The tech stack underpinning banking’s deposit-centered business model has evolved over decades. It’s so big and complex that maintaining it constitutes a multi-billion-dollar industry of its own. Now blockchain threatens to blow it all away.
The new US GENIUS Act lets decentralized applications (dApps) hold money in stablecoin form on behalf of users. That opens up incentives for retail customers to deposit money and spend it directly on-chain, in an ever-evolving array of micro-personalized services.
If every dApp is a potential future bank, how can traditional high street lenders – with high fees, inflexible packages, and huge and complex IT architectures – keep up? We explore how the forces enabling such a transition could be evolving.
Key Takeaways
- A crypto-friendly SEC and the recently enacted GENIUS bill could be an extinction-level event for legacy banks.
- Blockchain and DeFi services arguably have the legal and regulatory support needed to mount a challenge.
- Of course, we’ve been here before. FinTech banks have been trying to break the institutional hold on retail finance for a decade – with variable success.
- The difference now is that both money and services have gone digital, and the technical foundations for competition are fast, flexible, and cheap.
Table of Contents
Table of Contents
A Blockchain-Triggered Breakup?
Bundling is essential to banking’s business model. Open an account and you get a package of services – loans, deposits, credit cards, custody services, payment processing, credit cards, asset management, or investment banking.
You may not be interested in everything in the package, but you’re charged the full package fee. Try to use a service, and you discover it only executes on the bank’s timeline, and according to its rules.
Crypto is simpler. It offers two things every banking customer wants – storing money and transferring it – with the freedom to invent new services and add or discard them on the fly. Money becomes software: programmable, mobile, and always available.
Those freedoms, paired with provisions of the US GENIUS Act, are about to cause problems for legacy banks and the deposits they rely on.
Washington’s late embrace of crypto – and stablecoins in particular – presents an existential threat to massive institutions dependent on a cheap source of funding, and whose packaged offerings are weighed down by out-of-date IT systems and pre-digital compliance.
Innovations Making a Difference
Seen through that lens, banking’s unbundled future could look very different. The technical foundations are being built right now:
- Slash offers a blockchain banking platform that lets small businesses open a USD account without establishing a Legal Liability Company (LLC) first, sidestepping the costs and account-closure risks that process involves.
- Fireblocks has created a token processing engine that can mint and reconcile stablecoins across more than 80 blockchains. It already secures transactions worth trillions for banks like ABN AMRO, BNP Paribas, and BNY Mellon.
- Anchorage Digital, the first chartered digital asset bank, handles crypto custody for the likes of Franklin Templeton, which flows its crypto investments directly into Anchorage custody and settles shares instantly instead of the normal two days.
- Safe has created an SDK that gives any dApp a simple login and multi-signature policy, making it easier to offer services like gas abstraction and streaming payroll. It currently enables roughly $100 bn in smart-account treasuries.
The next phase will be a decentralized banking service capable of integrating capabilities like these – re-bundling them, if you like – for retail banking users.
Can Crypto Banks Make Money?
Promising as these developments are, blockchain’s entry into the banking game isn’t a slam dunk. FinTechs have been trying to dislodge the high street giants for more than a decade.
Customers appreciate Monzo and Revolut as transactional platforms, but haven’t been as willing to hand over their deposits. That’s stopped them from achieving scale in lending and other high-margin services.
The barriers to blockchain in banking are just as high. Circle’s recent IPO application to the SEC is packed with risk disclosure caveats. Competition is “difficult and intensifying,” with profitability subject to structural elements like interest rates that are beyond its control.
The arrival of central bank digital currencies (CBDCs) would “almost certainly” stifle demand for stablecoins, it warns. The regulatory environment – though warming – “remains uncertain.”
Circle’s filing also lays bare an uncomfortable truth: stablecoins can cost more to issue and manage than USDC/USDT’s results might lead investors to believe. The firm’s 2024 operating expenses totalled around $480 million, alongside $1 billion in USDC “distribution, transaction, and related costs.”
PayPal, banking’s original FinTech challenger, recently announced plans to encourage stablecoin payments by offering 3.7% on user balances. That would be roughly 65 basis points under the current US Fed rate. Hardly a margin worth picking a fight over with giant entrenched incumbents.
For crypto to win, it might have to act as a loss leader, clearing a path for other, more profitable services later down the line.
The Bottom Line
When future historians tell the tale of the digital revolution, unbundling will be a recurring theme.
The internet unbundled newspapers into search engines, blogging platforms, and bulletin boards. Fiber optic tech unbundled cable networks into streaming services. MP3s unbundled albums into individual songs. Web browsers unbundled Web 1.0 – ushering in Web2 by breaking up the restrictive packages offered by AOL and CompuServe.
That same dynamic is playing out between crypto and banking. Crypto is being embraced by TradFi, and blockchains are proving themselves as money rails. Users may well decide their idle deposits are better left on apps they choose themselves. The apps would reap the compound interest while building up balances in a decentralized system with massive distribution.
Who wins the DeFi vs. TradFi battle? If blockchain enables faster money movements and stablecoins make it safe for user deposits to be held by anyone under a proper regulatory regime, we could see today’s finance giants replaced by a new model – one with very different economics.
FAQs
The recently enacted GENIUS Act makes it easier to launch stablecoin-based banking services. A regulatory framework mandates one-to-one reserve backing with high-quality assets and requires transparency through monthly public disclosures. It provides a pathway for stablecoin issuers to become supervised financial institutions.
It’s technically possible, but risks and regulatory concerns could stop it from catching on. Protocols like Aave already allow users to lend and borrow crypto assets with collateral and interest rates. However, they operate in a legal gray zone.
Legacy banks have begun adopting blockchain tech to improve efficiency, security, and reduce costs for services like cross-border payments. Some are collaborating with fintech firms to offer new digital services and compete with decentralized finance platforms.
References
- Slash (@slashapp) on X (X)
- Fireblocks drives the next wave of digital asset innovation for Banks & FMIs with new flexible deployment offering (Fireblocks)
- Crypto Bank for Institutions (Anchorage Digital)
- Ethereum Smart Accounts (Safe)
- S-1 (Sec)
- PayPal Aims to Boost Stablecoin Use By Offering 3.7% on Balances (Bloomberg)
- wsj.com (WSJ)
