States, community banks see opportunity in nascent stablecoin industry

Bank of North Dakota President Don Morgan is overseeing the launch of the state’s stablecoin later this year. Morgan sees the Roughrider Coin as a way to protect North Dakota’s community banks against losing deposits to the nonbanking sector..Although Morgan is aware of security risks in the stablecoin landscape, he sees risk management surrounding the nascent industry as doable and necessary with the right provider. His belief — banks need to stay updated on the ever-changing market to compete in the future — is supported across the industry.‘It’s about long-term health’North Dakota is the second state in the country to establish its own stablecoin, with Wyoming launching its Frontier Stable Token last August. The name of North Dakota’s coin honors former President Theodore Roosevelt’s Rough Riders, a group of college athletes, cowboys and hunters who fought in the Spanish-American War.The Roughrider Coin will be used for business-to-business transactions, including transfers into and out of the payment medium. Morgan does not envision Bank of North Dakota competing with banks in the stablecoin space, as it is not part of the organization’s mission. The only state-owned bank in the United States, BND operates as a banker’s bank, and partners with financial institutions to offer loans for economic development, community projects and student loans.BND had been working with its longtime core provider, Fiserv, and discussed building an on-chain, stablecoin-enabled mobile payment rail for community banks in the state. Bank of North Dakota is aware of several in-state banks in the pilot stage of unveiling their own stablecoins.Morgan sees stablecoins as helping community banks — many of which still operate on payment rails established before the Digital Age — evolve and become competitive in the modern payments sector. “It’s about the long-term health and resiliency of our community banks and credit unions down the road in protecting their deposits and evolving into the banking-fintech hybrid space we feel they need to evolve into,” Morgan said.The presence of stablecoins in banking has been building for years, and accelerated last July with the passage of the GENIUS Act. The landmark law, which is expected to take effect next January, was the first U.S. regulatory framework for issuers. The month after GENIUS passed, BND began a pilot partnership to build the program, which is expected to launch in September.Morgan sees GENIUS as allowing Bank of North Dakota to build third-party architecture. BND is not waiting for further regulatory guidance to build the program, but is open to changes when necessary. Bank of North Dakota is using internal risk teams and third parties to flesh out risk assessments and for testing and oversight.“We have to stay not only with risk as the top profile and understanding the mechanisms and picking the right partners, but we also have to stay nimble enough to adjust to anything,” Morgan said. “We’re in a forward-edge, leading-edge, pilot-type environment, which is an odd space for a bank to be in. That being the case, we’ve got to be able to build this out, so it comes down to, do we have the right partners? Do we have the right mindset? We feel we have both.”An emerging threat?The stablecoin market cap was around $300 billion as of early February. J.P. Morgan predicts the market cap could reach $500 billion by 2028, while Standard Chartered estimates the global stablecoin market could hit $2 trillion.Standard Chartered recently estimated stablecoins could pull $500 billion in deposits from U.S. banks by the end of 2028. The banking industry is concerned the GENIUS Act could enable crypto firms to skirt the law’s ban on paying interest or “yield” on payment stablecoins. In late February, the Office of the Comptroller of the Currency issued a proposed rule to implement the GENIUS Act limiting the ability to offer stablecoin rewards and issue branded stablecoins. Skirting the ban could cause roughly $3 billion to $6 billion in deposit flight in Michigan alone, predicted Kenneth Kelly, CEO of Detroit-based First Independence Bank..Speaking in February during the American Bankers Association’s Conference for Community Bankers in Orlando, Kelly said stablecoins are the latest instance of bank disintermediation during the past 40 years, and will require banks to essentially have their call reports published on a daily basis. “We have to be enabled by our core platforms,” he said, noting that in the past it has sometimes been difficult for bankers to get the information they need from their core systems.As stablecoins rise in prominence, bankers and industry trade groups say banks have no choice but to adjust to the trend. Although customers might not directly ask for digital assets, the benefits of blockchain technology — 24/7 availability, instant settlement and programmability — still matter, said Brooke