Banks are not interested in stablecoins for the reasons you think

The news: With Bitcoin once again moving up and to the right, legacy financial institutions and fintechs are taking a much closer look at a key corner of the crypto ecosystem—stablecoins.

• Coinbase told BankingDive that it has been “very busy meeting demand for banks, brokers and fintechs” as federal regulators walk back implicit and explicit limits on banks’ crypto activity.
• SoFi expects to “expand beyond [crypto] investing” once Congress passes a long-anticipated stablecoin bill, per CNBC.
• Bank of America said it may also launch a stablecoin after Congress passes legislation.
• Visa and Stripe-owned Bridge just debuted an API that will let issuers launch stablecoin-linked Visa cards for retail transactions, though transactions are completed in fiat.
• And Mastercard partnered with OKX and Nuvei to facilitate true stablecoin settlement—even if the customer pays with fiat.

Why this is happening: From a payments perspective, it's not really clear why banks would all want their own private stablecoins.

Unless you’ve blindly embraced a crypto-maximalist vision that one day you will go to your local farmers market and pay a vendor with your BofAcoin, which is immediately converted into their WellsDollars account, so that they can pay their suppliers with CitiBux, the retail payments use case for many banks launching their own stablecoins doesn’t quite add up.

Private stablecoins would constantly be minted, burned, borrowed, and exchanged, and all of the middleman payment networks, gateways, and the like that make modern commerce possible would need to be reinvented for the blockchain era to make each separate coin interoperable—so much for crypto disintermediation.

Banks probably aren’t that interested in stablecoins for retail payments: If stablecoin interoperability headaches weren’t enough to deter banks, consider that Tether has a $148.8 billion lead in the stablecoin space that even a G-SIB might struggle to compete with. PayPal—a brand globally synonymous with commerce—is approaching two years since it launched PYUSD, and its coin hasn’t even cracked $1 billion in market cap.

But it seems like maybe even PayPal isn’t actually interested in using its stablecoin for payments.

Yield, baby, yield: I was pretty surprised when PayPal announced that it would offer “rewards” not for transacting with PYUSD but for holding PYUSD. Holders—or maybe HODLers—can earn a nice 3.7% annually on their PYUSD balances.

That’s not a reward… that’s interest. That’s PayPal telling you that you will get a satisfying return if you leave your money parked with PayPal. It sounds a lot more like a high-yield savings or money market account—without, presumably, a 1099-INT come tax season.

But banks already do that: Fintechs like hawking stablecoins because, unless we return to the ZIRP days, stablecoins are money printers—you give them $1, they give you a coin purportedly worth $1, and they buy interest-bearing Treasuries (or, if you’re Tether, maybe also sometimes corporate debt?).

That’s… kind of how banking already works? Take in deposits, and then make a higher yield on interest than you’re offering to depositors. So why would banks reinvent a wheel that’s already running very profitably?

Bank stablecoins will facilitate crypto investing: Banks are in a bind.