Stablecoins: Bridging Blockchain and Traditional Banking

Stablecoins are a rapidly growing class of digital assets that promise to combine the stability of traditional currencies with the efficiency of blockchain. In fact, stablecoins have become so popular that they now account for the majority of on-chain cryptocurrency transaction volume. Businesses and financial institutions around the world are beginning to leverage stablecoins for cross-border payments, liquidity management, and as a hedge against volatile local currencies. This article provides an educational overview of what stablecoins are, how they function in the blockchain ecosystem, and how they could integrate into traditional banking systems. We will also cover the different types of stablecoins, emerging use cases in banking (from faster cross-border transfers to digital asset custody), recent regulatory developments in major jurisdictions, and how compliance measures like KYC/AML can be applied in the stablecoin realm. The goal is to demystify stablecoins for finance professionals and illustrate why banks and regulated institutions are paying close attention to this innovation.

What Are Stablecoins?

Stablecoins are digital currencies designed to maintain a stable value by pegging themselves to an asset with relatively low volatility, such as a national currency. Unlike cryptocurrencies like Bitcoin or Ether, which can fluctuate wildly, a stablecoin aims to stay at a fixed price (commonly 1.00 unit of a fiat currency). Most stablecoins achieve this peg by being backed 1:1 by reserves of the reference asset or through other stabilization mechanisms. For example, a USD-backed stablecoin will hold reserves in U.S. dollars or equivalent highly liquid assets so that each digital coin is redeemable for $1. By anchoring value to fiat currency or other assets, stablecoins provide the predictability and trust of traditional money while operating on blockchain networks. These tokens circulate on public or permissioned blockchains (like Ethereum, Tron, or specialized bank networks) and can be transacted globally, 24/7, with near-instant settlement. In essence, stablecoins blend the transparency and programmability of blockchain with the relative price stability of fiat money, making them a crucial bridge between the crypto world and traditional finance.

Types of Stablecoins

Not all stablecoins are created equal – they use different methods to maintain their price peg. The main categories include fiat-backed, crypto-collateralized, and algorithmic stablecoins (as well as some hybrid or commodity-backed models). Below are the primary types and how they work:

Fiat-Backed Stablecoins: These are the most common and straightforward type. Each stablecoin is backed by reserves of fiat currency (like USD or EUR) held by the issuer in bank accounts or cash-equivalent assets. For every 1 stablecoin issued, $1 (or the equivalent value) is kept in reserve. Users can redeem the token for the underlying fiat. This mechanism ensures the price stays at $1 since it’s fully collateralized by real-world money. Examples: USD Coin (USDC) and Tether (USDT) are pegged to the U.S. dollar and claim to hold dollar-denominated reserves to match their circulating supply. Some banks and fintech firms are also exploring tokenized deposits, which are effectively fiat-backed stablecoins issued by banks (we’ll discuss this later).

Crypto-Collateralized Stablecoins: These stablecoins use other cryptocurrencies as collateral instead of fiat. Because cryptocurrencies are volatile, these models are often over-collateralized – meaning the value of crypto locked in reserve exceeds the stablecoins issued. For instance, a user might lock $150 worth of Ether to mint $100 of a crypto-backed stablecoin, absorbing potential price swings. Smart contracts automate this process and can liquidate collateral if its value falls too much. The most well-known example is Dai (DAI), which is pegged to USD but is backed by reserves of Ether and other crypto assets; the MakerDAO protocol dynamically manages collateral ratios to keep Dai’s value stable. Crypto-collateralized coins maintain decentralization (no bank holds reserves) but can be less capital-efficient due to the high collateral requirements.

Algorithmic Stablecoins: Algorithmic stablecoins aim to maintain their peg without direct collateral, relying on algorithms and market incentives to control the token’s supply. The system programmatically expands or contracts the supply of the stablecoin (or a related token) in response to price deviations. For example, an algorithm might issue more coins if price rises above $1, or buy/burn coins if price falls below $1, aiming to push the price back to target. While innovative, purely algorithmic models have proven challenging to sustain. They rely on steady demand and investor confidence. A cautionary example was TerraUSD (UST), an algorithmic USD stablecoin that collapsed in 2022 when its peg mechanism failed, erasing billions in value. This highlighted the risk that without concrete reserves or collateral, a loss of market trust can trigger a “death spiral.” (Some newer designs use hybrid approaches – for instance Frax (FRAX) is partially collateralized and partially algorithmic – but they are still experimental.)

