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The Increasing Interest of Banks in Stablecoins
In recent months, banks that once observed the booming stablecoin market from a distance are now eager to participate. Tether Holdings, the leading stablecoin issuer, has reported significant profits, prompting traditional financial institutions to explore their options in this evolving sector.
This year, Societe Generale – Forge took a significant step by launching a Euro-backed stablecoin aimed at retail investors. Other financial institutions like Oddo BHF SCA are also developing their Euro-denominated stablecoins. London’s Revolut is contemplating its own stablecoin, while Deutsche Bank-backed DWS is collaborating on a venture named AllUnity, which is set to unveil a stablecoin in the coming year. Additionally, BBVA is looking to enter the stablecoin market.
In the United States, there are anticipations that banks will soon follow suit once new legislation allows them to issue their own stablecoins. Meanwhile, European banks are gaining clarity from the newly established Markets in Crypto-Assets Regulation (MICA) and the recent decision by Tether to retire its EURt stablecoin, creating a favorable environment for new entrants that aim to provide fiat-like alternatives for payments.
Jean-Marc Stenger, the CEO of SG-Forge, emphasized the likelihood of banks launching stablecoins in the future. “It’s a substantial undertaking, and while I can’t say it will happen immediately, I am confident it will occur,” he stated. His firm is already in discussions with multiple banks interested in adopting or partnering to issue stablecoins.
Visa has entered the scene as well, having recently launched a tokenization network that enables banks to issue stablecoins. The card network is piloting this initiative with BBVA and is engaged in talks with numerous other banking institutions globally.
“Demand has been noted from banks in regions such as Hong Kong, Singapore, and Brazil,” remarked Cuy Sheffield, Visa’s head of crypto, highlighting their active engagement with financial entities worldwide.
Moreover, Standard Chartered has joined forces with blockchain gaming firm Animoca Brands and Hong Kong Telecommunications to issue HKD-backed stablecoins as part of an experimental program endorsed by the Hong Kong Monetary Authority. The initiative aims to see the stablecoin live by 2025, according to Rene Michau, the global head of digital assets at Standard Chartered.
The push towards stablecoins signals a broader embrace of blockchain technology in payment systems. This aligns with ongoing developments in deposit tokens, another product being explored by major banks like JPMorgan Chase. While deposit tokens operate similarly to stablecoins, they are directly linked to bank accounts, allowing for internal transfers among customers of the same bank. However, deposit tokens’ compatibility with different banks remains a challenge, and they may not address the needs of the unbanked population. This is where stablecoins, which can be acquired by anyone with a cryptocurrency wallet, can play a crucial role.
JPMorgan Chase anticipates that the rise of stablecoins and tokenized deposits can coexist and expects the drive for bank-issued stablecoins to become mainstream in the next few years, according to Naveen Mallela, co-head of JPMorgan’s digital asset unit Kinexys.
The incentives for banks to introduce stablecoins are clear, driven by customer demand and the potential for substantial profits. Tether is projected to close the year with net profits exceeding $10 billion, showcasing the lucrative nature of this sector.
However, not all banks share the enthusiasm for issuing their own stablecoins. For instance, Xapo Bank in Gibraltar has opted against entering this space due to Tether’s dominant position. Joey Garcia, a board member at Xapo, stated that their focus is on facilitating the interaction between blockchain efficiency and the security of traditional bank accounts.
Nonetheless, issuing stablecoins carries risks for banks. An analysis by the European Central Bank highlighted concerns that transforming retail deposits into stablecoin deposits could negatively impact a bank’s liquidity coverage ratio, which is essential for meeting short-term financial obligations.
In the U.S., regulatory clarity is still needed regarding acceptable reserves for banks backing their stablecoins and whether these deposits would be insured. “If banks were to offer uninsured stablecoins alongside insured deposits, it would likely confuse consumers regarding what is protected,” cautioned Hilary Allen, a law professor at American University. “This confusion could lead to panic in a crisis if consumers discover their bank-issued stablecoins lack insurance.”
In addition to recent developments, central banks worldwide are also pursuing the issuance of central bank digital currencies (CBDCs), which may eventually supplant bank-issued stablecoins in certain contexts, particularly wholesale payments. Avtar Sehra, CEO of Libre Capital, noted that interest in commercial bank digital currencies is widespread, suggesting a potential preference among banks to collaborate on a consortium-based digital currency model.
The landscape of digital finance continues to evolve, with traditional banks recognizing both the risks and opportunities presented by stablecoins.
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