Banks in the stablecoin future

Citigroup has put out a new report attempting to envision a place for banks in a world where stablecoins become popular.

Why it matters: Citi's base case sees the stablecoin market quintupling over the next five years, with a bull case projecting nearly $4 trillion.

Zoom in: The report cautions that predictions about market size are complicated and should be met with caution. However, it sees a number of drivers for stablecoin growth.

• The report's contributors bet a major source of growth will come from a shift in the way global players hedge against local currencies, moving from holding dollars to holding stablecoins.
• Another driver is expected to be people and businesses substituting traditional checking accounts for stablecoins for short-term liquidity needs, such as payments and cash management, taking advantage of blockchain's more convenient rails.
• And finally, stablecoin growth will likely come with the overall growth of crypto as a real industry.

The intrigue: Citi makes one bold claim, that looks good for the dollar.

• "We expect the stablecoin supply will remain US dollar denominated (approx. 90%), with non-US countries promoting national currency [central bank digital currencies]."

The big picture: The relationship between banks and stablecoins could benefit all sides — banks gain better products through blockchain, while stablecoins gain legitimacy with institutional investors and businesses.

• Stablecoins might hurt bank deposits, but the report sees lots of other ways for banks to stay relevant. Some banks, for example, are already playing a role providing custody for stablecoin reserves.
• On top of that, banks can broker the purchases of stablecoin reserve assets, such as U.S. Treasuries, for issuers.

Meanwhile, with coming legislation they will be able to issue stablecoins, serve as a bridge between crypto and traditional money and offer new kinds of financial products based on stablecoins.

• There are also going to be new kinds of businesses in clearing and settlement created by stablecoins.

Friction point: Citi brings up something that has been a favorite topic of this newsletter.

• "At a system level, stablecoins may have a similar impact as 'narrow banks' and there is a long policy debate on the pluses and minuses of such institutions."

The bottom line: "2025 has the potential to be blockchain's 'ChatGPT' moment for adoption in the financial and public sector, driven by regulatory change," the authors write.

💭 Our thought bubble: 👆