Other categories: A few stablecoins are commodity-backed, using assets like gold or other precious metals to stabilize value. For example, PAX Gold (PAXG) is backed by physical gold reserves, with each token representing one fine troy ounce of gold. There are also stablecoins backed by traditional financial assets like government bonds or money market instruments, effectively tokenizing those assets (Ondo’s USDY and others have used U.S. Treasury bills as collateral to produce a yield-bearing stablecoin). Regardless of type, the common goal is to maintain a predictable price. The choice of mechanism affects the risk profile: fiat-backed coins carry issuer and reserve risk, crypto-backed coins carry crypto-market risk, and algorithmic coins carry model risk. Many in the industry view fiat-backed stablecoins (especially those with transparent reserves) as the most straightforward for integration with traditional finance, since they resemble a digital form of a currency or bank deposit.

How Stablecoins Function on the Blockchain

Stablecoins operate on blockchain rails, meaning transactions are recorded on distributed ledgers rather than in private bank databases. Most prominent stablecoins (like USDC or USDT) exist as tokens on public blockchain networks such as Ethereum, Tron, Solana, or others. Transacting a stablecoin is similar to transacting any cryptocurrency, except the value is intended to remain stable. Users hold stablecoins in digital wallets (which could be custodied by a provider or self-managed), and they can send or receive them globally to anyone with a compatible wallet address. A transfer of stablecoins typically settles within seconds or minutes (depending on the blockchain’s speed) and can be done 24/7, unlike bank wires that cut off on weekends or require intermediaries. This makes moving money faster and potentially cheaper. For example, a cross-border payment that might take 1–3 days and $25+ in fees via traditional bank networks (e.g. SWIFT) could be done with a stablecoin in seconds at a cost of a few cents, dramatically improving efficiency.

Stablecoins achieve their stability through the mechanisms described earlier: e.g., when users buy a fiat-backed stablecoin from the issuer, dollars flow into the reserve and an equivalent number of tokens are minted on-chain; when they redeem, tokens are burned and reserves released. This minting and burning process (often handled by smart contracts or the issuer’s systems) keeps supply aligned with reserves. In the broader blockchain ecosystem, stablecoins play several critical roles:

Medium of Exchange: They provide a crypto-native form of cash that businesses and individuals can easily transact with. In many crypto markets, pricing products or services in dollars via a USD stablecoin is more practical than using a volatile crypto asset.

Liquidity and Trading Pair: Stablecoins are heavily used on cryptocurrency exchanges (both centralized and decentralized) as a base trading pair. Traders can park value in a stablecoin to avoid market volatility without leaving the crypto markets. This has made stablecoins underpin a huge portion of trading volume and liquidity in the crypto economy.

Decentralized Finance (DeFi) Enabler: In DeFi protocols (for lending, borrowing, yield farming, etc.), stablecoins are essential. They allow users to lend and earn interest, or post collateral for loans, without exposing themselves to volatility. Much of the $100+ billion DeFi ecosystem relies on stablecoins as the unit of account and store of value within smart contracts.

Bridge between TradFi and Crypto: Perhaps most importantly for our discussion, stablecoins serve as a bridge between traditional finance (TradFi) and blockchain. They are often the onramp/offramp for fiat currency into the crypto world. For example, an individual or company can convert bank dollars into USDC, use the USDC on blockchain for various purposes, and later redeem back to bank dollars. This connectivity means stablecoins could be integrated into financial services as a complement to traditional payment networks.

In summary, stablecoins function as digital cash on blockchain, enabling near-instant, round-the-clock transactions. This capability opens up a range of use cases that traditional banking systems (with their legacy infrastructure and intermediaries) struggle to serve efficiently. Below, we explore some key use cases and integration points for stablecoins in the context of traditional banking.

Use Cases for Stablecoins in Traditional Banking

Stablecoins were initially adopted within the crypto markets, but they are increasingly finding applications in mainstream finance and banking. Traditional financial institutions are investigating or already implementing stablecoin-based solutions to improve legacy processes. Here are some current and emerging use cases:

Cross-Border Payments and Remittances

International money transfers are a natural fit for stablecoins. In the conventional system, cross-border payments often pass through multiple correspondent banks, incurring fees and delays. Stablecoins can streamline this by moving funds on a blockchain directly between parties. A payment in stablecoin can settle in seconds, across any distance, as long as both sender and receiver have access to the token. This has huge implications for remittances (where migrants send money home) and corporate payments alike. As noted, a transfer that might cost $30 and take several days via SWIFT can be accomplished almost instantaneously using a stablecoin like USDC, with negligible fees. Because stablecoins are pegged to fiat, neither the sender nor receiver faces currency volatility during the transfer – the amount sent is the amount received in real terms.

