Stability for Stablecoins?
- Joe Bona
- 4 hours ago
- 7 min read
“The most important thing about any monetary system is that it provides a stable unit of account.” – Russell Napier
It seems like every day my email feed is filled with articles related to stablecoins. And as you have probably observed, the views expressed regarding their impact on traditional banking vary greatly!
Articles range from suggesting the industry is about to get “run over” to it’s a “non-event” for community financial institutions.
So, which is it?
For those too busy with their day job to have conducted the research themselves, here are the basics of stablecoins.
If you are looking for a “hot take” or some definitive predictions on the direction of stablecoin issuance, this crash course might leave you wanting more. But if you’re interested in starting your education on a rapidly evolving topic, this is for you!
From the Editor
On Friday, July 18, 2025, the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins of 2025 Act) was signed into law, thereby creating the first comprehensive federal regulatory framework for stablecoins. Although the Act isn’t slated to take effect until early January 2027 (or perhaps earlier if final rules are issued more expeditiously), the reality is that its reverberations are already being felt throughout the financial services industry.
While it might be speculative to assess precisely what the risks or opportunities for your institution might be, it’s never too early to start asking questions and researching how to prepare.
In this month’s Bulletin, DCG Director Joe Bona does yeoman’s work putting together a highly digestible summary of the Act and stablecoins along with several potential considerations for your institution. If nothing else, perhaps this writeup serves as a catalyst for your team and its exploration into stablecoins.
And lastly, we encourage you to take our 2-minute survey regarding your institution’s current “relationship” with the GENIUS Act and stablecoins. DCG plans to publish more content related to the passage of the GENIUS Act and highly values any input our readers may share.
Vinny Clevenger, Managing Director
How did we get here?
On July 18, 2025, the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins) was signed into law, thereby establishing the first federal legislation to regulate U.S. Stablecoin issuance.
The GENIUS Act establishes rules for issuers of stablecoins. Several of the key provisions of the bill are:
Allows only federally approved entities to issue payment stablecoins
Requires that issuers hold 100% of reserves in cash, insured demand deposits, or highly liquid investments
Requires monthly disclosures
Prohibits the “direct” payment of interest on stablecoins
The Act is slated to go into effect at the earliest January 18th, 2027, or 120 days after the primary federal regulators issue their final regulations.
Additionally, there are several other pending pieces of legislation that may influence how the industry ultimately transacts with stablecoins. Those include the STABLE Act (Stablecoin Transparency and Accountability for a Better Ledger Economy Act) and CLARITY Act (Digital Asset Market Clarity).
What are stablecoins?
The GENIUS Act specifically defines a payment stablecoin as “a digital asset used or designed for payments or settlement, for which the issuer is obligated to redeem for a fixed monetary value and is expected to maintain a stable value.”
Stablecoins are designed to limit volatility relative to other forms of digital currency by maintaining a stable value relative to a reference asset (e.g., the US dollar), and are typically backed by reserves such as cash, U.S. Treasuries, or other low-risk government-issued assets.
The issuer of the coin is responsible for managing the peg by holding reserves in line with the circulating supply of stablecoins in underlying assets.
Stablecoins initially gained traction as a resource for crypto users to hold their funds while moving in and out of other cryptocurrencies. Over the last several years, stablecoin use in digital wallets has increased.
The digital currency has been touted for its ability to expedite transaction speeds at reduced costs, with cross-border payments and remittances serving as good use cases.
In countries that have unstable local currencies, USD-backed stablecoins have seen activity increase to insulate against volatility.
The immutability associated with stablecoins (due to the use of blockchain technology) coupled with the ability to program behaviors (most commonly through “Smart Contracts”) are the other predominant features that supporters have championed.
The Banking Industry Lobbyist Position
Both the American Bankers Association (ABA) and Independent Community Bankers of America (ICBA) have actively worked with the government to ensure Bank interests are heard regarding the passing of legislation affecting stablecoins.
The major concern revolves around deposit disintermediation within the industry, with the ABA noting a reduction in deposits would lead to fewer loans being written and likely at a higher cost.
The ABA and ICBA also referenced the importance of prohibiting the payment of interest or yield on payment stablecoins, as well as prohibiting non-bank issuers of stablecoins from obtaining a Federal Reserve Masters Account. The final Act did not allow a pathway for non-bank issuers to obtain a master account nor pay yields on coins.
Lastly, the ABA stressed the need for the regulatory body to mitigate financial stability risk by establishing language “around reserves, redemption, capital and liquidity, operational risk management, and cybersecurity to all stablecoin issuers.”
The NCUA has publicly stated the importance of prompt establishment for regulatory rules around stablecoin issuance so its member institutions can adapt and preserve competitive parity within the financial services industry.
Why might a consumer choose stablecoins?
