Stablecoin Supercycle - A Threat to Traditional Banking

The rise of stablecoins could change how global finance works. What started as a market worth about $200 billion is expected to grow into a multi trillion dollar system, and become a core part of everyday financial activity.

Stablecoins are gaining momentum because they move money faster, cheaper, and more efficiently using digital networks.It is a kind of simplified version of banking services that allows you to make payments and settlements without using the slow infrastructure of traditional banks.

How Stablecoins Cut Out the Middlemen

Stablecoins take advantage of one major weakness in financial system which is that cross border payments are slow and expensive. As you know current system operates on correspondent banks and networks like SWIFT, and those have problems:

• International transfers can take one or two days to settle.
• Multiple intermediaries charge fees, reducing the amount that actually arrives.
• Transactions usually only work during banking hours.

Stablecoins work very differently - money moves instantly at any time of day directly between users on public blockchains, no need for multiple banks in between. Because of this, stablecoins are a more advanced and efficient settlement system.

Some financial institutions are already starting to use this technology. Economic impact could be big - stablecoins can replace large parts of the correspondent banking system.

The Bank - Lite Model: Making Money Without Lending

One of the most disruptive aspects of stablecoins is the bank-lite business model used by major issuers. This model carries less risk and costs far less to operate, since users deposit dollars or other fiat currency, and the issuer creates digital tokens at a 1:1 ratio. The deposited money is then invested in very safe, highly liquid assets, mainly short term U.S. Treasury bills.And the issuer earns interest from these safe investments. When interest rates are high, this generates huge profits with minimal overhead.

This means tech companies can make money in ways that were once reserved for banks, but without facing the same strict rules, regulations, or risks. By earning interest on the money people deposit, stablecoins compete directly with traditional banks and threaten their profits.

Regulatory Challenges and Risks

There isn’t yet a global framework for handling stablecoins, which is a big obstacle for both adoption and stability.

Key questions are, whether stablecoin issuers should be treated like advanced payment services or banks. Proposed laws, “Genius Act”, aim to clarify this, but there are some concerns.

• If a large stablecoin issuer cannot honor 1:1 ratio, it could trigger a financial panic, similar to a bank run. The growing size of the market makes this a real risk.
• Users of stablecoins don’t have safeguards like FDIC insurance, it’s a big risk if things go wrong.

The growth of stablecoins depends heavily on regulation, governments must either create a new category for digital banks or require issuers to follow traditional banking rules, which will limit their efficiency and profitability (the whole point).

Conclusion

Stablecoins are faster, cheaper, and more efficient than traditional banking, and they threaten established business models in cross border payments and deposit holding. A parallel financial system is already forming and offering huge benefits to issuers.

The main question now is will the regulators slow down this innovation, or write rules that manage risks while allowing the economic advantages of digital dollars?