Banks are starting to leverage this potential. For instance, JPMorgan’s Liink/Onyx network uses JPM Coin (a JPMorgan-issued stablecoin) to allow participating corporate clients to make dollar or euro payments across borders much faster than traditional wires. In 2023, JPMorgan even expanded JPM Coin to support euro-denominated payments, with Siemens as the first corporate user of the Euro JPM Coin for cross-border treasury flows. Other major banks are experimenting with stablecoin-based payment corridors: Japan’s Project “Pax” is a pilot involving the three largest Japanese banks (MUFG, SMBC, and Mizuho) to use stablecoins for cross-border payments, integrating SWIFT messaging with blockchain settlement. This project aims to test interoperability between the existing banking network and on-chain stablecoin transfers, highlighting that stablecoins can complement rather than entirely bypass traditional networks.

Beyond banks themselves, payment processors and fintech companies have also jumped in. For example, PayPal launched its own USD-backed stablecoin (PYUSD) and completed its first international business payment via blockchain, paying an invoice to Ernst & Young in seconds. And credit card network Visa has run pilot programs to settle transactions in USDC stablecoin over blockchain for merchants, instead of relying on wire transfers. These developments show how stablecoins can reduce friction in moving money globally. For banks, incorporating stablecoins into their cross-border payment offerings could mean faster service for clients, lower intermediary costs, and the ability to transact outside of standard business hours. It’s a way to modernize correspondent banking – or potentially leapfrog it – using blockchain as the settlement layer.

Settlements and Instant Clearing

In addition to cross-border remittances, stablecoins hold promise for settlement and clearing of financial transactions. Settlement refers to the final transfer of value to discharge a payment or trade obligation. Today, many types of transactions (securities trades, interbank loans, etc.) go through end-of-day or even multi-day settlement cycles. During that time, credit risk and operational risk exist because the actual exchange of funds hasn’t occurred yet. Stablecoins, effectively functioning as cash on ledger, enable instant or same-day settlement because the token transfer and ownership change can coincide precisely with a transaction event.

Banks have started trialing stablecoins for internal settlements. One notable example is Wells Fargo, which piloted a proprietary digital cash token for internal cross-border transfers between its branches. They reported that this blockchain-based system was faster and more efficient than using the traditional SWIFT network for moving money internally across countries. The immediate settlement reduced the need for overnight funding or reconciliation between their ledgers. Similarly, JPMorgan’s JPM Coin (mentioned earlier) is essentially used to settle obligations between clients on its Onyx network in real time – JPM Coin acts as a tokenized deposit that can move within the network instantly to settle payments, with finality assured by the bank.

Beyond payments, stablecoins are being used to settle trades in financial markets. Some pilot programs (often in sandboxes or private networks) involve using a stablecoin as the cash leg for securities transactions, enabling delivery vs payment within minutes. For example, several broker-dealers and Bank of America participated in a project with Paxos Settlement Service where a Paxos-issued stablecoin was used to settle stock trades on a T+0 basis (same day) rather than the usual T+2. And in Australia, ANZ Bank launched an AUD-pegged stablecoin and executed the first tokenized equity trade and even enabled real-time pension payments using that stablecoin. These cases illustrate that settlement latency can be greatly reduced by using stablecoins as the settlement medium, since the value transfer is embedded in a blockchain transaction that can be synchronized with other records (like transfer of a security token).

In summary, for banks and financial market infrastructures, stablecoins offer a tool to achieve nearly instantaneous clearing and settlement. This could lower counterparty risks, free up trapped liquidity, and improve efficiency in markets (potentially operating 24/7). However, to realize these benefits broadly, institutions need to coordinate on common standards and ensure regulatory acceptance (since today most of these projects are in pilot stages or within closed networks).

Digital Asset Custody and Treasury Management

As clients increasingly hold digital assets, banks are exploring roles as custodians for stablecoins and other crypto assets. Custody in the digital asset context means securely holding the private keys or managing the wallets that control those assets. Stablecoins might be the first form of crypto that many corporate treasurers or investors are comfortable holding (because of their price stability), so it’s natural that banks consider offering custody for them, just as they custody cash, securities, or gold for clients. In the U.S., regulators have clarified that banks are permitted to provide cryptocurrency custody services (with appropriate safeguards), which opens the door for holding stablecoins on behalf of customers.