Ybarra, senior vice president of innovation and strategy for the American Bankers Association.Morgan expects the entire banking industry will be on an on-chain payment rail in the next decade as younger customers are more likely to want a frictionless experience. He sees additional stablecoin use cases for bank transfers and loan advances over the next several years, with banks and credit unions eventually offering stablecoin-enabled deposit account products. Although some banks can stick to current offerings and not see deposit losses, others could see attrition to large payment processors such as Venmo, PayPal and other competitors.Morgan sees stablecoins as a sign of a more existential issue banks need to address: The massive rise of customers seeking digital service. “Customers want more and more financial transactions on their iPhones and their devices, and they want it all integrated, and they want the apps integrated and they want the ability to do everything,” he added.On the leading edgeLast year, the Nebraska Department of Banking and Finance authorized Telcoin Bank as the first regulated crypto bank in the country and the state’s first digital asset depository institution. Telcoin has released the first bank-issued stablecoin, eUSD.Wyoming and Texas were among the first states to define the commercial legal rights and obligations related to a digital asset transaction. Unlike Bank of North Dakota, Wyoming’s Frontier Stable Token moves past banks to end-user merchant adoption. The state sees its Stable Token as a way to foster innovation while generating revenue for public education.There is also private sector stablecoin innovation in the Cowboy State. After a multi-year court battle with the federal government, Custodia Bank Founder and CEO Caitlin Long expects her Cheyenne-based company will soon become the first digital asset-focused bank to receive a master account from the Federal Reserve..Custodia first applied to secure a Federal Reserve master account for direct payment access in 2020, which the Fed denied three years later, citing safety risks. Long said the denial was part of an anti-cryptocurrency stance by the Biden administration, which allegedly tried to pressure banks to cut ties with the stablecoin industry by issuing unclear rules, informal guidance and threats.In 2025, a federal appeals court sided with the Fed’s discretion to not approve Custodia. Federal Reserve Gov. Christopher Waller has since expressed support for “skinny” Federal Reserve master accounts, which would allow applicants to have a faster timeline for review and basic Fed payment services. Those approved would neither be able to access daylight overdraft privileges nor borrow from the Fed’s discount window. Long said Custodia Bank proposed such an option to the Federal Reserve Bank of Kansas City in 2022. In March, Kraken Financial became the first crypto firm to gain access to the Federal Reserve’s core payment systems.Long said the Fed’s decision not to welcome stablecoins into banking pushed the digital asset out of the banking system and benefitted larger banks with the in-house resources to develop their own programs.A former Wall Street banker at Morgan Stanley, Credit Suisse and Solomon Brothers, Long’s support of the stablecoin industry was sparked by her understanding it could help banks solve one of the banking industry’s most significant problems. “Anybody in the back office of a bank understands what that means, because each bank has to duplicate the same data and reconcile it because each one of them is maintaining their own ledgers,” Long said. “Those ledgers are never in sync, which is a big reason why the system periodically is unstable.“That’s especially a problem in the large banks and Wall Street where you have mountains of transactions. But it is a problem for the community banks as well. And these shared ledger technologies enable the duplication and reconciliation problem to be solved in a cheaper way.”There was a push to make Wyoming be the headquarters for top stablecoin firms, similar to the position South Dakota has for credit card companies. The credit card operations for First PREMIER Bank, Citibank and Wells Fargo are based in the Mount Rushmore State. The South Dakota Legislature voted to exempt commercial banks from the state’s usury laws in 1980. A measure passed by the state’s voters in 2016 bans state-licensed money lenders from making loans with an annual percentage rate of more than 36 percent.In October, Custodia and San Antonio-based Vantage Bank launched a tokenized deposits consortium, which integrates tokenized deposits and stablecoins into online banking. Tokenized deposits are digital representations of traditional bank deposits kept on a distributed ledger or blockchain. Vantage started considering providing custody services for digital assets in 2020, said Chief Business Architect Shawn Main. Despite encountering regulatory challenges, Vantage Bank stayed close to the stablecoin industry, becoming the first bank to join the Texas Blockchain Council in 2021..Custodia Bank was seeking correspondent banking relationships at the time, and needed a bank partner to help operate accounts. Vantage Bank saw stablecoins as a chance to build for the future. “As stablecoins started to rise to dominance, it was pretty clear to us that was going to have an impact on the industry as a whole,” Main said. “Specifically Vantage, because we do a lot of cross-border business. We have a lot of foreign national customers.