Banks are moving aggressively into stablecoins, but the shift could backfire on their core lending business. The $304 billion stablecoin market, dominated by Tether ($183 billion) and USDC ($74 billion), is now competing directly with traditional bank deposits, creating a funding crisis that could make loans more expensive for borrowers.

The Bank for International Settlements (BIS) chief Pablo Hernández de Cos warned on August 28 that stablecoins pose a structural threat to banking. Federal Reserve researchers describe these digital tokens as potential competitors to traditional transaction accounts, a core product that has historically generated stable funding for banks.

How Are Banks Responding to the Stablecoin Challenge?

Banks are not sitting idle. A Federal Reserve survey from September 2025 found that roughly half of surveyed banks were prioritizing growth in at least one stablecoin or digital-asset area over the following three years. Major institutions are deploying different models to compete:

• JPM Coin (J.P. Morgan): Represents a bank deposit on a blockchain, allowing customers to move funds across digital networks while maintaining traditional deposit protections.
• CoinVertible (Société Générale-FORGE): A Markets in Crypto-Assets Regulation (MiCA) compliant stablecoin backed by segregated collateral, designed to meet European regulatory standards.
• Qivalis (37 European Banks): A shared euro stablecoin platform launching in the second half of 2026, unifying banks across 15 countries on a single interoperable payments rail rather than competing with separate tokens.

The distinction between these models matters enormously. Nitin Gaur, Head of Institutions at Nethermind, explained the critical difference: "A tokenized deposit and a bank-issued stablecoin are two different liabilities with different legal character, different capital treatment, different insurance status and different settlement properties".

Nitin Gaur, Head of Institutions at Nethermind

What Happens to Bank Funding When Customers Switch to Stablecoins?

Here is where the problem emerges. Under the proposed US GENIUS Act (which Treasury outlined implementation rules for on August 17), payment stablecoins must maintain at least one-to-one backing with eligible reserves, such as cash or short-dated Treasury securities.

When a bank issues a stablecoin under this framework, the reserves backing it cannot be lent out. Gaur described the balance-sheet impact: "A stablecoin issued under a GENIUS pathway is not a deposit. It is a payment instrument backed by segregated reserves the issuer cannot lend against. When a treasurer moves a hundred million from a demand deposit into the bank's own coin, the bank has converted a funding source into a matched, non-lendable reserve pool".

Gaur

This creates a funding squeeze. If customers move money from traditional deposits into stablecoins, banks lose access to that capital for lending. Adrian Wall, Managing Director of the Digital Sovereignty Alliance, warned of the cascading effect: "If stablecoin adoption ultimately shifts funding away from bank deposits rather than recycling those funds back into the banking system, banks could face higher funding costs and potentially less capacity to extend credit".

Adrian Wall, Managing Director of the Digital Sovereignty Alliance

The real-world demand for these products is already evident. In July, Citi executed a dollar payment from London to Thailand over a US holiday weekend using its tokenized-deposit service, demonstrating round-the-clock clearing that traditional banking cannot match. Western Union launched USDPT in May, with Anchorage Digital Bank issuing the stablecoin on the Solana blockchain.

Could Fragmentation Make the Problem Worse?

As more banks enter the stablecoin space, a new risk emerges: fragmentation. If every bank launches its own token, users end up with dozens of incompatible coins, each with smaller liquidity pools. Converting one bank's stablecoin to another during market stress could become difficult or costly.

This is precisely why Qivalis was created. Ernesto Olmedo Pereira, Head of Strategy and DeFi at Qivalis, explained the rationale: "If every bank launches its own token, you get dozens of thin, incompatible pools instead of one deep, liquid euro instrument. Qivalis, an independent company backed by 37 banks, exists precisely because the banks behind it decided to build one shared, interoperable euro rail together rather than compete with 37 separate ones".

Olmedo Pereira, Head of Strategy and DeFi at Qivalis

J.P. Morgan's Kinexys products already show significant scale, with around $7 billion in daily activity. By contrast, CoinVertible reported €156.6 million of euro tokens and $12.55 million of dollar tokens outstanding as of August 31, illustrating the wide variance in adoption across different models.

What Happens Next?

Banks face a strategic choice. They can compete through services surrounding stablecoin payments, such as foreign exchange and corporate lending, rather than trying to control the money itself. Qivalis's planned launch in the second half of 2026 will test whether cooperation can attract regular business beyond its founding banks.

The broader question remains unresolved: Will stablecoin adoption recycle funds back into the banking system, or will it drain deposits permanently? If the latter occurs, banks will need to raise funding costs to attract capital, ultimately making loans more expensive for businesses and consumers. The stablecoin race, intended to modernize payments, could inadvertently reshape the cost of credit itself.