Some large custody banks have already taken steps in this direction. Notably, BNY Mellon, one of the world’s largest custodians, formed a partnership with Circle (the issuer of USDC) to integrate stablecoin services. This integration allows certain BNY Mellon clients to seamlessly send funds to Circle and convert into USDC, or redeem USDC back to fiat, through their bank, indicating a direct bridge between traditional banking and stablecoin networks. Essentially, BNY Mellon acts as a custodian of the reserve funds and as a service provider enabling creation and redemption of the stablecoin for its clients – showing confidence in USDC as a settlement asset. Likewise, Standard Chartered has been working on custody solutions and even stablecoin issuance plans via its Hong Kong subsidiary, and Northern Trust and State Street (other major custodians) have invested in digital asset custody platforms that could handle stablecoins.

Custody isn’t just about storage – it’s also about providing trust and compliance. When a bank offers to custody stablecoins, it will implement robust security (to prevent hacks/theft of private keys) and will integrate those assets into account statements, audit trails, and insurance coverage similar to traditional assets. This gives institutional clients peace of mind to hold stablecoins for longer periods or larger amounts. It can also tie into treasury management: for example, a corporate client might hold a portion of its working capital in a USD stablecoin to take advantage of 24/7 liquidity, then rely on the bank’s custody and interfaces to swap back to fiat when needed or make payments directly in stablecoin. In volatile emerging markets, companies even use stablecoins as a more stable store of value (holding digital USD via stablecoin instead of local currency), and banks could facilitate that by holding those stablecoins in custody and helping manage conversion.

Finally, banks could incorporate stablecoins into their treasury services – for instance, offering automated escrow or conditional payments using smart contracts. We’re seeing early signs of this: JPMorgan enabled “programmable payments” with JPM Coin for its corporate clients, allowing money to move when certain predefined conditions are met (like an IoT sensor indicating a delivery). Siemens, for example, uses JPM Coin and smart contracts to automate internal transfers for treasury operations. This kind of programmable treasury service is something banks can offer if they custody and manage stablecoins on behalf of clients. Overall, by providing stablecoin custody and integrating it into traditional portals (online banking, treasury platforms), banks make it easier for clients to take advantage of blockchain-based money without dealing with the technical complexities directly.

Regulatory Developments for Stablecoins (U.S., EU, Asia)

Regulation is a key factor in how and when stablecoins integrate with traditional banking. Over the past couple of years, major jurisdictions have moved toward clearer rules for stablecoins, recognizing both their growing use and the potential risks. As of mid-2025, here is an overview of regulatory updates:

United States

In the U.S., regulators and lawmakers are actively working on establishing a comprehensive framework for stablecoins, especially those used as payment instruments. Several high-profile legislative proposals have been introduced. Two notable bills making their way through Congress in 2024–2025 are informally known as the GENIUS Act and the STABLE Act. These proposals aim to set national standards for stablecoin issuance and use. Broadly, they would require that any payment stablecoin is fully backed by high-quality reserves on a one-to-one basis, that issuers maintain redemption at par (so customers can always get $1 for 1 stablecoin), and that regular audits and disclosures of reserves are provided. They also mandate that issuers be properly licensed or chartered – issuers could operate under a federal bank charter or under state regimes with oversight, depending on size and structure. Importantly, the GENIUS Act (introduced in early 2025 and flagged as a priority by lawmakers) clarifies that stablecoins fulfilling these criteria should not be treated as securities, removing a legal uncertainty that has worried some institutions. If these bills (or a compromise thereof) pass, it would give U.S. banks and companies much-needed legal certainty to issue stablecoins or integrate them into services.

Even ahead of new laws, regulators have provided some guidance. The Office of the Comptroller of the Currency (OCC) has indicated that national banks may use public stablecoins for payment activities and may engage in stablecoin-related services (like reserve custody or node operation) provided they manage the risks and obtain supervisory non-objection. The Federal Reserve and other banking regulators, however, have been cautious – in early 2023 they issued statements urging banks to ensure any crypto-asset activities (including stablecoins) are legally permissible and safely conducted. Some states, like New York (NYDFS), already require stablecoin issuers under their jurisdiction to meet reserve and attestation standards. Overall, the U.S. is moving toward treating stablecoins akin to a form of electronic money, to be issued by insured depository institutions or regulated non-banks under banking-like supervision, to protect consumers and financial stability.

