KBRA Financial Intelligence

U.S. Banks to Disrupt the Stablecoin Status Quo

Welcome to KFI Monthly Insights. In this edition, we highlight the following key topics:

• The evolving market structure and growth of dollar-pegged stablecoins throughout the past several years

• Potential regulatory reforms that may allow banks to disrupt the industry and increase accessibility in digital asset markets

• Mergers and acquisitions (M&A) activity among U.S. lenders slowed slightly in February with just five deals announced

Banks and Regulators Shift Toward Digital Asset Adoption

Digital asset adoption among U.S. institutions has accelerated significantly throughout the past two years. Last December, KBRA Financial Intelligence (KFI) highlighted the success that American asset managers experienced in their rollout of exchange-traded products backed by custodied Bitcoin, noting that a similar phase of adoption could soon occur among the nation’s banks. One digital asset product that may be the most natural for depositories to offer is the stablecoin, generally defined as a digital token with a stable value derived from a 1:1 peg to the underlying value of a currency or similar fungible asset. Stablecoins now handle trillions of dollars’ worth of annual transfer volumes around the globe.

Advocates assert that stablecoins could be used to optimize banks’ cross-border payments, as well as treasury and liquidity management, and to enable bank-level engagement with smart contracts and decentralized finance protocols. The origin of stablecoins can be traced back to digital asset market participants seeking to overcome perceived inefficiencies in the traditional financial system, where manual processing, weekends, and other factors can slow the process of settlement significantly. Liquidity can be moved via blockchain in the form of digital tokens far more rapidly, which is beneficial in markets that trade 24/7 like cryptocurrencies. According to the Office of the Comptroller of the Currency (OCC), blockchains are a type of independent node verification network (INVN), a common term used in the office’s interpretation of banks’ permissible payment activities involving stablecoins.

Bank of America CEO Brian Moynihan recently affirmed his belief that bank-issued stablecoins would eventually be interoperable with U.S. dollar (USD) deposit accounts, confirming that the bank “will go into that business” if regulatory reforms allow. For many years, a stringent and often indeterminate U.S. regulatory framework has prohibited banking institutions from engaging with cryptocurrency markets directly. FDIC documents recently released on the orders of Acting Chair Travis Hill shed some light on previous agency actions and communications that made even made banks’ attempts to provide services to digital asset enterprises seem “extraordinarily difficult—if not impossible.”

It is unknown if Hill, who served as vice chair at the FDIC prior to being tapped by President Trump to act as the new agency executive, will be appointed to the position permanently, but he had been a critic of the FDIC’s rigid approach toward digital assets for some time. In March 2024, Hill stated that the FDIC appeared “closed for business” to any institutions interested in anything related to blockchain technology, and that it would be helpful to provide certainty that “deposits are deposits, regardless of the technology or record-keeping deployed.”

Hill is just one of the key regulatory figures deployed by the White House who may prove instrumental in transforming the federal government’s approach to crypto oversight. The SEC, awaiting confirmation of Trump nominee Paul Atkins, has begun abandoning a mountain of outstanding litigation against numerous cryptocurrency exchanges and developers. Simultaneously, David Sacks, Chair of the President's Council of Advisors on Science and Technology, has announced the first White House crypto summit will take place this week, where the establishment of a “Strategic Reserve consisting of Bitcoin and other top cryptocurrencies” will be discussed.

Exploring Current USD Stablecoin Market Dynamics

The upending of the regulatory uncertainty that has thus far kept U.S. banks away from the digital assets industry, and the subsequent entrance of institutions with the size and regulatory reporting standards of Bank of America, would be an unprecedented shift in the stablecoin industry. The total value of stablecoins in circulation has bloomed into a $200 billion market cap. USD-denominated tokens are the primary attraction, but the largest share of the market is dominated by a relatively small cohort of nonbank financial institutions (NBFI). The largest of these issuers, Tether, is a non-U.S. entity that has faced legal challenges from American regulators in the past.

