see stablecoins as a tool to protect their currency’s influence in the digital realm.

Systemic and Financial Stability Risks

The most profound risk stablecoins pose is the potential for systemic instability, particularly through the risk of a ‘run’. Like uninsured bank deposits or money market funds in past crises, stablecoin issuers are susceptible to runs during times of panic. If stablecoin holders lose confidence, they would redeem their tokens, forcing issuers to liquidate their reserve assets on a large scale.

• Impact on Bank Deposits: If stablecoin reserves are held as uninsured bank deposits, a run on a stablecoin could lead to issuers pulling these large, uninsured funds out of the banking system. This would put a severe strain on banks and could trigger a broader financial crisis.
• Market Liquidity: A sudden and large-scale stablecoin redemption could force issuers to sell off their underlying assets, which often include US Treasury securities. This could cause a ‘fire sale’ in the Treasury market, leading to liquidity problems and causing interest rates to rise substantially for a short period. As the largest stablecoins, Tether’s USDT and Circle’s USDC acquired around $152 billion (USDT $127 billion, USDC $25 billion) in US short-term Treasury securities, representing 7% of total Treasury bills.

Reserve Ring-Fencing and Narrow Banking Effects

Stablecoins under GENIUS or MiCA require reserves to be held in cash or liquid assets, which can restrict funding for lending and banks’ ability to generate interest income, leading to the ‘narrow bank’ effect. Additionally, this sparked fears amongst some US banks that it may lead to reduced deposits and increased cost of funds as cash migrates to stablecoins, or ‘deposit disintermediation’. However, the impact may depend on the banks’ reliance on deposits.

Distribution Wars

Stablecoins cannot pay yield directly to users under GENIUS or MiCA. This removes one of the banks’ levers to attract deposits, and may shift competition to distribution and infrastructure (e.g., merchant rails, exchange connections, other incentives). Given the existing competitive landscape with fintech players (e.g., PayPal’s PYUSD), DeFi protocols (e.g., Hyperliquid’s USDH), and global issuers (e.g., Tether, Circle), this implies that banks may have to seek partnerships and collaborations with other stablecoin issuers, or become early movers to stay competitive.

Deposit Tokens

Apart from stablecoins, deposit tokens are another popular form of token  being explored. Deposit tokens represent funds deposited by a customer, and can be used for transfers within banks and/or amongst banks. For example,  JP Morgan’s JPMD, a USD deposit token on Base that provides 24/7 settlement for eligible customers. Swiss banks including UBS, PostFinance, and Sygnum Bank are also experimenting with tokenised bank deposits on a public chain.

A dual-rail future may happen where deposit tokens represent closed-loop, permissioned tokens for institutional use cases like interbank settlement and B2B payments, while stablecoins are the open-loop, publicly transferable tokens for retail remittances and merchant payments.

Overall, stablecoins are becoming increasingly crucial for banks. Their role in distribution, settlement, and liquidity makes them important for global transactions. Banks that do not embrace this change may risk losing share in new consumers and cross-border opportunities. Furthermore, as emerging markets and local-currency stablecoins continue to grow, there may be an opportunity for foreign exchange to be moved on-chain, linking domestic liquidity to global stablecoin rails.

4. Rise of Specialised Blockchains and Partnerships

Crypto-native players, including USDT and USDC, are currently dominating stablecoin market cap — yet the stablecoin landscape is gradually changing with new entrants. The question may soon shift from who has the largest issuance to who controls the rails and distribution that connect stablecoins to users and institutions.

Stablecoin issuers generate profits through a dual-revenue model: primarily from interest earned on reserves backing their digital currencies, and increasingly from transaction fees when operating on controlled infrastructure. By building proprietary blockchains and payment rails, issuers can capture transaction fees, gas revenues, and network effects that were previously captured by external blockchains. This infrastructure control strategy, combined with scaling stablecoin adoption and fostering robust ecosystems, allows issuers to maximise profitability both through traditional reserve management (earning 4-5% annually on Treasury-backed reserves) and through direct monetisation of transaction velocity via fee capture on their owned networks.

By scaling stablecoin usage and fostering a robust ecosystem, issuers increase profitability as their stablecoins become more integrated into daily financial activities.

Landscape: Issuers and Specialised Blockchains

There are two parallel fronts of competition: 

• Issuers: Such as native stablecoin issuers, DeFi protocols, fintech companies, and traditional financial institutions. Each leverage distinct distribution strengths.
• Specialised Blockchains: Designed specifically for stablecoin transactions, these blockchains focus on low fees, compliance, and other institutional-grade features, unlike general-purpose blockchains.

With new features and existing customer acquisition rails, these entrants likely exacerbate the competitive landscape by highlighting the need for customer acquisition through partnerships and to adapt to institutional needs around compliance and efficiency.

In particular, players should focus on bolstering: 

• Distribution and Network Effects: Expanding network integrations with wallets, exchanges, and merchants, as well as ecosystem partnerships
• Regulatory Compliance: Adhering to frameworks (e.g., MiCA, GENIUS) and incorporating privacy-preserving features to satisfy institutional demand
• Unit Economics: Optimising transaction costs, customer acquisition costs, and revenue-sharing with partners

Outlook

Similar to the evolution of tokens and blockchains, stablecoin adoption will likely fragment across multiple issuers and networks rather than a winner-take-all consolidation. Issuers will aim to ring-fence their ‘in-house’ liquidity, and blockchains will compete on cost, compliance, and enterprise features.

Since MiCA- and GENIUS-compliant issuers are prohibited from paying interest, stablecoin incentives and yield opportunities may be redirected on-chain into DeFi protocols. For example, PYUSD’s adoption on Solana was accelerated by DeFi protocol Kamino’s incentives.

With more issuers competing for liquidity and volumes, distribution wars will likely intensify. Issuers will want to make their stablecoins available multi-chain and on various crypto and TradFi platforms, forging partnerships with payment infrastructures and DeFi. Balance sheet strength matters, but distribution capabilities will determine adoption.

5. Conclusion

The stablecoin landscape is rapidly evolving, driven by a multi-front contest between traditional finance, regulated fintechs, and crypto-native infrastructure. The GENIUS Act in the US and MiCA in the EU are providing regulatory clarity, positioning stablecoins as a core component of global financial infrastructure. For banks, stablecoins are becoming a strategic necessity, offering enhanced efficiency, new revenue streams, and expanded market reach, while also presenting challenges related to systemic risks, deposit disintermediation, and intense distribution competition. The market is also seeing the rise of specialised blockchains and partnerships, with competition shifting from issuance size to control over the rails and distribution that connect stablecoins to users and institutions. As the market matures, stablecoin adoption will likely fragment across multiple issuers and networks, with distribution capabilities and compliance becoming key determinants of success.

Read the full report: The Institutional Stablecoin Nexus – Convergence of TradFi, Regulation, and Crypto-Native Innovation

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Authors

Crypto.com Research and Insights team

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