Stablecoin Regulatory Clarity: Can Disruptors Be Disrupted?

Summary Regulatory clarity from the Digital Asset Market Clarity Act may not favor stablecoin issuers, as yield payments are likely to be restricted. Banks are defending their funding base by ensuring stablecoin issuers cannot offer interest, maintaining traditional deposit advantages and limiting crypto competition. Big Tech and banks may ultimately cooperate, leveraging banks' regulatory status and tech firms' distribution to issue stablecoins, rather than compete directly. Investors should be wary of extrapolating early fintech growth rates, as regulatory shifts and competitive dynamics can quickly disrupt disruptors. A few days ago, my algorithm pushed an article from Politico across my notifications bar. Politico reports that Wall Street banks are at war with the cryptocurrency industry regarding the proposed Digital Asset Market Clarity Act - apparently, the banks are losing. I was somewhat surprised, not that there is a war, or that the banking industry is losing it, but rather, that the banking industry is opposed to certain measures contained in the proposed bill. Banks have issued private currencies for centuries - indeed, the last time I passed through Chek Lap Kok Airport, the ATM spit out Hong Kong Dollars issued by HSBC Holdings (HSBC), and anyone who visits Scotland will likely come across Scottish Pounds issued by the Royal Bank of Scotland ( NWG , RBSPF ). Why wouldn’t private banks want to earn seigniorage, take advantage of blockchain related cost savings, and be at the forefront of change and innovation? Perhaps the answer is that they are trying to protect their moat, not just from the existing stablecoin players, but also from deep-pocketed tech companies. Support for this notion is provided by the fact that soon after the GENIUS Act was passed last year, the Bank Policy Institute, a non-profit advocacy group funded by the banking industry, wrote that, ‘Using reasonable assumptions, the Baumol-Tobin model suggests that the demand for stablecoins would double if stablecoins pay interest’, and that, ‘ … if stablecoins are backed mostly by Treasury securities and reverse repos, there could be a substantial decline in deposits. In a worst-case scenario where all stablecoin growth came from deposits, it would be a 20 percent decline (Huther and Wang (2025)). But even if some of the funding came from money market funds or other sources, a substantial decline in deposits would seem likely. ’ BPI further warned that if stablecoin issuers were able to offer yield, i.e. pay interest on deposits, the resultant increased cost of funding for the banking industry would lead to increased loan rates of 42 bps. Moreover, systematic risk and runs on stablecoin issuers were possible, meaning that, “ The resulting financial crisis is not hypothetical – such a buildup and collapse closely resembles the dynamics that led to the Global Financial Crisis. ” What politician would want that? Increased lending costs – bad. A Financial Crisis – BAD. Letting Stablecoin issuers pay interest – BAD BAD BAD! Stop the madness! I don’t know if the banking industry really is losing the overall war, but with regard to the specific battle concerning the ability of stablecoin issuers to offer yield, the banks appear to be winning. As currently drafted, the act specifies that the two lead regulators of the industry will be the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). There is no role for the Fed, the OCC, or state regulators, all entities that oversee and regulate deposit taking institutions that pay interest. As well, according to CoinDesk , an agreement has been in place since March that will prevent crypto firms from offering yield that looks like deposit interest. PayPal Holdings Inc. ( PYPL ) will likely be the company most affected by this. Language reproduced from the draft legislation makes this point clear, though it also specifies that stablecoin issuers will be able to have loyalty reward programs similar to those offered by credit card issuers. Phew! Yet another financial crisis prevented, I know I’ll sleep better. While I was digesting all of this, my thoughts ran to the legalization of marijuana in Canada. It wasn’t the bonanza for the shareholders of early entrants that had been forecast. Quite the opposite in fact, increased competition wiped many of them out. I don’t have a crystal ball, but maybe the cryptocurrency industry should be careful about what it wishes for. In any case, as I reflected upon the nature of competition, in both nature and in business, I also thought about how cooperation is sometimes the model that emerges; think of symbiosis in nature, and how companies behave in industries where oligopolies are the dominant type of business organization. My purpose in writing this article isn’t to recommend buying or selling the equity of stablecoin issuers such as Circle Internet Group ( CRCL ), PayPal Holdings ( PYPL ), or other crypto companies. Instead, I want to convey the message that a consolidation will come, as will new entrants. There will be winners and losers from deregulation, and hopefully this article will give some hints on how to identify them. Here are some thoughts on how things might eventually shakeout. I. Sometimes The Early Bird Doesn't Get The Worm I see parallels with the state of the crypto industry today with the early days of the internet. Regulatory uncertainty, pioneering firms replaced by bigger rivals, a lack of product differentiation, leading to technological innovations and features that allowed new players to dominate the space. I’m old enough to remember when the conventional wisdom was that since browsers were going to be the gateway to the internet, Netscape was going to be the most valuable company in the world. Ultimately, Navigator was supplanted by Microsoft’s Internet Explorer, which in turn also lost its market leading position, and today Alphabet's Chrome has a 64% global market share. When do the advantages that second movers like Google ( GOOG ) possess start to outweigh the first mover advantages of pioneers such as Yahoo? The concept of Network Effects is instructive. No one used Blackberry Messenger because no one used Blackberry Messenger. If your friends weren’t on it, what value did it have? Are there any stablecoins in the market today that are likely to become ubiquitous, merely because most people use them? In the 1970s Betamax and VHS competed for leadership in the home video market, each having roughly half of the market. Despite having an inferior picture quality compared to Betamax, VHS was the ultimate winner. Several explanations are often given. First, consumers preferred the smaller size of a VHS cartridge because they were easier to store. Second, while both systems could record a standard TV show, a VHS cartridge’s smaller size meant that it could record an entire NFL game, whereas a Betamax cartridge would often stop recording halfway through the fourth quarter. Finally, it’s sometimes said that the porn industry played a part in VHS reaching a tipping point. A smaller cartridge meant a smaller camera and other recording equipment, which apparently had utility to movie makers who had to move from bedroom to bedroom. The slightly inferior picture quality wasn’t an issue, because it was still better than the grainy images that consumers were used to. What, if any, features will a stablecoin issuer of today be able to offer that will differentiate its currency from others? Will consumers care about loyalty programs in the same way that consumers in the 70s valued a smaller cartridge? A strong brand helps to maintain dominance, so ask yourself, how many of today’s stablecoins have widespread consumer recognition, and which ones merely fill a geographic or other niche? For years, Microsoft ( MSFT ) dominated the browser market until competition authorities intervened, because every PC and Windows based laptop came pre-loaded with Explorer, and switching to a new browser involved a lengthy and complicated process. So switching costs are relevant when assessing how well an existing player will be able to defend its market share from new entrants. Is there a cost in switching from one stablecoin to another? II. Lessons From Meta (Facebook) The big tech company that has put the most work into starting its own cryptocurrency / stablecoin is Meta ( META ) . “ When Facebook unveiled Libra in 2019 , the ambition was sweeping – a proprietary stablecoin backed by a basket of global currencies that would function as a parallel financial system for the company’s billions of users.” If launched, Libra would have had similarities with both contemporary stablecoins such as USCoin ( USDC-USD ), Tether ( USDT-USD ), and PayPal USD ( PYUSD-USD ) , and also with the Special Drawing Rights (SDRs) that are issued by the International Monetary Fund. Like today’s stablecoins, it would have been: i) issued on a blockchain, ii) designed to provide stability, iii) developed with a value proposition of delivering secure, low-cost transfers and global payments, and iv) backed by real world assets such as fiat currencies and government securities. Unlike today’s stablecoins, it would not have been a single currency stablecoin, but instead, it would have been backed by a trade weighted basket of currencies (USD, EUR, JPY, GBP, CAD etc.) in the same way as SDRs are. Another difference was governance. Instead of having a single issuer, after initial resistance from politicians, a large consortium of over 100 corporations was envisaged as the body that would provide oversight. In essence, it had the potential to become a global currency, with Facebook and its 3 billion strong userbase being the main trading platform. Libra also had one key difference when compared to SDRs. The IMF is a non-profit entity, Meta, and the companies in the proposed governing consortium clearly are not. Governments pushed back hard. Libra was seen as a competitor to national currencies that would be a threat to monetary sovereignty and the ability of countries to manage interest rates. Emerging market countries worried about capital flight. As mentioned, governance was an issue. Finally, Meta’s reputation wasn’t stellar at the time, and privacy concerns were also raised. Meta went back to the drawing board, and “ the project was rebranded Diem in 2020 in an attempt to distance itself from the backlash." As well as changing the governance model to a consortium, Diem was also changed from being backed by a basket of currencies, to a single currency stablecoin, the model that is currently most prevalent in the market today. Nevertheless, “ Payment giants including Visa and Mastercard withdrew from the consortium under regulatory pressure … By early 2022, Meta sold the Diem intellectual property to Silvergate Bank and walked away entirely.” It's worth noting that Meta’s stablecoin project failed due to political pushback from both Republican and Democrat Congresses and administrations – this isn’t a Red / Blue issue. What lessons can be learned? From Meta’s perspective, it now plans to integrate regulated third-party stablecoins onto its platforms by the second half of 2026, and " a pilot [is] currently running in Colombia and the Philippines, two markets where traditional banking infrastructure is both slow and expensive for cross-border transactions", which entails Meta paying developers with Circle's USDC-USD. Under this arm’s length approach, Meta will be an enabler of payments, and not a monetary authority. Presumably this will allow for Meta to avoid the regulatory oversight issues and concerns that it faced in the past. I for one, though, would have concerns about purchase and payment data sourced from transactions I made on Instagram, WhatsApp, or Facebook being used by Meta or third parties to predict my behavior, or to push advertisements my way. I can see regulators having similar reservations, so perhaps Meta’s timeline is a bit aggressive. III. What Might A Potential Big Bank / Big Tech Stablecoin Model Look Like? Three models come