From Wall Street Mockery to a Trillion-Dollar Market: How Stablecoins Are Reshaping the Financial System

Compiled by: Liam

In the eyes of conservative figures on Wall Street, the “use cases” of cryptocurrencies are often discussed in a mocking tone. Veterans have long seen it all. Digital assets come and go, often with great fanfare, exciting those investors who are enthusiastic about memecoins and NFTs. Apart from being used as tools for speculation and financial crime, their applications in other areas have repeatedly been found to have flaws and shortcomings.

However, the latest wave of enthusiasm is somewhat different. On July 18, President Donald Trump signed the Stablecoin Act (GENIUS Act), providing the long-desired regulatory certainty for stablecoins (crypto tokens backed by traditional assets, typically the US dollar). The industry is currently in a period of rapid growth; Wall Street professionals are now eager to get involved. “Tokenization” is also on the rise: on-chain asset trading volume is rapidly increasing, including stocks, money market funds, and even private equity and debt.

Like any revolution, revolutionaries are ecstatic while conservatives are anxious. Vlad Tenev, CEO of digital asset broker Robinhood, stated that this new technology could “lay the foundation for cryptocurrency to become a pillar of the global financial system.” The view of Christine Lagarde, President of the European Central Bank, is somewhat different. She is concerned that the emergence of stablecoins amounts to “the privatization of currency.”

Both parties realize the scale of the transformation at hand. Currently, the mainstream market may face more disruptive changes than early cryptocurrency speculation. Bitcoin and other cryptocurrencies promise to become digital gold, while tokens are merely wrappers or vehicles representing other assets. This may not sound remarkable, but some of the most transformative innovations in modern finance have indeed changed the way assets are packaged, segmented, and restructured—exchange-traded funds ( ETF ), Eurodollars, and securitized debt are typical use cases.

Currently, the circulating stablecoin value is $263 billion, which is an increase of approximately 60% from a year ago. Standard Chartered Bank expects the market value to reach $2 trillion in three years. Last month, JPMorgan Chase, the largest bank in the U.S., announced plans to launch a stablecoin product called JPM Coin Deposit (JPMD), despite CEO Jamie Dimon’s long-standing skepticism toward cryptocurrencies. The market value of tokenized assets is only $25 billion, but it has more than doubled in the past year. On June 30, Robinhood launched over 200 new tokens for European investors, enabling them to trade U.S. stocks and ETFs outside of normal trading hours.

Stablecoins make transaction costs low and quick because ownership is recorded instantly on the digital ledger, eliminating the intermediaries that operate traditional payment channels. This is especially valuable for cross-border transactions, which are currently costly and slow. Although stablecoins currently account for less than 1% of global financial transactions, the GENIUS Act will provide support for them. The act confirms that stablecoins are not securities and requires that stablecoins must be fully backed by safe, liquid assets. Reports indicate that retail giants, including Amazon and Walmart, are considering launching their own stablecoins. For consumers, these stablecoins may be similar to gift cards, providing a balance for spending at retailers, and they may be offered at lower prices. This could disrupt companies like Mastercard and Visa, which have profit margins of about 2% on sales facilitated in the U.S.

Tokenized assets are digital replicas of another asset, whether it’s a fund, company stock, or a basket of commodities. Like stablecoins, they can make financial transactions faster and easier, especially for trades involving illiquid assets. Some products are just gimmicks. Why tokenize stocks? Doing so may enable 24-hour trading, as the exchanges where stocks are listed do not need to be open, but the advantages of this approach are questionable. Moreover, for many retail investors, marginal trading costs are already low, even zero.

Effort Tokenization

However, many products are not that fancy. Taking money market funds as an example, they invest in treasury bills. The tokenized versions can also serve as a means of payment. These tokens are backed by secure assets, just like stablecoins, and can be seamlessly exchanged on the blockchain. They also represent an investment that outperforms bank interest rates. The average interest rate on U.S. savings accounts is less than 0.6%; many money market funds yield as much as 4%. BlackRock’s largest tokenized money market fund is currently valued at over $2 billion. “I expect that one day, tokenized funds will be as familiar to investors as ETFs,” wrote the company’s CEO Larry Fink in a recent letter to investors.

This will have a disruptive impact on existing financial institutions. Banks may be trying to venture into new digital packaging areas, but part of their motivation for doing so is the realization that tokens pose a threat. The combination of stablecoins and tokenized money market funds could ultimately reduce the attractiveness of bank deposits. The American Bankers Association points out that if banks lose about 10% of their $19 trillion in retail deposits (the cheapest source of financing), their average financing cost would rise from 2.03% to 2.27%. While the total deposits, including commercial accounts, will not decrease, bank profit margins will be squeezed.

These new assets may also have a disruptive impact on the broader financial system. For example, holders of Robinhood’s new stock tokens do not actually own the underlying stocks. Technically, they own a derivative that tracks the value of the asset (including any dividends paid by the company), rather than the stocks themselves. Therefore, they do not have the voting rights typically conferred by stock ownership. If the token issuer goes bankrupt, holders will find themselves in trouble, needing to compete with other creditors of the defunct company for ownership of the underlying assets. Earlier this month, the fintech startup Linqto, which had issued shares of private companies through special purpose vehicles, faced a similar situation. Buyers are now unclear whether they own the assets they believe they own.

This is one of the greatest opportunities for tokenization, but it also presents the greatest challenges for regulators. Pairing illiquid private assets with easily tradable tokens opens up a closed market for millions of retail investors, who have trillions of dollars available for allocation. They can purchase shares in the most exciting private companies that are currently out of reach. This raises questions. The influence of agencies like the U.S. Securities and Exchange Commission ( SEC ) over public companies is far greater than their influence over private companies, which is why the former is more suitable for retail investment. Tokens representing private shares would transform what was once private equity into assets that can be traded as easily as ETFs. However, ETF issuers commit to providing intraday liquidity by trading the underlying assets, while token providers do not make such commitments. At a sufficiently large scale, tokens could effectively turn private companies into public companies without the usual disclosure requirements.

Even regulatory agencies that support cryptocurrencies want to draw a line. Hester Peirce, a commissioner of the U.S. Securities and Exchange Commission (SEC), is referred to as the “crypto mom” due to her friendly attitude toward digital currencies. In a statement on July 9, she emphasized that tokens should not be used to circumvent securities laws. “Tokenized securities are still securities,” she wrote. Therefore, regardless of whether the securities take on new cryptocurrency packaging, companies issuing securities must comply with information disclosure rules. While this makes theoretical sense, the large number of new assets with novel structures means regulators will be endlessly in a catch-up mode in practice.

Thus, there is a paradox. If stablecoins are truly useful, they will also be genuinely disruptive. The greater the appeal of tokenized assets to brokers, customers, investors, merchants, and other financial companies, the more they can change finance, a change that is both exciting and concerning. Regardless of the balance between the two, one thing has become clear: the view that cryptocurrencies have yet to produce any noteworthy innovations is a thing of the past.