STABLECOINS vs. BANKS …The Battle for the Future of Money Turns Fierce

For more than a century, the battle to control money has unfolded between governments, central banks, and commercial lenders. Today, that battlefield has shifted. In the shadows of the digital economy, a new competitor has risen quietly but forcefully. Stablecoins, once a niche tool used by cryptocurrency traders, have evolved into a parallel monetary system. They circulate across borders, mimic the structure of narrow banks, and increasingly shape liquidity in ways that regulators never approved and traditional banks never anticipated.

This competition is no longer theoretical. It is now a struggle over who gets to define the meaning of money in the digital age. As the stablecoin ecosystem absorbs billions in safe assets and channels the US dollar into blockchain rails, it presses on the most sensitive nerve of modern finance: the authority of banks to mediate money creation, liquidity, and credit.

The result is a clash of systems, a confrontation between centuries of banking tradition and a new digital order that is taking shape faster than regulators can respond. The battle for the future of money has never been fiercer.

The New Challenger Growing in the Shadows

To understand why stablecoins have become such a disruptive force, one must look at what they quietly represent. They are not banks. They are not money market funds. They are not registered payment service providers. Yet they function as money in the digital realm. Their issuers hold billions in safe, liquid assets and issue digital liabilities redeemable at par. They are available instantly, globally, and often outside the reach of national laws.

USDT, USDC, and other fiat-backed stablecoins collectively command hundreds of billions of dollars. Despite the crypto market volatility, their growth has been remarkably stable because they solve a problem that global users face: access to the US dollar.

In places where inflation destroys savings, stablecoins operate as lifelines. In regions where the dollar banking system is restricted or inaccessible, they become the only feasible access point to dollar liquidity. What began as a tool for crypto arbitrage has turned into a parallel dollar ecosystem that neither the Federal Reserve nor Wall Street controls.
This growth is no coincidence. Stablecoins replicate a model that regulators historically resisted: narrow banking.

The Return of Narrow Banking in Digital Form

Narrow banking is not a new concept. It traces back to the 1933 Chicago Plan, designed to eliminate bank runs by requiring banks to hold one hundred percent reserves against deposits. Under this vision, banks would store safe assets such as Treasury bills instead of lending depositors’ money. Loans would only be issued from time deposits or equity, not from liquidity needed for payments.

For decades, economists revisited the idea whenever banking crises exposed systemic fragility. The most recent attempt, The Narrow Bank (TNB), proposed a reserve-only institution that would offer interest on deposits backed entirely by accounts at the Federal Reserve. Regulators rejected the idea because it would have siphoned huge pools of capital away from banks, weakening their role in transmitting monetary policy.
Stablecoins have unintentionally revived the narrow bank model.

Their issuers do not lend. They do not create credit. They invest almost exclusively in safe assets, mostly short-term US Treasuries and reverse repo agreements. Their liabilities are instantly redeemable on demand, and their balance sheets resemble the textbook version of risk-free banks.

The difference is striking! While narrow banks were prevented from operating because they threatened the traditional banking system, stablecoins have emerged without the same resistance. They do not require Federal Reserve accounts. They operate globally. And users flock to them precisely because they offer a simple proposition: a digital dollar backed by safe collateral, available anytime and anywhere.

This is why many analysts argue that stablecoins are not just financial products. They are digital eurodollars, operating outside the reach of the US banking system while still denominated in US currency. This dual identity makes them both a tool and a threat.

The Blackhole Effect: Stablecoins Absorb Treasuries and Lock Liquidity Away

The most profound impact of stablecoins lies not in their convenience but in the way they interact with the global liquidity cycle. Every new stablecoin minted requires an equivalent amount of safe assets to be purchased. The issuers become long-term holders of Treasury bills and reverse repos. Unlike banks, they cannot redeploy these assets into loans or use them as collateral for broader financial activity.

In essence, stablecoins take Treasuries off the circulation map.

Traditional banks use Treasuries in multiple ways. They hold them for liquidity, lend against them in the repo market, pledge them for interbank borrowing, or sell them when credit conditions tighten. These assets circulate constantly, supporting a complex web of financial activity.

Stablecoin issuers break this cycle. Their Treasury holdings sit in segregated accounts, often with custodians outside the United States. These holdings cannot be re-hypothecated or reused in repo markets. Once absorbed, these Treasuries effectively vanish from the traditional liquidity ecosystem.

Analysts now refer to this as the liquidity blackhole effect. As stablecoins grow, more Treasuries are locked into static reserves. This resembles quantitative tightening, where central banks intentionally withdraw liquidity from markets. The difference is that stablecoin tightening occurs without policy coordination and responds not to economic cycles but to user demand.

