Banks look into issuing their own stablecoins to fend off crypto, enhance services
Decentralization and circumventing the traditional financial system are central tenets of most cryptocurrencies. Stablecoins, on the other hand, have sought to use the advantages blockchain technology offers while avoiding the volatility that has come to be another hallmark of crypto. Traditional banks like stability, of course, but they have noticed the benefits that blockchain brings, notably speedy and low-cost transactions. With governments around the world beginning to put cryptocurrency regulations in place, banks are exploring the notion of issuing their own stablecoins to modernize and retain supremacy in the financial world.
Well-Positioned
It could turn out that crypto does indeed revolutionize finance, just not in the way proponents have imagined. Big, established businesses buying up or adopting the innovations new competitors bring to the market before those challengers have a chance to overtake them is a tale as old as time. The way banks see it, fiat-backed stablecoins combine the best of traditional finance and cryptocurrency. There’s increased efficiency without the volatility.
As governments institute crypto regulations, banks are in a better position than decentralized competitors. They already navigate regulations every day, they have lots of customers who trust them, and they’re heavily capitalized. They can afford to comply with regulations, invest in new technologies, and can bring large customer bases along with them.
Thanks to their stability, stablecoins are ideal for real-time and cross-border payments as well as money wiring. The services most banks offer now add friction for customers by taking too long, costing too much, or both. But if banks issue their own stablecoins, which have the bonus capability of easy cross-platform exchanges, they’ll make life easier on their customers. Big banks such as JPMorgan and BNP Paribas have already been using blockchain networks in limited capacities.
Japan Test Case
Last year, Japan passed a law regulating stablecoins that took effect June 1. It could serve as a test case for other large economies, and the country’s largest banks are lining up to issue their own stablecoins. Mitsubishi UFJ Trust and Banking, Japan’s biggest bank, plans to issue Progmat Coin in 2024. It will be used for digital securities and NFT purchases and will let people and businesses send money to each other without going through a clearing network.
“The basic architecture involves financial institutions interested in issuing stablecoins depositing an equivalent amount of fiat currency with MUFG’s trust bank. Progmat then issues an equivalent amount of stablecoins. The funds in the trust bank are bankruptcy-remote, making this potentially the most secure stablecoin for use on public blockchains,” Motoki Yoshida of TOKI, a “cross-chain bridge” and Progmat partner, told Blockworks.
Minna no Bank, Tokyo Kiraboshi Financial Group, and Shikoku bank also plan to issue their own stablecoins in partnership with G.U. Technologies.
The banks will use Japan Open Chain, an Ethereum-compatible public blockchain backed by the new law.
“Since stablecoins can be issued not only in Japanese yen but also in other currencies around the world, this is considered to be a great business opportunity for Japanese financial institutions, including the possibility that Japan will be responsible for global settlements,” G.U. Technologies said.
U.S. Banks
The U.S. has yet to pass stablecoin legislation, though members of Congress have proposed and drafted bills regulating stablecoins. In the meantime, a group of banks founded the USDF Consortium in 2022, proposing to issue its own stablecoin called USDF. Figure Technologies and JAM FINTOP have partnered with the nine banks to facilitate adoption of USDF, which started on the public Provenance blockchain but has since switched to a private blockchain awaiting regulatory approval.
“USDF is a ‘tokenized deposit’ that represents an existing bank deposit on a blockchain ledger,” the consortium says on its website. “By extending the existing banking model onto blockchain we can deliver modern payments infrastructure while maintaining the numerous protections and benefits that our two-tier banking system provides today.”
The consortium envisions a wide range of applications for banks and their customers, including capital call financing and supply chain finance. Crucially, it says, the FDIC membership of all founding banks addresses consumer protection concerns that non-bank issued stablecoins don’t. The consortium is trying to get banks across the U.S. to join the project, and customers of a participating bank could only use USDF for transactions with customers of another consortium member bank.
TassatPay, in use by six FDIC-insured banks, has completed more than $1 trillion in transactions on its private permissioned blockchain-based platform, with use cases including maritime finance, automated claims processing, commercial construction, private equity capital calls, and mortgage warehousing. Tassat clients are connected to FedNow, the Federal Reserve’s newly-debuted real-time payments platform.
“Everyday consumers are able to move money at any time of the day and at any point in the week, yet businesses are limited to 9am – 5pm, Monday through Friday. That needs to change, and we are excited for the arrival of FedNow,” Kevin R. Greene, chairman and CEO of Tassat Group, said.
Issuing their own stablecoins, financial institutions could make banker’s hours 24/7/365.
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