The Potential and Challenges of Stablecoins
Stablecoins, a type of cryptocurrency designed to minimize price volatility, are often touted for their potential benefits, particularly their ability to facilitate cheaper, faster money transfers. Their use is being explored by a broad range of stakeholders, including consumers, banks, regulators, merchants, and central banks. These entities are interested in how stablecoins can enhance real-time settlement and streamline cross-border payments.
However, despite the enthusiasm surrounding these digital assets, the impact of stablecoins at a significant scale has been somewhat limited. This limitation is particularly evident when you consider the challenges related to compliance, regulation, and operational integration.
The issue isn’t necessarily that stablecoins are flawed. Instead, the problem lies in the existing financial and payment systems with which stablecoins interact. These systems were never designed to support real-time, always-on money, and this incompatibility exposes the outdated nature of much of today’s banking infrastructure.
Tokenisation is not a Workaround for Legacy Architecture
Stablecoins promise always-on, instant payments, but current banking systems, especially those built on legacy platforms, struggle to deliver this. This issue is particularly prominent in the US, where much of the banking system still operates on infrastructure designed for batch processing and limited operating hours, rather than continuous payments.
The result is a growing disconnect between what stablecoins can provide and what existing systems can handle. This mismatch leads to reconciliation delays, liquidity constraints, and increasing operational strain.
Some institutions try to solve this problem by layering new technology that can handle stablecoins and other tokenised instruments over existing platforms. However, each additional layer can introduce new points of reconciliation, monitoring, and failure. Instead of simplifying cross-border payments, this approach adds complexity to systems already struggling to manage liquidity, risk, and settlement across multiple rails.
This is because always-on, real-time payments can’t be treated as an afterthought. Platforms need to be capable of continuously processing, monitoring, and reconciling transactions.
Initiatives like Project Agora, led by the International Bank for International Settlements and the Institute of International Finance, show promise in addressing these issues. The project aims to revolutionize cross-border payments using tokenisation and acknowledges the need for banking infrastructure upgrades and testing to make this possible.
Money at Scale Comes with Non-negotiables
Stablecoins don’t operate in isolation. As their use expands, expectations around consumer protection, fraud prevention, liquidity management, and regulatory oversight inevitably rise. This is the reality of money at scale. Compliance obligations such as anti-money laundering, liquidity, and counter-terrorist financing don’t disappear just because an asset is tokenised.
The speed at which tokenised money moves increases safety and fraud risks and leaves no room for error. Any intervention needs to happen instantly when funds move. Traditional safety controls designed for delayed settlement and post-transaction review struggle in always-on environments because they aren’t designed to support continuous monitoring and prevention.
However, the regulatory landscape is evolving to account for these challenges. Frameworks such as MiCA in Europe and the Genius Act in the US show clear intent to incorporate stablecoins into the payments landscape, but with the same operational and regulatory expectations applied to other forms of money.
As tokenised payments scale, new requirements around fraud prevention, resilience, and consumer protection will continue to emerge. To keep up, banks need to develop infrastructure that can adapt to these regulatory changes, through platforms that support continuous controls and real-time updates, rather than relying on periodic checks.
The Widening Gap Between Fintechs and Banks
These pressures are already reshaping competition in the payment landscape between banks and fintechs. Fintechs and non-bank providers are better prepared for the incoming wave of tokenised payments because their modern, cloud-native architectures allow for quick innovation and continuous operation. In contrast, many banks remain constrained by legacy, batch-based systems, and complex point-to-point integrations that slow down change and increase operational risk.
As stablecoins continue to gain traction, it’s clear that payments are no longer a back-office function. They are now a frontline competitive differentiator. Instant payments are already significantly reshaping the payments landscape, raising customer expectations. To meet these expectations and prepare for the next wave of payments modernisation through tokenisation, banks need to rebuild their payments infrastructure. They should aim to leverage cloud-native, API-first platforms that support the real-time processing and high availability that these assets require. This approach will enable stablecoins to deliver on their potential.
Steve Cook, Co-Founder and Strategic Advisor at Form3
Source: Here
