U.S. Wall Street banks and the crypto industry are in a head-on clash over stablecoins. As stablecoins, digital currency pegged to the dollar, spread quickly, banks moved to put the brakes on, saying they could threaten financial stability, while the crypto industry pushed back, saying traditional finance is trying to block competition. The debate has intensified as stablecoin issuers hold Government Bonds worth billions of dollars, showing that this market is already deeply intertwined with the traditional financial system.
Stablecoins are digital currency pegged 1-to-1 to legal tender such as the dollar or the euro. They are expanding their use beyond a medium for crypto transaction to cross-border payments and money movement. On the 2nd (local time), according to the Financial Times (FT) in the U.K., stablecoin supporters say the digital currency is faster and cheaper than existing payment systems and optimized for digital environments. Some see it as potentially replacing cash or bank deposits in the long term.
However, Wall Street banks have labeled the spread of stablecoins a risky experiment that could threaten the financial system. The core of the debate is whether crypto corporations can pay interest or rewards to customers who hold stablecoins. Under current rules, stablecoin issuers cannot pay interest, but crypto exchanges operate similar reward structures. The banking sector views this as a regulatory gap, arguing that crypto corporations perform bank-like functions without being subject to the same oversight.
The crypto industry countered that banks are trying to use regulation as a weapon to block competition out of fear of deposits outflows. In fact, if stablecoins spread, some deposits could leave banks. Internal research at the Fed analyzed that in limited scenarios the movement could be in the tens of billions of dollars, but the banking sector warned that deposits of up to trillions of dollars could flow out.
The dispute has spilled into politics. The crypto industry has built influence in Washington through campaign funds, and President Donald Trump has publicly supported the crypto industry as a strategic growth sector. Some crypto corporations applied for bank charters, seeking to enter the regulatory fold. By contrast, the banking sector and the broader financial industry strongly opposed allowing stablecoin interest payments and access to the Central Bank payment network.
Experts noted that the conflict could extend beyond simple inter-industry competition to become a structural issue for the financial system. If deposits move to stablecoins on a large scale, banks' lending capacity could shrink and the supply of credit to the real economy could be constrained. In a crisis, a surge in redemption requests for stablecoins could lead to fire sales of the Government Bonds backing them, potentially heightening financial market instability.
In fact, major stablecoin issuers such as Tether and Circle hold large amounts of U.S. Government Bonds. Some Central Bank and regulators have warned of the possibility of a "digital bank run" related to stablecoins. In the past, a specific stablecoin temporarily wobbled in value due to the fallout from a bank failure.
Not all financial institutions view stablecoins solely as a threat. Some banks in Europe and the United States are preparing for change by experimenting with issuing their own stablecoins or tokenizing asset. There is also an outlook that the role of stablecoins could grow as the markets for stocks, bonds, and funds gradually become tokenized.