Europe (EU)

The European Union has taken a lead in formally regulating crypto-assets including stablecoins. The landmark MiCA (Markets in Crypto-Assets) Regulation was passed in 2023 and began phasing into effect in mid-2024. Under MiCA, stablecoins (distinguished as “asset-referenced tokens” for those tied to multiple assets or “e-money tokens” for those pegged to a single currency like the euro) face strict rules before they can be offered in the EU. Issuers must, for example, hold full reserves equivalent to the value of coins in circulation, with very robust capital, liquidity, and disclosure requirements. They also need authorization from a relevant financial regulator in an EU member state. In essence, an entity issuing a euro-pegged stablecoin must be licensed (likely similar to an e-money or payment institution license) and will be supervised to ensure it upholds redemption rights, reserve quality, and consumer protection. MiCA stops short of covering CBDCs (central bank digital currencies are outside its scope), but crucially it allows traditional financial institutions, including banks, to engage with stablecoins within this regulated framework. Banks in the EU can even issue their own stablecoins (and some have already started doing so under e-money licenses), act as custodians for stablecoins, or be market makers, provided they comply with MiCA’s provisions.

One early success under the EU regime: Société Générale’s blockchain subsidiary (Forge) became the first subsidiary of a large bank to issue a stablecoin under regulation. In 2023 it launched EUR CoinVertible (EURCV), a euro-backed stablecoin, after obtaining a license and it aligned the product with expected MiCA rules. This coin is fully reserved and transparent, targeting institutional clients. The fact that a systemically important EU bank launched a stablecoin with regulatory approval is a significant precedent. It signals that European regulators are open to innovation as long as it happens under clear safeguards. We can expect more euro (or other currency) stablecoins to emerge from banks or fintechs in Europe as MiCA is implemented through 2024–2025, potentially improving cross-border euro payments and Eurozone settlement options.

Asia (Singapore, Hong Kong, Japan, etc.)

Asia is a diverse landscape when it comes to stablecoin regulation, but several major financial hubs have moved quickly to provide guidelines:

Japan: Japan was one of the first major economies to enact a comprehensive stablecoin law. The legislation (passed in mid-2022, effective June 2023) legally defines stablecoins as “digital money” and limits their issuance to licensed financial institutions. In practice, this means only regulated entities like banks, registered money transfer companies, and trust banks in Japan can issue stablecoins to the public. The law also requires that stablecoins be linked to the yen or another legal tender and that holders must be able to redeem them at face value. These rules were put in place to protect users (especially after observing global incidents like TerraUSD’s collapse) and to ensure any stablecoin in Japan’s market is as safe as bank deposits. Following this framework, Japanese banks began experimenting: as noted earlier, the three megabanks in Japan joined a pilot to use legally issued stablecoins for cross-border payments in partnership with SWIFT. This indicates regulators’ support for innovation under the new rules.

Singapore: Singapore’s central bank (Monetary Authority of Singapore, MAS) has generally been pro-innovation but cautious. In 2022–2023 MAS issued guidelines for single-currency stablecoins (SCS) focusing on quality of reserve assets, redemption at par, and disclosure standards. By late 2023, Singapore introduced formal requirements that any stablecoin pegged to the Singapore dollar or G10 currencies and issued in Singapore must be fully backed by reserve assets of appropriate quality, and issuers must offer redemption within a short timeframe (e.g. T+5 days) to holders. These rules are aimed at ensuring stability and were accompanied by proposals to require stablecoin issuers to be licensed under the Payment Services Act. Singapore’s clarity in rules has attracted some issuers to consider launching there, and local banks could also issue or use stablecoins under the regulated model.

Hong Kong: Hong Kong’s monetary authority (HKMA) announced that by 2024 it will bring stablecoins into regulation, noting that only licensed institutions will be allowed to issue stablecoins and that they must be fully backed (algorithmic stablecoins “are unlikely to be accepted”). They launched a consultation in 2022 and plan to implement a regime requiring issuers to obtain a license, maintain reserves, and meet AML requirements. Hong Kong is positioning itself as a crypto-friendly hub (in contrast to mainland China’s restrictions), and regulating stablecoins is part of that strategy. For example, Standard Chartered HK has already formed a joint venture to apply for a license to issue a Hong Kong dollar stablecoin, anticipating the new regulations.

Others: Many other Asian jurisdictions are following suit. South Korea has studied stablecoin rules in the context of broader crypto legislation. India and China have taken a more restrictive stance on privately issued stablecoins (China effectively bans them in favor of its CBDC). Australia is working on a framework too; in fact, Australia saw an Australian bank (ANZ) issue an AUD stablecoin under existing law, prompting regulators to consider clearer rules. Overall, Asia’s financial centers are ensuring that if stablecoins are used, they are within the existing financial system’s oversight, treating them somewhat like stored-value facilities or e-money.

