Written by: Yueqi Yang
Translated by: Block unicorn
Congress is rapidly pushing forward a new crypto legislation that could give stablecoins a more important role in the financial system, even putting banks on the defensive before Trump's involvement.
Trump stated that he wants stablecoin rules to be the first crypto legislation priority of his government. Caught off guard, banks have begun intensifying lobbying efforts to seek significant modifications to regulations, from who can issue stablecoins to their design methods, to maintain their position in the financial system.
As banks and crypto companies battle over regulatory influence, Trump launches his own stablecoin, directly threatening the business of both industries.
Unlike more well-known crypto assets like Bit, stablecoins do not fluctuate in price and are typically pegged to the US dollar. They function similarly to money market funds, used for storing cash and easy cross-border transfers. The current stablecoin market has surged to $230 billion, with Tether and Circle's USDC dominating, valued at $145 billion and $60 billion respectively.
The latest entrant is the Trump family. Last week, the crypto project "World Liberty Financial" founded by Trump and his sons announced the launch of their own stablecoin USD1. This has raised concerns that Trump might push for legislation favorable to his business.
Congress Advances Stablecoin Bill
Congress is accelerating stablecoin legislation. On Wednesday, the House Financial Services Committee plans to vote on a stablecoin bill to decide whether to submit it to the full House. A similar bill was passed earlier this month by the Senate Banking Committee. Trump hopes the bill will be passed before August and has garnered some Democratic support.
Stablecoin legislation could threaten banks' position in the financial system. Customers might deposit funds into stablecoins instead of bank deposits and transfer money without going through banks.
Stablecoins are highly interconnected with the financial system, as they are backed by cash and government bonds. Stablecoin issuers heavily rely on traditional banks to store these assets and handle customer fund transactions. Regulators remain vigilant because problems with stablecoins could impact the banking system and the entire economy.
Regulators have long been tightening control over the crypto industry, so when stablecoin legislation suddenly became a priority, banks were caught off guard. "The banking sector faces a long-term threat, with assets potentially flowing out of the banking system," said Jackie Reses, CEO of Lead Bank in Kansas City, Missouri, which collaborates with fintech companies.
The Trump Factor
Mike Belshe, co-founder and CEO of crypto custody company BitGo, said banks were surprised by the Trump administration's push for crypto-friendly regulations. "Every bank is trying to figure out how to handle digital asset companies and their level of digital asset involvement."
Trump's stablecoin increases pressure on banks, as it is expected to be well-received, and the Trump family has explicitly stated their intention to challenge the banking system.
"People will support Trump's stablecoin to curry favor with the Trump administration," said Kevin Lehtiniitty, founder and CEO of stablecoin infrastructure company Borderless.xyz.
Donald Trump Jr., president of World Liberty Financial, was outspoken about his ambition to challenge banks. He said he began to believe in the value of cryptocurrencies after banks cut off business ties due to his family's political stance.
"I realized that the entire financial system and banking sector is actually a Ponzi scheme," he stated during an online speech at a blockchain summit in Washington, D.C., discussing the Trump family's crypto plans.
A spokesperson for World Liberty Financial said their stablecoin is aimed at "institutional clients, sovereign investors, and retail investors" for cross-border transactions and plans to launch "in the near future".
BitGo, supported by Goldman Sachs and one of the world's largest crypto custody institutions, stated it will offer Trump's stablecoin USD1 to its thousands of institutional clients and hold USD1 reserve assets through its bank partners, such as cash and government bonds, and provide USD dollar settlement services.
"Clearly, the World Liberty team's influence is significant, not just in the US but internationally," said Belshe, who fundraised for J.D. Vance during last year's campaign.
Several Democratic senators, including Elizabeth Warren, have requested bank regulators to explain how they will address conflicts of interest from Trump's stablecoin. In a letter, they questioned the Federal Reserve and the Office of the Comptroller of the Currency on how they will "maintain credibility and integrity and mitigate the unprecedented risks to the financial system posed by Trump and his family's stablecoin USD1".
Bank Lobbying
The banking industry is lobbying to protect its deposit base. For example, they want to prohibit stablecoins from paying interest and ban non-financial companies from issuing stablecoins to prevent tech giants like Elon Musk's X from competing with banks. Banks also want to prohibit stablecoin issuers from directly accessing the Federal Reserve payment system, which is currently only open to banks. Circle has been seeking such access to directly hold assets at the Federal Reserve and settle transactions independently without relying on banks.
Banks also want to ban US residents from using offshore stablecoins like Tether unless their issuers register in the US. Currently, Tether is not regulated by US regulations due to being established overseas. This also creates another layer of conflict of interest, as Howard Lutnick, the Secretary of Commerce, whose company Cantor Fitzgerald manages Tether's assets.
Some banks, including Bank of America, are considering launching their own stablecoins for payments. Paxos, which helped companies like PayPal issue stablecoins, says it is negotiating with banks and expects "several banks" to launch their own stablecoins in the future. PayPal's stablecoin, issued less than two years ago, has $800 million in circulation, and Fidelity Investments is also considering launching a stablecoin.
Circle is pushing for banks to adopt its USDC stablecoin for payments rather than issuing their own. Circle CEO Jeremy Allaire says he hopes USDC's user network will attract banks to collaborate with them.
This means Circle might share the interest income from its reserve assets with banks. Currently, Circle already shares some revenue with Coinbase, which promotes USDC to its users. "We build business relationships that allow partners and us to make money," Allaire said.