Banks have been restrained from offering digital tokens externally, but the technology is not totally foreign. As far back as 2019, JPMorgan Chase had developed and begun utilizing a dollar-backed stablecoin called “JPM Coin” to facilitate wholesale or interbank fund transfers. Though never distributed publicly, the bank disclosed that JPM Coin was being used in commercial transactions by late 2020, with significant financial institutions like Goldman Sachs signing on to JPM’s custom blockchain service. In 4Q 2024, JPM Coin was rebranded to Kinexys Digital Payments, with the blockchain business processing an average of more than $2 billion a day.

The structure and function of stablecoins vary, but this analysis is primarily concerned with dollar-denominated, asset-backed stablecoins. In this instance, the peg is maintained by a constant guarantee that one token can be constantly redeemed for one dollar. Liquidity for these token redemptions come from a pool of reserves, with the most popular reserve asset being United States Treasury (UST) securities. Treasury bills, which mature in a year or less and are considered cash-equivalent assets, now make up the majority of claimed reserves among major stablecoin issuers. This arrangement has provided a significant windfall to stablecoin issuers as the Federal Reserve has ratcheted up rates throughout the past several years. Industry leader Tether reported a record annual net profit north of $13 billion for 2024.

December 2024 attestation documents show that almost $112 billion worth of UST securities populate the consolidated reserves backing three large asset-backed USD stablecoins–nearly equivalent to the collective sum of UST securities held by a cohort of 2,513 U.S. commercial banks. Stablecoin UST reserves are held in addition to tens of billions of dollars of reverse repurchase agreements, money market funds, and even precious metals. The composition of these attested reserves and the reliability with which they are presented have shifted significantly over the past several years. As recently as December 2021, one-third of the claimed reserves backing the most popular stablecoin, Tether’s USD (USDT), were composed of commercial paper from unknown issuers. More recently, Tether’s attestations imply the company has eliminated holdings of commercial paper and employed the services of accounting firm BDO Italia to perform “reasonable assurance engagements” on USDT’s consolidated reserves, disclosing its opinion in quarterly independent auditors’ reports.

Additionally, Tether has employed U.S. asset manager Cantor Fitzgerald as a custodian for some amount of its UST reserves. Custody is a key service U.S. banks could provide in the digital asset space as well, as the OCC concluded in 2020 that national banks are permitted to hold stablecoin “reserves” as a service to bank customers. In December 2024, KFI highlighted the progress of several major U.S. custodian banks’ efforts to expand into digital asset custody.

Legislative Clarity May Open Stablecoin Industry to Banks

Though Tether has made apparent improvements in terms of transparency, it remains an offshore entity, recently relocating its headquarters from the British Virgin Islands to El Salvador, and its dominance in the USD-pegged stablecoin market has remained a concern among U.S. government officials. Without naming Tether or any other issuer specifically, the Financial Stability Oversight Council’s (FSOC) 2024 annual report cites the stablecoin industry’s concentration, opacity, and alleged lack of (or disregard for) compliance as a “potential risk to financial stability.” The FSOC, comprised of then-Treasury Secretary Janet Yellen, and heads of various financial regulatory bodies, recommended action on behalf of Congress to create a “comprehensive federal prudential framework for stablecoin issuers” to address various risk factors that could emerge from a lack of regulatory controls. It remains to be seen how turnover at the White House, coupled with the ensuing shakeup of regulatory officials, may impact the FSOC’s views on stablecoins in 2025.

Tether has maintained a significant first-mover advantage in the stablecoin market, having launched four years before USDT’s primary competitor, USD Coin (USDC), came onto the scene in 2018. U.S.-based Circle Finance is the issuer behind USDC, the second-largest stablecoin by market capitalization at $56 billion. However, USDC has seen comparatively little growth over the past three years, now only slightly more than one-third the size of the market-leading USDT, which is 70% larger than its 2022 high. Tether’s increasing market share has likely been aided by its status as the primary trading pair among non-U.S. headquartered exchanges, which generally have the highest volume.

