An hour before a scheduled procedural vote in the U.S. Senate on the GENIUS Act, which would establish a federal regulatory framework for stablecoins, the President and CEO of the Independent Community Bankers of America (ICBA), Rebeca Romero Rainey, issued a statement. The statement begins:
On behalf of the nation’s community bankers, ICBA urges the Senate to ensure the GENIUS Act provides regulatory clarity while including necessary guardrails to protect against the negative economic consequences that would result from community bank disintermediation.
Shortly after, the procedural vote on the GENIUS Act failed:
An early Senate vote to move forward on crypto legislation failed Thursday afternoon — a blow to bipartisan efforts to regulate stablecoins. The final tally was 48 to 49. Two Republicans, Missouri’s Josh Hawley and Kentucky’s Rand Paul, joined Democrats in voting no. Just a week ago, the bill looked likely to sail through with easy bipartisan support. But following a heated Democratic lunch, everything fell apart resulting in Thursday’s damning vote.
Reportedly, Democrats’ objections to the GENIUS Act are primarily due to President Trump’s foray into the stablecoin business, which most recently included a $2 billion deal with the United Arab Emirates and Binance.
However, it would not surprise me if the ICBA’s statement affected the outcome as well. Politicians, especially those from rural states, have a well-founded fear of the community banking lobby.
And, it seems, the community banking lobby has a fear of stablecoins.
I’m here to tell you that it’s a very well-founded fear.
The argument for why regulated stablecoins are catastrophically dangerous for community banks has three parts:
- Product innovation tends to win in financial services.
- All else being even, fintech product developers will prefer to build on stablecoins.
- Most community banks have no path to win in stablecoins.
Let’s quickly walk through each.
Product Innovation Tends to Win in Financial Services
Hopefully, this first point is self-evident.
Ever since digital customer acquisition channels ascended to primacy and eliminated the distribution moats that banks had been digging for decades, product innovation has been the dominant competitive advantage in financial services.
It’s why BNPL has been able to take market share from credit cards. It’s why many large retail banks now offer two-day early access to your paycheck. It’s why Bill bought Divvy and American Express bought Center.
If you build the best products, you (usually) win.
Fintech companies are great at product innovation. Big banks are getting better at it (or, at least, quickly copying or acquiring the innovations that fintech comes up with). Most community banks are quite bad at it.
All Else Being Equal, Fintech Product Developers Will Prefer to Build on Stablecoins
It seems increasingly likely to me that a large percentage of innovative financial services products in the future will be built on top of stablecoins.
There are a few reasons for this.
First, stablecoins are a superior development infrastructure for specific product use cases. This is probably the most pressing reason why Stripe, which referred to stablecoins as “room-temperature superconductors for financial services” in its most recent annual letter, acquired Bridge for $1.1 billion.
Which use cases are best supported by stablecoins? Here’s Stripe:
Stablecoins have four important properties relative to the status quo. They make money movement cheaper, they make money movement faster, they are decentralized and open-access (and thus globally available from day one), and they are programmable. Everything interesting follows from these characteristics.
I would quibble with some of that. Many arguments you see that stablecoins are cheaper are apples-to-oranges comparisons. And I still haven’t heard a sufficiently compelling case for why “programmability” is a uniquely valuable trait of stablecoins.
However, stablecoins are indeed fast and global by default. And, as I wrote a while back, they are (as their name suggests) stable, which is actually a huge benefit to consumers and business owners living in other parts of the world.
Let’s say you wanted to give consumers living in countries with volatile currencies the ability to store money in U.S. dollars and frictionlessly spend it with local merchants in their local currencies; stablecoins might be the best choice!
Here’s a new product announcement from Stripe:
Visa and Bridge today announced a new card-issuing product. Fintech developers using Bridge can now offer stablecoin-linked Visa cards to their end customers in multiple countries through a single API integration.
Cardholders will be able to make everyday purchases from a stablecoin balance at any merchant location that accepts Visa. For example, when a customer in Colombia shops locally and uses their Bridge-enabled Visa card to pay a merchant, Bridge deducts the requisite funds from the customer’s stablecoin balance and converts the balance into fiat, enabling the merchant to get paid in their local currency like any other transaction. Customers can add these cards to supporting digital wallets and pay at the 150M+ merchant locations that accept Visa.
The integration enables issuance of new card programs in multiple countries at once, starting with Argentina, Colombia, Ecuador, Mexico, Peru and Chile. The focus on Latin America aims to address the growing demand for consumers and businesses to utilize stablecoins to store value and fund everyday purchases.
So, that’s the first reason.
The second reason flows from the first. Once you have major fintech infrastructure providers like Stripe and Visa incorporating stablecoins into their platforms, the subtle differences between stablecoins and other fintech infrastructure options start to become more salient.
Take Robinhood’s forthcoming banking product, which offers 4% APY on savings, up to $2.5 million in FDIC insurance, a debit card, the ability to send money across the world in over 100 currencies, and a number of other bells and whistles.