United Kingdom

The UK is also moving to regulate stablecoins, particularly for use in payments. The Financial Services and Markets Act 2023 included provisions to bring “digital settlement assets” (DSAs) – a term that covers stablecoins – into the scope of regulation. The Bank of England and the Financial Conduct Authority (FCA) have been developing rules for stablecoin issuers, likely similar to e-money requirements (e.g., capital, safeguarding of funds, and prudential supervision). Although the detailed rules are still being worked out, the direction is that certain stablecoins will be recognized as valid forms of payment once they meet regulatory standards for stability and consumer protection. The UK Treasury has expressed interest in making the UK a hub for stablecoin and crypto innovation, while ensuring risks are mitigated. In practice, this means a UK-approved stablecoin could be used by fintechs and banks in everyday payments with oversight similar to payment systems. As of mid-2025, the UK is setting up this regime: for instance, requiring stablecoin issuers to obtain a Payment Systems Regulation (PSR) designation if their coin is used systematically for transactions. Several UK-based companies are ready to launch GBP-pegged stablecoins once the rules are clear, and even big firms like PayPal have signaled interest (PayPal’s USD stablecoin might eventually be extended to other currencies, including GBP, under such regulations).

Key takeaway: Regulators broadly are converging on a view that stablecoins should be regulated akin to money. Whether under banking laws, payments/e-money laws, or bespoke crypto-asset laws, the core requirements being imposed are: maintenance of high-quality reserves equal to the coin’s supply, redeemability at par for users, proper licensing and supervision of issuers, and integration of compliance measures (AML, consumer protection, operational resilience). This emerging clarity is encouraging more banks to engage with stablecoins, since the rules of the road are being established.

Compliance and KYC/AML in Stablecoin Systems

One of the crucial considerations for integrating stablecoins into traditional finance is compliance – particularly Know Your Customer (KYC) and Anti-Money Laundering (AML) measures. By design, public blockchain transactions (including those of most stablecoins) are pseudonymous: the ledger might show that Wallet X sent 1,000 USDC to Wallet Y, but it doesn’t by itself reveal who controls X or Y. This is a challenge for banks, which operate in a heavily regulated environment requiring them to verify customers’ identities, monitor transactions for illicit activity, and comply with sanctions and reporting obligations.

KYC for stablecoins typically is enforced at the on/off ramps. For example, if a customer wants to buy stablecoins from an issuer or a regulated exchange using their bank funds, that issuer or exchange will perform KYC checks before selling the stablecoins. Once on-chain, however, the stablecoins can move between addresses without any built-in identity checks. This means banks must adapt their compliance processes when dealing with stablecoin transactions. They need to ensure that the participants they interface with (their own customers, or other institutions in a network) are vetted. In a scenario where a bank offers a stablecoin payment service to a corporate client, the bank would likely only allow transfers to whitelisted addresses or known counterparties that have completed KYC. We are already seeing models of permissioned stablecoin networks: JPM Coin, for instance, runs on a private blockchain where only JPMorgan and its permissioned clients (all of whom are known entities) can transact. This closed-loop approach inherently satisfies KYC/AML since every participant is identified and vetted by the bank.

For public stablecoins like USDC or USDT, banks will rely on a combination of measures. They can use blockchain analytics tools (from companies like Chainalysis, Elliptic, etc.) to trace stablecoin flows on-chain and flag addresses linked to hacks, sanctioned parties, or money laundering. These tools analyze patterns and known illicit wallets, helping compliance teams manage risk even when direct customer info isn’t on-chain. Additionally, issuers of regulated stablecoins maintain the right to freeze or blacklist tokens associated with criminal activity – for example, Circle (issuer of USDC) has frozen addresses when law enforcement reports funds associated with crime. While this is a reactive measure, it adds a layer of control amenable to regulators.

AML regulations like the FATF Travel Rule, which requires sharing sender and receiver information for crypto transfers above certain thresholds, are being gradually implemented by crypto service providers. Banks working with stablecoins would integrate such solutions, ensuring that when a customer initiates a sizable stablecoin transfer, the necessary originator/beneficiary information accompanies it through approved channels. In many ways, the compliance challenge with stablecoins is similar to handling cash or cross-bank transfers – the bank must know its customer and the nature of transactions, even if it doesn’t control the entire flow of funds once they leave its platform.