to mind. The first is the third-party arm's length model that Meta is pursuing. In this model, there is no need for a banking partner because there are no banking type products being offered. This strategy is the lowest risk for a tech company, both in terms of potential reputational damage, and also, the capital commitment that is required. Rather than competing with the stablecoins of incumbents, or with other tech companies, it's merely offering a distribution platform to an exclusive partner stablecoin, or, offering an open platform to all stablecoins. This is probably the best scenario for existing stablecoin issuers. A second potential model is that tech companies issue their own stablecoins and compete with each other, and with existing incumbents. Bearing in mind Meta's experience with Libra, these would have to be single currency stablecoins. Even this measure, however, wouldn't guarantee positive regulatory approval. Diem was supposed to be a single currency USD stablecoin with a large body of over 100 entities overseeing it, and there was still no political appetite. Would things be different this time around? Possibly, but the issue is scale. One could see five or six tech companies having a combined float of stablecoins in the $ trillions, and this would inject an element of systemic risk into the economy and uncertainty to the banking system, in a way that currently isn’t the case. Although the global stablecoin market is estimated to have a float of $300 billion, this is small beer compared to the size of traditional currencies. For example, US M2 is $22.7 trillion, the Eurodollar market is circa $5 trillion, and there is also the black market. Factoring in global currencies like the Euro, JPY, etc., the global money supply exceeds $100 trillion. How would existing players fare in this type of a world? Theoretically, Amazon could pass on some of the cost savings from its own stablecoin to its customers. Could existing stablecoins compete with an X / SpaceX combination that bundled an X-Coin with cellphone and internet services? There is still plenty of physical commerce that occurs, not everything is bought online and delivered. Apple Pay is widely accepted, and this could help speed the adoption of "CORE." Get it? Apple Core? Okay, pretty bad, they are the branding experts, not me. The third model is cooperation between big banks and big tech. The logic seems compelling - everyone does what they're good at. Banks would be the issuers of single currency stablecoins. There is a tradition of private currencies in the US, and at one time there were over 8,000 of them. As noted, banks like RBS and HSBC currently issue their own money, with their currencies being exchangeable on a one-to-one basis with GBP and HKD. Similar types of JPMorgan ( JPM ), Citigroup ( C ), or Bank of America ( BAC ) stablecoins would be seen as enhancing America's currency, not harming it. Further, rather than being seen by politicians as a threat to the banking system, such coins would be seen as complementary. Paying interest wouldn't be a threat. Banks have FX trading desks and large treasuries that already handle almost every currency in the world. They're also regulated and if need be, have FDIC insurance - these mountains have already been climbed. Finally, they have large custodial operations that benefit from economies of scale - it's a natural fit for them to hold any necessary collateral. Big tech is great at UX, user adoption , and many companies have user bases numbering in the billions. Further, as noted, many have real services or products that banks don't. These can be bundled with a stablecoin to deliver value to clients that banks can't do on their own. So Big Tech handles distribution. Perhaps this type of scenario seems far-fetched. It's not, it's already happening in one form or another. Goldman Sachs ( GS ) and Apple ( AAPL ) already offer the Apple Card , and Apple has recently announced that they will transition to Chase in two years. Although there is no stablecoin involved, it is Big Tech partnering with a big bank to offer a banking product that is used for payments. As for "offering yield" or paying interest on stablecoins, the banking industry's big bad bogeyman? PayPal has effectively already been doing it by using reverse repos entered into with highly regulated creditworthy banks, to fund "yield rewards". While there is no formal deposit being held by PayPal, and technically no interest is being paid, the ultimate source of funding is deposits held at a regulated bank, that are passed through to a stablecoin holder, via a reverse repo. Notably, this is exactly the type of activity that it seems will be prohibited under the Digital Asset Market Clarity Act. In the future, if a stablecoin issuer wants to pay interest to its customers, its best bet will likely be to team up with a bank issuer. In which case, one has to ask, who’s the most attractive partner, Apple, Amazon, Meta etc., or PayPal, Circle, Tether? IV. Conclusion - Sometimes Disruptors Get Disrupted I love me my Wise ( WPLCF ). A debit card that works in over 100 countries, mid-market FX Rates, seamless cross-border transfers with no fees, and my wallet has balances in USD, GBP, CAD, THB, MYR, and VND. I even thought about investing in it, which is why I did a deep dive into stablecoins and other potential payment models. After looking at Figure 1, I've decided to remain a customer, and to not become an investor. Figure 1. Revenue Growth Of Select Fintechs Vs. Traditional Payment Platforms V ), Mastercard ( MA ), Wise (WPCLF) and Pay Pal" width="640" height="299" contenteditable="false" data-width="640" data-height="299"> Seeking Alpha I guess my advice is that regulatory clarity doesn’t always open up a brave new world that is dominated by incumbents. So be wary of valuations made on spreadsheets that show early-stage growth rates continuing ad infinitum, and that also use discount rates that don’t have a risk premium built in, to account for the possibility of disruptors being disrupted.