The premier topic on the agenda at the new Senate Banking Subcommittee on Digital Assets’ first hearing last month was stablecoin legislation. Several different iterations of stablecoin-related bills have been floated in Congress over the past several years with scant results. A new bipartisan piece of legislation introduced in the Senate, the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, is the latest attempt to create a standard framework for dollar-pegged stablecoin issuers to comply with. Under GENIUS, both depository institutions and NBFIs could seek licenses to issue stablecoins, provided they submit to federal oversight from the OCC- or state-level oversight for issuers with less than $10 billion in stablecoin market capitalization.

Among all stablecoins, only USDT and USDC currently surpass the $10 billion threshold. Though a number of large depositories may have the resources to launch and scale novel stablecoin products relatively quickly, a much larger grouping of smaller U.S. banks will be more likely to solicit third parties to either build out stablecoins for them or provide infrastructure to handle stablecoin payments and deposits. Digital payments firm PayPal has undertaken this strategy, forging a partnership with U.S.-based Paxos Trust Company. Under the arrangement, Paxos issues the PayPal USD stablecoin (PYUSD) and manages the back end (including reserve reporting) on behalf of PayPal, which focuses on distribution and adoption. PYUSD, launched in 2023, is now the fourth-largest stablecoin by market cap at $760 million.

KFI will continue to contextualize the ongoing evolution of financial institutions’ role in the digital asset ecosystem with data leveraged from our bank and credit union data platform. Our tools and datasets, which include our proprietary KFI scores, cover 10,000 U.S. institutions and are available for trial here.

Recent M&A

Newport Beach, California-based Genesis Bank (KFI Score: A) announced in a February 13 press release that the $185 million bank will acquire Excel Bank, a tradename of $299 million Beverly Hills-based EH National Bank (KFI Score: B-) in an all-cash transaction for an undisclosed price. The deal is expected to close mid-2025.

McAllen, Texas-based Rio Bank (KFI Score: B) announced in a February 20 press release that the $945 million bank will acquire $498 million San Antonio-based Lone Star Capital Bank (KFI Score: B) for an undisclosed price. The expected deal closing date was not disclosed.

Yoakum, Texas-based Yoakum National Bank (KFI Score: B+) announced on February 21 that the $331 million bank will acquire $56 million Citizens State Bank of Ganado, Texas (KFI Score: B-) for an undisclosed price. The deal is expected to close in 2Q 2025.

Aurora, Illinois-based Old Second Bancorp, Inc. (NASDAQ: OSBC) (KFI Score: B+) announced in a February 25 press release that the $5.7 billion lender will buy $1.5 billion Oak Brook, Illinois-based Evergreen Bank Group (KFI Score: B) and its parent company, Bancorp Financial, Inc., in a cash and stock transaction valued at $197 million, or approximately $62.60 per Bancorp Financial common share. The deal is expected to close in 3Q 2025.

Stuart, Florida-based Seacoast Banking Corporation of Florida (NASDAQ: SBCF) (KFI Score: B+), the parent company of $15.2 billion Seacoast National Bank (KFI Score: B), announced in a February 27 press release that it will acquire $734 million Heartland National Bank (KFI Score: A-), the bank subsidiary of Sebring, Florida-based Heartland Bancshares, Inc., in a cash and stock transaction valued at $110 million. The deal is expected to close in 3Q 2025.

In Case You Missed It

Follow KFI’s blog for our latest research, data analytics, and product updates. Read our insight pieces on 10,000 banks, credit unions, and more. Some of our recent analysis highlights include the following:

Bank Lending Impacted by Rising Yields and Booming U.S. Deficit

Trump Tariffs May Expand Bank Margins, but Weaken Construction Lending

Major Consolidation of U.S. Bank Regulators Begin to Take Shape

Mortgage Delinquencies Rise as Rates and Tariff Threats Weigh on Housing Market

Van Hesser’s 3 Things in Credit

February 7: Tariff Time, Credit’s iPhone Moment, and Earnings Check-Up

February 14: Euphoria Downside, M&A Downdraft, and 10-Year Direction

February 21: Homebuilder Blues, Walmart Guidance, and Tight Spreads