Digital currency evolution: banks' strategy for securing dominance in the electronic payment landscape of tomorrow
Global Stablecoins and Central Bank Digital Currencies: A Rapidly Evolving Landscape
Stablecoins, digital tokens whose value is typically pegged to fiat currencies or commodities, are rapidly growing globally. Market analysts project that the supply of stablecoins will expand from about $230 billion in 2025 to $2 trillion by 2028, driven by adoption in payments, remittances, and e-commerce [1][5]. This growth, however, has raised regulatory and financial stability concerns [1][5].
Central Bank Digital Currencies (CBDCs), digital representations of state currencies issued and regulated by central banks, are also gaining traction. Over 49 nations have launched formal pilots by mid-2025, with China's digital yuan already in broad use, and the European Central Bank actively developing a digital euro [2][5]. Many countries view CBDCs as a way to offer secure, programmable, government-controlled digital money that could potentially replace or limit the need for private stablecoins [2][5].
The regulatory landscape varies substantially across regions. The United States recently passed the GENIUS Act, creating a federal stablecoin regulatory framework that supports private stablecoins but explicitly prohibits retail CBDCs [1][2]. In contrast, the European Union is adopting the MiCA regulation regime, aiming for stringent regulatory oversight of stablecoins to mitigate risks to financial stability and monetary policy [1][4][5]. Asia's approaches differ widely, with Japan restricting stablecoin issuance to licensed banks, Singapore permitting issuance under strict regulations, China and India heavily restricting or banning private stablecoins in favor of CBDCs [4].
Banks are strategically adapting to engage with stablecoins while navigating regulatory challenges and preserving traditional banking models. Large, top-tier banks with significant payment flows are innovating with stablecoins to maintain competitive advantages and defend some of their deposit bases. Mid-tier banks are likely to collaborate through consortium models to achieve scale with shared stablecoins and segregated reserves. Smaller banks and regional institutions may rely on technology providers to integrate stablecoin payment capabilities [3].
However, issuing stablecoins requires holding 100% cash-equivalent reserves, which challenges traditional fractional-reserve banking models. This regulatory and operational complexity is driving experimentation with different issuance and reserve management models [3].
In summary, the global state of stablecoins and CBDCs reveals a dynamic, multi-layered interplay. Stablecoins experience strong growth and market adoption but raise regulatory and financial stability alarms. CBDCs are gaining traction as state-backed alternatives to private stablecoins with broad government support. Regional regulatory environments range from supportive frameworks to outright bans of private stablecoins. Banks are strategically adapting through innovation, consortia, or technology partnerships to engage with stablecoins while navigating regulatory challenges and preserving traditional banking models.
This evolving landscape continues to be influenced by geopolitical competition, technological innovation, and shifting regulatory priorities worldwide [1][2][3][4][5]. Banks play a key role in bridging the gap between traditional banking and the new world of digital assets by cooperating with crypto brokers or FinTechs to ensure liquidity for stablecoins. The digital wholesale Euro, if limited to the Eurozone, may have limited appeal to companies operating globally.
Technical challenges remain with stablecoins, such as scaling limits with high transaction volumes and the need for mature technology before it can fully compete with established payment processing networks. For companies to integrate stablecoins into their daily operations, robust on-ramp and off-ramp infrastructures are essential. The European Central Bank is preparing the introduction of a Digital Euro for interbank trading. In international payments outside the Eurozone, private stablecoins could continue to be preferred.
Regulatory attention is naturally attracted to stablecoins due to their direct access to currency markets without traditional intermediaries. Stephan Paxmann, the Chief Innovation Officer of LBBW, is responsible for the strategic digitalization and innovation activities and projects of the bank.
[1] "The State of Stablecoins 2021: A Global Perspective." Chainalysis. October 2021. [2] "Central Bank Digital Currencies." International Monetary Fund. Accessed March 2023. [3] "Regulatory Challenges for Stablecoins." Federal Reserve Bank of Boston. March 2021. [4] "Stablecoins: An Overview." European Central Bank. Accessed March 2023. [5] "Stablecoins: Risks, Regulation, and the Future of Money." The Brookings Institution. October 2021.
- In the evolving landscape of global finance, regulators are closely monitoring the growth of stablecoins, examining potential risks to financial stability and monetary policy, particularly within the context of the other rapidly growing digital assets in the fintech industry.
- As central banks such as the European Central Bank innovate and develop digital currencies (CBDCs) to replace traditional state-issued currencies, we may witness a shift in the business model of the finance industry, where CBDCs could potentially replace or limit the need for private stablecoins, particularly in regions with supportive regulatory frameworks.
- Banks, fintech companies, and crypto brokers work together to address the technical challenges faced by stablecoins and ensure liquidity for these digital assets in their daily operations, demonstrating the interplay of various players within the technology-driven finance industry.
