Stablecoins have rapidly emerged from the periphery of cryptocurrency markets into a central topic in financial and regulatory conversations. These blockchain-based digital tokens are designed to maintain a stable value, typically pegged 1:1 to the U.S. dollar, and enable fast, low-cost transactions 24/7. While they promise to modernize payments and expand financial access, stablecoins also pose new challenges to the banking industry and policymakers.

The numbers underscore their dramatic rise: The stablecoin market grew from under $5 billion in 2020 to more than $200 billion by 2025. Tether (USDT), the largest stablecoin by market cap, recently surpassed $140 billion. These developments have significant implications for how banks operate, how money moves and how financial stability is preserved.

Stablecoins generally fall into three categories. Fiat-backed stablecoins are the most prevalent. These include USD Coin (USDC) and USDT, which are backed by reserves like cash, commercial bank deposits or short-term U.S. Treasuries. Crypto-collateralized stablecoins, such as DAI, use other cryptocurrencies as reserves. They are overcollateralized to buffer against volatility. Algorithmic stablecoins attempt to maintain their peg through programmed supply controls rather than asset backing. This model has largely failed, as seen in the $40 billion collapse of TerraUSD (UST) in 2022, which lost its peg and shook confidence in the broader crypto ecosystem. Today, fiat-backed stablecoins dominate the market due to their perceived stability and alignment with traditional financial assets.

Originally developed to facilitate cryptocurrency trading, stablecoins are now being used in cross-border payments, remittances and as a digital store of value, especially in countries facing currency instability. Their ability to settle transactions in real-time and across borders creates efficiency gains that traditional payment rails struggle to match.

For emerging markets, dollar-linked stablecoins can provide an on-ramp to dollar-based savings and payments. In the U.S., businesses and fintechs are experimenting with stablecoins to reduce transaction costs, improve speed and introduce programmable features into payments infrastructure.

Stablecoins offer banks both promising opportunities for innovation and significant risks that could impact their core business models. On the opportunity side, stablecoins can help modernize the banking sector by enabling faster, more cost-effective and programmable payment systems. Banks may also explore new service lines, such as offering custodial solutions for digital assets, facilitating blockchain-based settlement or introducing tokenized deposit products. In addition, partnerships with fintech firms present a strategic path for traditional financial institutions to integrate blockchain infrastructure into their operations and remain competitive in an evolving financial landscape.

However, these innovations are not without risks. One major concern is deposit disintermediation – if customers choose to hold their funds in stablecoins instead of traditional bank accounts, this could reduce the deposit base, especially for community banks that rely on local funding to support lending. There is also the risk of a run: If users lose confidence in a stablecoin’s reserve backing, it could prompt mass redemptions and fire sales of reserve assets. This risk was exemplified when USDC temporarily lost its dollar peg in March 2023 during the Silicon Valley Bank collapse, underscoring the need for transparency and high-quality reserves.

Cybersecurity and compliance challenges are another area of concern. The rapid and global nature of stablecoin transactions increases the risk of money laundering and cyberattacks if issuers and intermediaries do not implement robust know-your-customer and anti-money laundering controls. Additionally, vulnerabilities in smart contracts or digital wallets could expose users and banks to technical and financial risks. Lastly, market concentration poses a threat; if major technology companies enter the stablecoin space unchecked, they could marginalize traditional banks and interfere with monetary policy implementation.

Recognizing both the risks and opportunities posed by stablecoins, Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act in July 2025. This bipartisan legislation – the first comprehensive federal framework governing payment stablecoins – was signed into law on July 18, after passing the Senate by a vote of 68–30 and the House by 308–122. The GENIUS Act aims to strike a balance between encouraging financial innovation and safeguarding consumer protection and financial stability.

Under the law, only specific entities are permitted to issue payment stablecoins. These include subsidiaries of insured depository institutions, newly chartered nonbank issuers regulated by the Office of the Comptroller of the Currency and state-regulated entities operating under frameworks deemed substantially similar to federal standards. Issuers are required to maintain 1:1 reserves in high-quality liquid assets, such as cash, short-term U.S. Treasuries or balances held at the Federal Reserve. They are prohibited from engaging in risky practices like rehypothecation of reserves.

To promote transparency and oversight, the Act mandates monthly reserve disclosures, annual independent audits and technical capabilities to freeze or redeem stablecoins in compliance with lawful orders. A tiered supervision structure is also introduced, with federal oversight triggered once an issuer surpasses $10 billion in circulation. Additional consumer protection provisions include asset safeguards in the event of insolvency, requirements for interoperability and statutory clarification that properly issued payment stablecoins are not considered securities under federal law.

Notably, the GENIUS Act confirms that banks may offer tokenized deposit products and custodial services for digital assets within existing legal frameworks. Regulators are now tasked with drafting implementing rules, and existing stablecoin issuers have been granted a three-year transition period to comply with the new standards or exit the U.S. market.

For Indiana’s banks and the broader financial industry, stablecoins represent both a strategic opportunity and a competitive challenge. When responsibly regulated, these digital assets can modernize payments, lower costs and strengthen the U.S. dollar’s role in the global digital economy – while reinforcing the traditional strengths of banks in providing secure and community-based financial services.

The GENIUS Act attempts to create clarity for banks to enter this space with confidence. By setting consistent standards for reserve quality, transparency and issuer eligibility, the law creates a more stable environment for innovation. Banks are now positioned to participate – whether by issuing their own stablecoins, developing tokenized deposit solutions or partnering with fintech firms to build blockchain-based payment systems.

As Indiana banks begin exploring these opportunities, their mission remains unchanged: ensuring safety, soundness and sustained investment in local communities. Smart regulation and continued refinement of the structure created by recent stablecoin legislation will better help position Indiana’s financial institutions at the forefront of digital financial transformation.