The Wall Street Journal (WSJ) reported that early discussions are taking place within banking consortia about the potential to create a joint bank stablecoin, citing sources. Potential vehicles for a stablecoin include the company responsible for Zelle and the Clearing House which operates the real-time payments network.
Zelle is run by Early Warning Services whose owners are Bank of America, Capital One, JP Morgan Chase, PNC Bank, Truist, U.S. Bank and Wells Fargo. The Clearing House is owned by 22 banks which include the same ones as Zelle but also BNY, Citi and many international banks such as Barclays, Deutsche Bank, HSBC and Santander. The WSJ stated that non-member banks might also be invited to participate in the stablecoin.
Given one of the primary real world use cases for stablecoins is cross border payments, The Clearing House may be better positioned for this initiative due to its international membership.
Cross border payment frictions
To execute a cross border payment in the conventional manner requires your bank to have an account at the destination bank. Failing that, your bank will need to pass the payment messages via other banks, the correspondent banking network. These layers of intermediaries add costs and delays caused by multiple layers of compliance and differences in banking hours. Plus, these sorts of payments use messages to instruct banks to move money, rather than directly making payments.
With stablecoins, a transfer is one and done. So there are no intermediaries and no delays between a message arriving and a payment being executed. This is particularly useful for cross border payments.
The likely imminent passage of the Genius Act stablecoin legislation in the United States is spurring banks to act. So far banks have not done a huge amount in the United States, because the previous administration discouraged engaging with DLT.
One example is the USDF Consortium. In 2022 it planned to create an interbank system on a permissionless blockchain, where any USDF token was redeemable at any of the participant community banks. Under regulator pressure, it moved to a private chain until it became clear that regulators still didn’t want it to proceed and it shuttered last year. There is some similarity with the current discussions, except USDF was more domestically focused.
A joint bank stablecoin – threats and opportunities
Banks view stablecoins as both a threat and opportunity. On one hand, stablecoins pose a threat because people might keep more money in stablecoins rather than in bank current accounts. Banks pay hardly anything to depositors, but earn revenues on lending.
However, this view is simplistic because other revenue streams would be affected. Cross border payments involve foreign exchange, income that banks could lose if they’re not part of the payment. Plus, if stablecoins are used for everyday payments this would impact the income that banks earn on retail card payments.
A key part of the competitive infrastructure in tokenization is the user’s wallet. By engaging in stablecoins, banks keep a seat at the table.
On the other hand, banks could create a competitive stablecoin for several reasons. Stablecoins have an on and off-ramp issue. Unless (or until) people choose to keep their money on chain, when they receive stablecoins they often want to off-ramp to conventional bank accounts. Banks can provide this service seamlessly, making a bank stablecoin more usable for non-crypto users.
Additionally, banks potentially can back the stablecoin with central bank reserves, which are superior to US Treasuries.
Will they cannibalize other revenues and programs?
The innovator’s dilemma is always whether incumbents are willing to sacrifice current revenues or whether they will cede areas to startups in favor of higher value segments. As the startups grow, they eventually expand into the higher margin segments.
JP Morgan has the most to lose as it processes $10 trillion in US dollar payments per day. The challenge is there are already tokenized payment initiatives targeting the high value corporate segments. If banks have a joint stablecoin, corporates are likely to want to use it.
For example, JP Morgan has Kinexys for Digital Payments (formerly JPM Coin) to provide instant 24/7 cross border payments to corporate clients and other financial institutions. Citi has its Token Services and other banks are following.
Plus JP Morgan and Deutsche Bank are participants in Partior, another tokenized cross border payment network. Where Kinexys and Citi Token Services work only for the clients of the banks, Partior is for interbank payments.
Apart from stablecoins, there are multiple projects around the world exploring using blockchain for interbank payments and cross border payments. Not least there is Project Agorá involving seven central banks – including the NY Fed – and more than 40 institutions.
There are also several domestic initiatives exploring the use of private ledgers and involving commercial bank money. There’s the Regulated Settlement Network in the United States, the Regulated Liability Network in the UK and Commercial Bank Money Token (CBMT) project in Germany. So far they are pretty early stage, with the CBMT perhaps the more advanced.
Some of the institutional infrastructure exists
The institutional infrastructure to make this happen is largely already in place. JP Morgan has a tokenized collateral service and Broadridge has an intraday repo solution that tokenizes Treasuries and is already being used for tokenization. Although it isn’t entirely necessary to tokenize the Treasuries to use them for a stablecoin. Plus, there are various other organizations working on tokenized collateral solutions.
There’s also Fnality, backed by 20 institutions, that tokenizes central bank money purely for institutional payment usage. It is live in the UK and working on going live in the United States. However, it is mainly intended for institutional payments, so it’s unclear whether it would be used as a backing asset.
If banks were to proceed with a joint stablecoin, the outcome could fundamentally reshape cross border payments and establish new standards for bank issued digital currencies.
Ledger Insights has published a report on the bank adoption of stablecoins, tokenized deposits and DLT payments. In addition to 70 projects, it explores design features, such as how to avoid pitfalls that could limit their longer term potential.
