Stablecoins Leave Traditional Banking Systems in the Dust

Stablecoins can move money across borders at speeds that leave traditional banking systems in the dust. According to Anthony Vassallo, director of crypto at Silicon Valley Bank, stablecoin adoption will show up on two different clocks: a slow clock where currency substitution and deposit erosion build over months or years, and a fast clock where a depeg, issuer shock, or banking event can move capital at software speed within hours.

The European Central Bank has raised concerns about the impacts of large stablecoin reserves held in bank deposits. These reserves are subject to traditional settlement timelines, while stablecoins settle around the clock. A recent incident involving USD Coin and Circle's disclosure that $3.3 billion of its reserves were held at the failed Silicon Valley Bank turned a banking failure into a stablecoin crisis almost overnight.

Stablecoin adoption is closely connected to demand for dollar exposure in economies facing currency pressure or banking crises. According to Arnold Lee, chief executive of Sphere Labs, most of these economies will continue moving toward dollars. He says the manner of this shift matters because countries that manage it and those that get overtaken by it end up in very different places.

A study published by the Bank for International Settlements found that increased stablecoin demand can put downward pressure on local currencies and make dollars more expensive to obtain through FX swaps. This effect is stronger when financial intermediaries are under strain.