If market fears rise, stablecoin demand often increases as investors seek digital dollars. This drives further purchases of Treasuries at the exact moment when the financial system needs them most. The result is an unintended pro-cyclical pressure cooker that tightens liquidity when markets are already stressed.
This is why some economists describe the stablecoin system as shadow quantitative tightening. It mimics central bank balance sheet contraction, but from the private sector and outside regulatory oversight.

Stablecoins Increasingly Unsettling Policymakers

Stablecoins occupy a grey zone that regulators struggle to define. They are too small to trigger immediate systemic oversight. Yet they are too globally interconnected to ignore. Their reserves are large enough to influence Treasury market dynamics, but their activities are not captured in traditional risk models.
This creates a policy dilemma.

Commercial banks remain the primary channel through which central banks transmit monetary policy. When interest rates change, loan terms adjust, deposit rates shift, and the real economy responds accordingly. Stablecoins disrupt this chain. They do not lend. They do not adjust credit risk. They simply absorb safe assets. And most issuers do not even pass interest earnings to users, making their monetary role almost entirely divorced from central bank objectives.

The refusal to approve TNB’s access to a Federal Reserve master account was symbolic. The Fed did not fear TNB’s failure. It feared its potential success. If a reserve-only bank offered high interest with no credit risk, deposits would flood out of traditional banks. Lending would contract. The banking system would weaken. Monetary policy transmission would deteriorate.

Stablecoins pose a similar risk, but through a different mechanism. They do not offer interest, yet they still attract deposits because they function as global digital dollars. They draw funds away from banks and payment companies, consolidating monetary power in private issuers whose incentives do not align with national policy objectives.

Even more troubling is the risk of a destabilizing run. If users doubt a stablecoin’s reserves or fear regulatory intervention, redemptions could trigger rapid Treasury sales. This resembles the 2008 money market fund crisis and the 2022 UK LDI crisis, where forced selling of safe assets amplified market stress.
Unlike banks, stablecoin issuers cannot turn to a lender of last resort. They operate in a world with no emergency lifelines.

A Digital Dollar System Outside US Control

One of the least discussed yet most consequential impacts of stablecoins is geopolitical. Because they circulate freely, they function as cross-border payment tools. They enable informal dollarization in countries with strict capital controls. They reduce reliance on correspondent banks for international transfers. They create an entire ecosystem of decentralized finance tools that operate without bank accounts.

In effect, stablecoins allow the dollar to spread even where US authorities prefer to limit access. This can reinforce global dollar dominance. Yet it also risks creating an uncontrollable offshore dollar network that grows without visibility or jurisdictional clarity.

Some policymakers view this as an advantage for US influence. Others see it as a long-term risk, because monetary control weakens when liabilities circulate outside regulated balance sheets.
What is clear is that stablecoins, once peripheral to global finance, are now embedded in international liquidity flows. Ignoring their impact is no longer an option.

Banks Fight Back: New Digital Strategies and Lobby Pressure

The banking sector is not sitting idle. As stablecoins expand, banks push regulators to restrict their growth or require stablecoin issuers to become banks themselves. Lobby groups warn that stablecoins weaken the deposit base and threaten the credit creation process. Several central banks have accelerated digital currency research because they fear losing control over retail money.

Some banks have even begun experimenting with tokenized deposits, hoping to offer blockchain-based payment tools without sacrificing their regulatory advantages.

The tension between the old system and the new digital order is accelerating. Banks argue that stablecoins should be tightly regulated, perhaps even limited. Stablecoin issuers argue that innovation must not be stifled by legacy institutions. Users, caught between the two, simply demand fast, stable, frictionless dollars.
The resulting friction is shaping a new monetary debate that is as political as it is financial.

Where the Battle Goes From Here

The conflict between stablecoins and banks is not simply about technology. It is about the very architecture of money. Stablecoins reveal the fragility of fractional reserve banking. They expose the complexity of liquidity cycles. They create new channels for dollar flows that bypass national borders. And they challenge the monopoly banks have held over deposit creation for centuries.

This battle will intensify as stablecoins continue to grow. Their impact on Treasury markets, global liquidity, and monetary policy transmission will become more visible. Regulators will be forced to respond. Banks will push for tighter oversight. Crypto innovators will push for greater freedom.

The future of money will not be determined by technology alone. It will be shaped by the balance of power between institutions that want to preserve the old system and digital challengers that seek to redefine it.
In this battle, neither side has secured victory. But one thing is certain: The competition between stablecoins and banks is now a defining feature of modern finance. The struggle over who controls liquidity, credit, and the structure of digital money will shape the next century of global economic order. And that battle has only just begun.