• Explains how stablecoins evolved from crypto trading tools to broader financial infrastructure
• Examines 24/7 liquidity and open architecture versus traditional payment rails
• Assesses concentration risks linked to Treasury-backed stablecoin reserves
• Explores potential impacts on bank deposits and small-to-mid-sized institutions
• Considers long-term implications for payment systems and funding competition

Ahead of Treasury & ALM USA, we spoke with Alex Smolovich about the growing intersection between stablecoins, U.S. Treasury markets, and bank funding models. As digital assets move beyond crypto trading into payments and liquidity management, treasury and ALM teams are evaluating how stablecoins could reshape deposit dynamics, funding costs, and the competitive landscape for banks.

Stablecoins are often discussed but not always clearly understood. From your perspective, what are stablecoins, how are they typically used, and what has driven their rapid growth in popularity?

The history of stablecoins dates back to over a decade ago. The main purpose was to solve a simple problem, how to provide price stability to crypto traders. The first iteration of stablecoins were backed by volatile crypto assets, and as you can expect that didn’t solve the intended purposes of volatility reduction. Subsequently the model switched to fiat backed stablecoins which is the model that most of us know today. 

There are primarily three different categories of crypto investors, 1) buy and hold investors 2) short term traders 3) those that simply aim to profit from market inefficiencies. Staplecoins play a crucial role for the short term investor bases in that stablecoins provide instantaneous liquidity and preservation of capital. The best comparison to tradfi is having a money market account option in your brokerage account without the interest bearing benefit. When you sell an asset in your brokerage account the money market account preserves the capital and maintains stable value.

As the crypto market continues to mature so have the stablecoins. As stablecoins continue to grow financial community, governments and retail users continue to find new use cases beyond crypto. Banks figured out that stablecoins are direct competitors to the traditional payment rails and governments found a new source of buyers to finance growing deficits. These have been key elements I think that have contributed to their growth.

One defining feature of stablecoins is their open architecture and 24/7 tradability. How does this fundamentally change the risk management considerations compared to traditional banking products?

As a quick background, today the Federal Reserve payment systems operates 22 hours a day 6 days a week. There are some products like FedNow that offer 24/7 operationality but that have yet to be fully implemented to support the institutional space. In the U.S. platforms like Zelle and Venmo already offer the 24 hour operationality due to their closed in ledge systems with some limitation ofcourse. 

Stablecoin issuers have done a great job building capabilities to operate across different chains and running 24/7 frictionless. The banking system and the regulators have taken notice and there are numerous initiatives underway to modernize the piping of the financial system. The most obvious risk is banks will need to make significant investments into modernizing their IT infrastructure, otherwise they risk becoming obsolete. Political certainty is another risk factor to consider. As Administrations change, so do regulatory priorities. Stablecoin legislation was a priority of the Trump Administration, will it remain the priority of the next Administration? 

Many stablecoins are backed by Treasuries, which brings both stability and concentration risk. How should the market think about the trade-off between perceived safety and the risks of market concentration?

Today there is just over $6 trillion in assets that are invested in government money market funds, stablecoins make up roughly $300bln. From a concentration perspective, government money market funds, which have much broader reach than Stablecoins, own approximately 20% of U.S. marketable national debt. All is to say that Stablecoins pose materially lower stability risk to the U.S. financial system relative to government money market funds. 

Looking ahead, if stablecoins continue to grow, how could increased demand for Treasuries affect bank funding dynamics, particularly for small and mid-sized institutions?

The supply side of the U.S Treasury market will be driven by the U.S. fiscal policy. Stablecoins utilize banking partners as a liquidity management tool. Where the bank funding dynamics intersect with Stablecoins is if stablecoins were are allowed to pay interest to reserve holders. Currently stablecoins do not pay interest to reserve holders, but as they expand their utility into the payments space that change. Should Stablecoins be allowed to pay interest or “rewards” to reserve holders that will inevitably draw deposits away from the banking sector directly. The Clarity Act that was proposed in the House Finance Committee included a provision that prevented Stablecoins from paying interest or “rewards”, however the proposal lost key support from Coinbase. 

There’s ongoing debate about whether stablecoins pose a real threat to banks’ core deposit base - or even to the U.S. dollar itself. Over the long term, how do you see stablecoins reshaping how people hold value and interact with money?

When money market funds were first introduced in the 1970s I expect that there were similar discussions about the risk money market funds posed to the banking sector. It's been 55 years and money funds continue to coexist alongside bank deposits. Money funds forced the banks to become competitive on deposit pricing and I believe that overtime Stablecoins will force commercial and Central Banks to improve U.S. payment rails to support 21st century commerce.