“That also led us down the path of thinking about how we protect the banking system and provide things like tokenized deposits, keep those deposits on the balance sheet and reduce deposit flight,” he added. Some community bankers have told Main they do not see the use case for stablecoins other than for cross-border transactions. Main disagrees, and sees a role for the payment in domestic payments. “Customers are locking up stablecoins to make payments between manufacturers and suppliers or logistics companies," he added. “Customers are already doing this but are afraid to talk to you about it or don’t feel you have the expertise.”What’s next?Banks looking to offer stablecoin services need to evaluate internal structures and upscale employees, not chase potential solutions, Main said. He suggested banks use loan participations and correspondent settlements to better understand risk appetites and build risk frameworks.Long sees banks as providing the most opportunity for stablecoins to flourish. According to a 2023 J.P. Morgan study, 88 percent of deposits that left the traditional banking system during the 2020 crypto bull market never returned, making her believe bank technology needs to improve to prevent deposit flight. “The real discussion should be what banks’ technology looks like, and that’s what Vantage and Custodia are delivering,” she added. “We have built what is functionally a side core that requires minimal lift from community banks to adopt.”Long said more than 70 banks and multi-member organizations are in the pipeline to join Vantage Bank’s developing stablecoin network, which is in its testing phase and is expected to launch this spring. Organizers hope at least 100 banks are onboarded in the next few years. Long sees the opportunity for community banks to have their own payment system and clearinghouse, similar to The Clearing House network for larger banks.Large banks such as Huntington Bancshares, First Horizon Corp and M&T Bank Corp are already building their own tokenized deposit network. Those companies, along with Old National Bancorp and KeyCorp, are working with blockchain-based platform Cari Network, which was founded by former U.S. Comptroller of the Currency Eugene Ludwig.“We saw the larger opportunity,” Main said. “We talked to many banks. We realized this could be an opportunity for community banks to take control of their money movement networks, not allow that to be concentrated again back up to the money movement networks, bring that power back down to community banks and give them back control over the thing they have lost control over for the last 50, 60 years.”Despite the Trump administration’s openness to stablecoins/cryptocurrencies, Long sees the possibility of regulations tightening in a few years if the next president is from the Progressive wing of the Democratic party. Long said Custodia established itself as a state-regulated entity as a precaution against national political influences.Bank trade associations have worked to ensure the Trump administration’s support of the stablecoin industry does not allow nonbanks to siphon deposits from community banks. Following a Feb. 11 meeting with the White House, the American Bankers Association, Bank Policy Institute and Independent Community Bankers of America said they “share the administration’s strong interest in finding agreement on crypto market structure legislation.“As we noted during the meeting, that framework can and must embrace financial innovation without undermining safety and soundness, and without putting the bank deposits that fuel local lending and drive economic activity at risk,” the groups stated. “We look forward to ongoing discussions to move market structure legislation forward.”Kelly said bankers need to consider whether to accept stablecoins or realize they will be controlled outside of the traditional banking system. He sees First Independence as needing to not be left behind in the stablecoin space — regardless of whether it issues its own token. “We are pushing and pulling our board on this topic,” he said.Kelly called on bankers to work with regulators to eliminate any negative impacts from stablecoins. “Bankers have to go on offense and find ways to help shape the market on this,” he said.“We are playing a high-stakes chess game, and this is all about us having control over deposit funding and the way we move value within the system.”