Market Reflections: Stablecoin Issuers Become The Bank

In the last 25 years, the domestic banking industry has been slowly consolidating, with relatively few new banking charters being issued. In the last 12 months however, this has dramatically changed, with a variety of digital asset and fintech firms seeking de novo banking charters. Heavyweights such as Brazilian Nubank, British Klarna, and a slew of US based Stablecoin issuers (Circle, Ripple, BitGo, Paxos, and Fidelity Digital Trust to name a few) are actively applying, or have been granted, banking licensure in the USA. In this post, we will reflect on why these companies are running towards regulation, and what it may mean for companies operating in the USA.

Undoubtedly, over-regulation can suffocate innovation. However, providing operators with clear guidelines, paired with strong consumer protections, is a win for all market participants. There are a variety of positive synergies unlocked via banking regulation. A few benefits at a glance:

1. First, regulation is shifted from a state-by-state basis to a federal basis, standardizing compliance.

2. Second, issuers signal to their customers custodied assets are held in secure accounts, giving incremental peace of mind.

3. Third and finally, these companies receive access to a federal reserve master account, creating significant operating synergies.

For those outside of the banking industry, a federal reserve master account is a bit of inside baseball. In short, this will grant stablecoin issuers access to the federal reserve’s payment infrastructure, without the requirement to work with a ‘sponsor bank’. Practically, this will allow Stablecoin issuers to move between fiat and digital currency concurrently, increasing the transparency and velocity of capital.

For those who consume Stablecoin services, this development hints at a few changing factors in the world. First, Stablecoin issuers are here to stay; a regulatory moat is growing and was not granted without a lengthy testing period by the federal reserve. Second, Stablecoin features are getting better by the day – atomic swaps serve to increase liquidity in the system. Lastly, increased regulatory clarity will empower more innovation given capital investments are not subject to arbitrary government rules.

For any questions on payments, treasury, Stablecoins or digital assets, please reach out to Jake Souleyrette at Soul@stabletxn.com.