Under the prism of trying to further understand stablecoins, I began thinking through and researching why a consumer may move their funds to stablecoins versus holding them in a traditional non-maturity deposit account with a financial institution.
Some reasons may be the ability to instantly complete transactions 24/7 at potentially lower costs, automatically deploy funds in smart contracts, and easily integrate with digital wallets.
A close cousin to stablecoins is “tokenized deposits.” JP Morgan recently issued a deposit token that is available to institutional clients and offers on-demand settlement and interest payments. This differs from stablecoins but is built on blockchain. Could other financial institutions head down this path to innovate their payment systems and retain their deposit base in a digital currency world?
Potential Risks
Despite the fact stablecoins are meant to provide stability and limit volatility relative to other digital currencies, there are potential scenarios that might present risk.
The first may be characterized as a financial stability risk. Although stablecoin issuers are required to back their coins with highly liquid assets, what if the industry experienced a rapid level of redemptions, causing treasury bonds to be abruptly divested and thereby creating significant price volatility within the treasury markets?
Treasury Secretary Scott Bessent recently posted on social media that “a thriving stablecoin ecosystem will drive demand from the private sector for US Treasuries, which back stablecoins.”
But what if there is a material and simultaneous “margin call” on stablecoins? Something akin to what happened with Silicon Valley Bank and Signature Bank (albeit related to retail customer deposits) but at a much larger scale? How would the financial markets react?
Likewise, could the “safety and soundness” of the underlying issuer be called into question? What if an issuer of stablecoins doesn’t properly manage their reserves and is unable to redeem the stablecoins when requested? Who is “on the hook” for that?
Another example could be a potential “de-pegging” event where the value of stablecoins strays from its reference asset.
While immutability is generally touted as a positive, there are risks associated given the “finality” of a transaction. This is relevant when considering larger transactions, especially related to potential fraud. It should be noted however, through legislation “all stablecoin issuers must possess the technical capability to seize, freeze, or burn payment stablecoins when legally required and must comply with lawful orders to do so.”
The use of stablecoins in illicit activities (such as money laundering or terrorism financing) is another concern that has led to scrutiny of digital assets.
As an issuer of stablecoins, does this also open a financial institution for additional cybersecurity risks and add layers to customer education? Could the rise of stablecoins create additional costs around technology as well?
There are also many other unknown risks (e.g., consumer protections, risk of Big Tech Monopolies, Regulatory Oversight, runs on liquidity, reserve capital levels, etc.) that could potentially impact the integration of stablecoins and that should be highly scrutinized prior to adoption by issuers and consumers alike.
Impact on Community Banking
Perhaps central to this entire Bulletin is the obvious concern that liquidity may tighten. A migration from traditional deposits to stablecoin could limit available liquidity at community banks, tightening their ability to lend and ultimately slowing potential local economic growth.
It’s no secret that community banks rely heavily on locally sourced retail deposits to fund lending. Per the ICBA, approximately 60% of small business loans and almost 80% of agricultural loans are funded with retail deposits. The disruption to the banking “flywheel” and potential curtailment of credit availability in local markets are primary concerns.
However, as with many other changes to banking over the years, it might also create opportunities.
The wider adoption and acceptance of stablecoin could provide opportunities for community banks to innovate in a world that is often hampered by the technology limits of core processing systems and disparate payment processing systems used across the banking sector.
Stablecoin could help institutions with modernizing their payment structure while also appealing to a potentially different customer segment that is often characterized as younger and more open to accepting changes versus older generations.
Adoption could also help support local business ecosystems by providing a way to streamline business-to-business payments, lower fees, and enable programmable money.
Concluding Thoughts
There are meaningful pros with stablecoins from a consumer perspective (24/7 access to funds, fast and less expensive global payments, pegged to fiat-currency, programmable, etc.) but also potential risks (pending regulatory clarity, counterparty risk, fraud risk, risk of a de-pegging event, no FDIC insurance, etc.).
Ultimately, this Bulletin is meant to be a starting point. I hope that this high-level overview serves as a catalyst for further investigation into stablecoins and how they may (or may not) influence your business.
DCG encourages your management team to initiate research into the new and forthcoming legislation to determine its compatibility with your organization. Like it or not, the clock is ticking, and it seems to be moving at a faster pace in many aspects of digital banking!
For more insights from Darling Consulting Group, click here.
Joe Bona is a Director at Darling Consulting Group. In his role, he assists banks and credit unions of all sizes throughout the country with asset/liability management. He works with management teams to develop institution-specific strategies to improve financial performance while effectively managing interest rate risk, liquidity, and capital through the ever-changing economic and regulatory environment.
Joe began his career at DCG in 2015 as a financial analyst. He earned a B.S. in business administration from Bryant University.
© 2025 Darling Consulting Group, Inc.