To facilitate compliance, stablecoin networks can also adopt structures like whitelisted addresses. Some newer stablecoins or tokenized deposit systems require that all wallet addresses holding the token be registered and verified. This approach trades off some decentralization for the assurance that at every hop, the asset sits with an identified party. This could be the model for consortium or bank-issued stablecoins: a network where only KYC’d users (banks, corporates, individuals who have been onboarded) can transact the coin. That way, a bank can confidently process and settle transactions knowing all participants are accountable. For example, the anticipated US bank consortium stablecoin (often speculated as an industry answer to private coins) would almost certainly run on a permissioned ledger with full KYC for every wallet.

In short, implementing KYC/AML in stablecoin systems requires a multi-layered approach: enforcing strict KYC at entry and exit points, using advanced blockchain monitoring for transactions in between, and potentially using permissioned networks or smart contracts that enforce compliance rules (like only allowing transfers between verified users). Banks venturing into stablecoins will need to update their compliance programs, train staff on analyzing blockchain transactions, and perhaps coordinate with regulators to set industry best practices. The good news is that the regulatory clarity emerging (as discussed above) is typically accompanied by expectations that stablecoin arrangements maintain the same standards as traditional money movement in terms of AML/CFT controls. Financial institutions could actually become key players in making stablecoin ecosystems more compliant and trusted, by extending their rigorous checks and reporting into this new domain.

Notable Stablecoins and Bank Initiatives

As stablecoins gain traction, numerous projects and partnerships have formed at the intersection of banking and digital assets. Below are a few prominent stablecoins and initiatives that banks or financial institutions are considering or adopting:

USD Coin (USDC): A U.S. dollar-backed stablecoin issued by Circle (in partnership with Coinbase), USDC is one of the largest stablecoins by market cap. It is fully reserved with cash and short-term Treasuries, with monthly attestations of its reserves. USDC has been attractive to institutions due to its transparency and regulatory-friendly approach. Several banks have engaged with USDC – for example, BNY Mellon holds USDC reserve assets and enables direct USDC settlement for certain clients. Visa and Mastercard have run pilots using USDC for settlement as well. USDC is widely seen as a bridge between crypto markets and banks, and it’s integrated into many fintech and payment platforms.

JPM Coin (JPMorgan Chase): JPM Coin is a stablecoin (effectively a tokenized deposit) issued by JPMorgan for use on its permissioned blockchain network. It is pegged 1:1 to the U.S. dollar (and recently the bank introduced a euro version), and it’s used internally and by JPMorgan’s corporate clients to instantly transfer value for payments and treasury operations. JPM Coin transactions settle on the Onyx network, which is controlled by the bank. The coin is not available to the general public; it’s a closed system to improve wholesale banking efficiency. JPMorgan reports that JPM Coin has significantly sped up transactions like international transfers and enabled new features like programmable, conditional payments for corporates. The success of JPM Coin has paved the way for other banks to consider their own digital cash tokens.

Tokenized Deposits (Deposit Tokens): A number of major banks are exploring issuing tokenized bank deposits, which are effectively stablecoins recorded as liabilities on the bank’s own balance sheet. The idea is to maintain all the regulatory protections of a bank deposit (deposit insurance, compliance with bank regs) while achieving the portability and 24/7 availability of a crypto token. Banks such as Citi, HSBC, JPMorgan, and UBS have all launched prototype “single-bank” deposit tokens on blockchain platforms. For instance, UBS’s Utility token or JPMorgan’s JPM Coin can be seen as early deposit tokens. These are typically used for specific purposes like interbank settlement or corporate transactions. Deposit tokens are an alternative vision to third-party stablecoins – instead of relying on a separate issuer like Circle, a bank could issue digital USD (or EUR, etc.) representing its customers’ deposits. This preserves the two-tier banking system (central bank -> commercial bank -> consumer) in a tokenized form. Several banks have collaborated on trials: for example, Project Guardian in Singapore and Partior (a cross-bank network by JPMorgan, DBS, and others) allow multiple banks’ deposit tokens to interoperate for cross-border payments. The appeal here is that tokenized deposits could be more directly regulated (since they are bank money) and benefit from existing legal frameworks, while still enabling blockchain-based settlement.

Societe Generale’s EUR CoinVertible (EURCV): As mentioned earlier, Société Générale Forge launched EURCV, a euro-backed stablecoin, in 2023. This stablecoin is fully compliant with French and EU regulations (it was issued under France’s digital asset laws and aligns with MiCA requirements). It’s targeted at institutional clients for on-chain bond settlements, liquidity management, and as a euro liquidity tool in digital markets. The SocGen stablecoin is noteworthy because it’s one of the first by a major global bank, signalling that banks can directly issue stablecoins within existing rules. Its adoption is still in early stages, but SocGen’s move is likely to be followed by other banks in Europe if successful.

