S Stablecoins: What They Are AND HOW THEY COULD AFFECT THE BANKING INDUSTRY BY DAX DENTON & ROSS TEARE, INDIANA BANKERS ASSOCIATION Stablecoins have rapidly emerged from the periphery of cryptocurrency markets into a central topic in financial and regulatory conversations. These blockchain-based digital tokens are designed to maintain a stable value, typically pegged 1:1 to the U.S. dollar, and enable fast, low-cost transactions 24/7. While they promise to modernize payments and expand financial access, stablecoins also pose new challenges to the banking industry and policymakers. The numbers underscore their dramatic rise: The stablecoin market grew from under $5 billion in 2020 to more than $200 billion by 2025. Tether (USDT), the largest stablecoin by market cap, recently surpassed $140 billion. These developments have significant implications for how banks operate, how money moves and how financial stability is preserved. Stablecoins generally fall into three categories. Fiat-backed stablecoins are the most prevalent. These include USD Coin (USDC) and USDT, which are backed by reserves like cash, commercial bank deposits or short-term U.S. Treasuries. Crypto-collateralized stablecoins, such as DAI, use other cryptocurrencies as reserves. They are overcollateralized to buffer against volatility. Algorithmic stablecoins attempt to maintain their peg through programmed supply controls rather than asset backing. This model has largely failed, as seen in the $40 billion collapse of TerraUSD (UST) in 2022, which lost its peg and shook confidence in the broader crypto ecosystem. Today, fiat-backed stablecoins dominate the market due to their perceived stability and alignment with traditional financial assets. Originally developed to facilitate cryptocurrency trading, stablecoins are now being used in cross-border payments, remittances and as a digital store of value, especially in countries facing currency instability. Their ability to settle transactions in real-time and across borders creates efficiency gains that traditional payment rails struggle to match. For emerging markets, dollar-linked stablecoins can provide an on-ramp to dollar-based savings and payments. In the U.S., businesses and fintechs are experimenting with stablecoins to reduce transaction costs, improve speed and introduce programmable features into payments infrastructure. Stablecoins offer banks both promising opportunities for innovation and significant risks that could impact their core business models. On the opportunity side, stablecoins can help modernize the banking sector by enabling faster, more cost-effective and programmable payment systems. Banks may also explore new service lines, such as offering custodial solutions for digital assets, facilitating blockchain-based settlement or introducing tokenized deposit products. In addition, partnerships with fintech firms present a strategic path for traditional financial institutions to integrate blockchain infrastructure into their operations and remain competitive in an evolving financial landscape. However, these innovations are not without risks. One major concern is deposit disintermediation – if customers choose to hold their funds in stablecoins instead of traditional bank accounts, this could reduce the deposit base, especially for community banks that rely on local funding to support lending. There is also the risk of a run: If users lose confidence in a stablecoin’s reserve backing, it could prompt mass redemptions and fire sales of reserve assets. This risk was exemplified when USDC temporarily GR SUMMIT 36 HOOSIERBANKER
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