Abstract

It is a common misconception to assess the cryptocurrency sector solely by its price movements and fixed supply features. While media coverage tends to fixate on market prices, the most noteworthy progress in the crypto space today centres around the use
of blockchains and smart contracts for payments and financial services. In this context, stablecoins have emerged as the most widely utilised assets.

Recent regulatory clarity for stablecoins on both sides of the Atlantic (Europe’s MiCA regulation and America’s GENIUS Act) represents a major turning point that will fundamentally reshape the financial landscape worldwide. Rather than focusing exclusively
on speculative trading, the industry is now shifting towards mainstream adoption of stablecoins and exploring how best to leverage blockchain-based payment systems.

Industry landscape

Stablecoins are tokenized cash issued by private institutions on public blockchains (for example, Ethereum), pegged to fiat currency, and backed by audited reserves. Stablecoins are currently utilized by 13% of financial institutions and corporations worldwide,
with 54% of non-users anticipating adoption within the next six to twelve months.

According to industry research, the majority of respondents project that between 5% and 10% of cross-border payments will be conducted using stablecoins by 2030, representing an estimated $2.1 trillion to $4.2 trillion.

The enactment of the GENIUS Act has established an essential framework, offering the regulatory clarity to accelerate stablecoin adoption. The GENIUS Act establishes a comprehensive framework for stablecoins denominated in USD. Its principal
provisions encompass, alignment between issuers and regulatory authorities, a formalized approval process for stablecoin issuers, clearly defined reserve requirements and comprehensive guidance regarding tax treatment and custodial services.

The GENIUS Act will expand the global reach of the US dollar via digital channels, recognising the consistent demand for US Treasuries created by stablecoins. Legislation now mandates that stablecoins be backed by US Treasuries, reinforcing the dollar’s
status as the world’s reserve currency and enhancing America’s borrowing power.

Despite their benefits, stablecoins present a significant drawback for end users as they are prohibited from paying interest. Under MiCA regulations, both issuers and service providers are barred from offering interest to stablecoin holders, ensuring that
all yields generated by the underlying assets accrue solely to the issuer. In contrast, the GENIUS Act forbids issuers from directly paying interest but permits related service providers to do so.

Key drivers

The recent advancements in payments infrastructure have emerged in response to longstanding challenges. These challenges include:

• Speed: Traditional payment methods often experience settlement delays of one to three business days, particularly for cross-border transactions.
• Cost: Conventional payment processing typically involves intermediaries, such as correspondent banks and clearing houses, resulting in multiple fees throughout the process.
• Transparency: Legacy systems may complicate the tracking and status of payments, especially during international transfers, due to their intricate structure.
• Availability: Systems dependent on traditional banking operate only during regular business hours and are unavailable on weekends and public holidays.
• Inclusion: Individuals remain underserved or excluded by the conventional payment infrastructure, which frequently requires compliance with KYC regulations and documentation like state-issued identification or proof of residence.

Furthermore, since domestic payment systems are often developed uniquely for different regions or individual markets, this has resulted in isolated systems and exclusive networks, which makes it challenging to achieve full global integration of payments.

Industry response

The new regulatory frameworks have triggered a surge of innovation, with major institutions exploring different use cases such as cross broader payments, merchant payments, P2P lending and remittances, loyalty programs, and trading. Unlike previous speculative
crypto cycles, these innovations rely on strong regulations, robust infrastructure, and clear economic incentives.

A selection example discussed here for reference.

• A group of nine major global Wall Street banks—including Goldman Sachs, Deutsche Bank, Bank of America, Banco Santander, BNP Paribas, Citigroup, MUFG Bank, TD Bank Group, and UBS—have announced plans to collaborate on developing a stablecoin
  backed by G7 currencies.
• ING, Banca Sella, KBC, Danske Bank, DekaBank, UniCredit, SEB, CaixaBank, and Raiffeisen Bank International have collaborated to introduce an euro-denominated stablecoin that is compliant with MiCAR regulations. The initiative aims to establish
  a credible European alternative within the US-dominated stablecoin market, thus enhancing Europe’s strategic autonomy in payment systems. Participating banks will have the opportunity to offer value-added services, including stablecoin wallet solutions and
  custody arrangements.
• JPMorgan Chase is moving deeper into cryptocurrencies with its own token, JPMD, which acts like a stablecoin. The bank plans to launch this deposit token on Coinbase’s public blockchain, Base, which operates on the Ethereum network. Each
  token is designed to digitally represent a commercial bank deposit. JPMD will enable clients to settle transactions around the clock and pay interest to holders. Unlike most publicly available stablecoins, JPMD is a “permissioned token” accessible only to
  JPMorgan’s institutional clients. According to JPMorgan, issuing a deposit token rather than a stablecoin offers institutional clients the advantage of more efficient and streamlined fund transfers, while maintaining strong integration with established banking
  infrastructure.
• Citi and Coinbase have partnered to create stablecoin payment solutions for institutional clients. Their initial goal is to simplify conversions between fiat and cryptocurrency, with plans to enable 24/7 payments in the
  future.

Key Participants and Functions

• Public Chains: Public blockchains serve as the fundamental infrastructure for stablecoins. They provide the secure and transparent digital ledger on which stablecoins are created, transferred, and maintained. This infrastructure ensures
  that stablecoin transactions are recorded immutably and can be verified by network participants.
• Issuers: Stablecoin issuers accept collateral in the form of fiat currency or cryptocurrencies. Upon receiving collateral, they issue an equivalent number of digital tokens, representing the stablecoin. This process ensures that each stablecoin
  is backed by actual assets, helping to maintain its value and stability.
• Banks and Custodians: Banks and custodians are responsible for safeguarding the collateral that supports stablecoins. They hold the underlying assets, such as fiat currency or other approved financial instruments, which back the stablecoin
  supply. Specifically, USD reserves are maintained in cash to address immediate liquidity requirements, while the remaining reserves may be invested in highly liquid assets, such as short-term U.S. treasuries, to ensure both stability and the ability to redeem
  stablecoins when needed.
• Trading avenues: It  plays a crucial role in the stablecoin ecosystem by providing platforms where users can buy, sell, and trade stablecoins. These venues facilitate the movement of stablecoins between parties and enable users to convert
  stablecoins to other digital assets or fiat currencies as required.
• Users: Individuals and organisations use stablecoins for a variety of purposes, including trading, savings, payments, and remittances. By leveraging the stability and efficiency of stablecoins, users can conduct transactions with reduced
  volatility and increased speed compared to traditional payment methods.
• Regulatory Oversight: Regulatory bodies oversee the stablecoin ecosystem to ensure the quality of reserves, compliance with applicable laws and regulations, and effective management of systemic risks. Their involvement helps maintain trust
  and stability within the system, safeguarding both users and market participants.

Way forward

Stablecoins, particularly following the GENIUS Act, represent a major change in global finance by lowering costs, improving liquidity, and simplifying cross-border payments for businesses and consumers. Firms must consider opportunities to develop stablecoin
products and services, establishing strategies aligned with existing business capabilities and supporting technological infrastructure. Additionally, firms are encouraged to engage with ecosystem partners to expedite market entry and capitalise on new revenue
streams.