JPM Coin & Partior (Cross-Bank Networks): While JPM Coin itself is single-bank, JPMorgan has also been a key player in Partior, a blockchain-based interbank clearing and settlement network. Partior (based in Singapore) involves multiple banks and aims to digitize commercial bank money for cross-border transfers. For example, a Singapore dollar token from DBS Bank could be swapped with a U.S. dollar token from JPMorgan on the platform, in real time. Partior’s approach is to use multiple stablecoins or deposit tokens issued by each participating bank, and handle FX and settlement through smart contracts. This initiative shows how banks can collaborate using tokenized money to improve cross-currency transactions. It’s being closely watched as a model that could scale to a SWIFT replacement for certain uses. Similarly, in the U.S., a group of banks discussed a consortium to create a common stablecoin or deposit token (sometimes referred to as a utility settlement coin for banks). While those discussions are ongoing, the motivation is clear: if private stablecoins are here to stay, banks might prefer a model where they collectively issue and control a stablecoin standard that meets their risk and compliance needs.

Central Bank Digital Currencies (CBDCs) vs. Stablecoins: Although not a stablecoin per se, it’s worth noting that the rise of stablecoins has also spurred central banks to develop CBDCs. Some banks and experts see tokenized deposits and private stablecoins coexisting with future CBDCs in a digital money ecosystem. For example, a digital dollar issued by the Federal Reserve could circulate alongside regulated private USD stablecoins. Banks might even serve as intermediaries or distributors of CBDC while also issuing their own tokens. The key point for finance professionals is that stablecoins are driving innovation now, and even if CBDCs arrive, the technical integration work and use cases being proven by stablecoins will likely carry over.

Each of these examples highlights that traditional banks are no longer sitting on the sidelines. They are actively testing and in some cases deploying stablecoin or stablecoin-like solutions. Whether through partnerships (like banks working with USDC issuers), proprietary projects (like JPM Coin), or industry consortia (tokenized deposit networks), the wall between crypto and traditional banking is gradually lowering. For financial institutions, the decision is shifting from “Should we pay attention to stablecoins?” to “What is our stablecoin strategy?” – be it using existing stablecoins as new payment rails, offering custody and conversion services, or even issuing their own digital cash tokens.

Conclusion

Stablecoins have evolved from a niche crypto tool into a significant financial innovation with the potential to transform traditional banking operations. They offer the stability of fiat currency combined with the agility of blockchain networks, enabling faster, around-the-clock transactions that traditional systems struggle to match. As we've discussed, stablecoins come in various forms – from fully fiat-backed coins like USDC that are making inroads with institutional adoption, to algorithmic experiments that taught the industry valuable lessons. For banks and finance professionals, stablecoins present opportunities in areas such as more efficient cross-border payments, instantaneous settlement of trades or interbank obligations, and expanded digital asset services like custody and treasury management for clients.

Crucially, the regulatory landscape by mid-2025 is becoming clearer. Regulators in the U.S., EU, and Asia are crafting rules to bring stablecoins under the umbrella of compliance and safety, which in turn is encouraging established institutions to participate. Banks can leverage their strengths – trust, compliance expertise, and customer relationships – to integrate stablecoins in a way that addresses risks. This includes implementing rigorous KYC/AML controls in a blockchain environment and conducting due diligence on stablecoin issuers or structures they choose to work with. By doing so, stablecoins can be used in a safe and legal manner, unlocking their benefits for mainstream finance.

In an increasingly digital economy, stablecoins might become as fundamental as email – an underlying utility that enables value to move as easily as information. We see early signs: large corporations settling invoices via stablecoins, banks launching pilot digital currencies, and payment networks embracing blockchain for settlement. Finance professionals with limited blockchain background should recognize that you don't need to be a cryptocurrency expert to understand the value proposition here. In many ways, a stablecoin is simply money going digital in a new form. Just as electronic bank deposits and wire transfers replaced physical cash for most business transactions, tokenized money could be the next evolution that coexists with current systems.

The integration of stablecoins into traditional banking is not without challenges (governance, interoperability, risk management), but the trajectory is clear. As regulations solidify and technology matures, stablecoins are poised to become part of the modern financial infrastructure. Banks that proactively engage with this trend – whether by facilitating stablecoin services or issuing their own – can position themselves at the forefront of innovation. Those that don’t may find clients seeking alternatives for faster, cheaper financial services. For the banking sector, stablecoins are both a disruptive force and an opportunity: a chance to blend the reliability of traditional finance with the efficiency of blockchain to better serve customers in the digital age.

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