Behind the scenes, Robinhood had to do a lot of work stitching together different vendors in order to assemble the product.
They work with Coastal Community Bank, which is providing the omnibus FBO account where all Robinhood customers’ money is being stored and facilitating domestic payments via ACH and card issuing. They have IntraFI, which sweeps all the excess deposits to a network of partner banks, which is how Robinhood can pay that 4% APY and advertise $2.5 million in FDIC insurance coverage. And they likely have a cross‑border FX engine (like Nium or Currencycloud) that can collect, convert, and pay out in 100+ currencies.
That’s a lot!
It’s not prohibitive for a large and sophisticated fintech company like Robinhood, but it is expensive and annoying. And it is prohibitive for smaller fintech companies that want to launch a similar offering.
I will not go so far as to say “crypto solves this” (punch me in the face if you ever hear me say that!), but I will say that stablecoins could simplify that stack.
Instead of Coastal + IntraFi + unnamed FX engine, you just have one stablecoin issuer that parks reserves in cash and Treasuries and facilitates payments between 100+ countries with no need for FX (the token is already the same dollar everywhere). You’d still need a bank for the debit card, but it would literally just be acting as a BIN sponsor. Everything else would be handled on-chain.
To be clear, stablecoins aren’t an unambiguously better choice than traditional banking-as-a-service (BaaS) options. Indeed, I cherry-picked the Robinhood example because the large cash balances and need for high yields and international money transfers make it an especially obvious fit for stablecoins. Chime, by contrast, probably wouldn’t see any reason to build on stablecoins vs. sponsor banks.
However, if stablecoins can just become roughly equivalent to traditional BaaS and sponsor bank options, I think we will see more and more fintech product developers move towards them, if for no other reason than stablecoins feel cool and modern (especially when Stripe is telling you so) and banks are percieved (even in the best circumstances) as fussy and antiquated.
(Editor’s Note — You will notice that I included terms like “equivalent” and “all else being equal” in this section of the essay. These are BIG assumptions. Stablecoins’ ability to compete, on an infrastructure level, with sponsor banks and BaaS platforms depends on them gaining approved regulatory status in the U.S. through the STABLE/GENIUS Acts [which have still have some significant flaws that need to be fixed] and making sure they are implemented in a way that doesn’t create a massive AML clusterfuck. My confidence level on all of this is not exceptionally high.)
Most Community Banks Have No Path to Win in Stablecoins
Community banks survived the first couple of waves of fintech disruption because that disruption was, in large part, built on top of community banks.
By virtue of the Durbin Amendment (which created superior unit economics for fintech companies built on banks with less than $10B in assets) and community banks’ higher risk tolerance, BaaS became the domain of community banks. This created new sources of non-interest income for community banks, but it also helped them retain and grow their deposits, which they then used to fund their consumer and commercial lending businesses.
The disruptive threat posed by stablecoins is different, and significantly more severe:
- Stablecoins will compete directly for community banks’ customers. This will be especially true if they are allowed to offer interest or rewards (this is a point of contention in the legislative deliberations) and if big tech companies like Apple, Amazon, and Meta adopt them (Meta is reportedly considering it).
- Stablecoins will compete with BaaS banks for fintech and embedded finance programs. Infrastructure providers like Stripe are already all-in on this. In addition to the card issuing product I mentioned above, Stripe also just announced Stablecoin Financial Accounts, which will allow users from more than 100 countries to store, receive, and send funds via crypto and fiat rails from a dollar-denominated stablecoin balance. I would guess that this product will soon be made available as an embedded finance offering for Stripe’s platform customers.
- Stablecoins will shift deposits from community banks to big banks. Based on the current draft of the GENIUS Act (and its peer in the House of Representatives, the STABLE Act), it seems likely that most stablecoin reserves will stay within the bank perimeter, but unlike BaaS, these omnibus reserve accounts will wind up at systemically important banks that specialize in custody services (State Street, BNY Mellon, etc.) Additionally, we will see a number of big banks compete directly in stablecoin issuance (Bank of America has already said it will look at this), which is something that most community banks will be unable or unwilling to do.
- Stablecoins will remove some deposits from the banking system. The STABLE/GENIUS Acts do allow for certain stablecoin issuers to keep reserve balances directly in a Fed Master Account. Functionally speaking, this is narrow banking, and it would cause some portion of deposits to leave the banking system entirely.
The overall result is that the core deposits that community banks rely so heavily on will flow up market, as these banks’ direct and indirect customers slowly adopt stablecoin-powered products. This disruption doesn’t have to happen at a large scale across the industry to devastate community banks.
And, as the ICBA warns, the downstream consequences for underserved customer segments could be devastating as well:
With community banks using deposits to make 60% of the nation’s small-business loans and 80% of banking industry agricultural lending, mitigating the risk of retail deposits migrating out of community banks — which have proven commitments to their communities and local credit creation — is critical.
