The Stablecoin Wars: How Traditional Banks Are Preparing to Kill Tether and USDC

Jeremy Allaire was sitting in a hotel room in Dubai in March 2023 after giving a keynote address at a finance conference in Abu Dhabi. He had planned to take a weekend off, ride camels, and celebrate his son’s birthday at the Burj Khalifa when the event that he had spent years denying could ever occur actually occurred. USDC fell to $0.88 on secondary markets after losing its dollar peg. Panic-selling was occurring among traders. Silicon Valley Bank was holding $3.3 billion for Circle. The stablecoin that was meant to be more secure than a bank had just shown in real time that it shared the same vulnerabilities.

It was a pivotal moment. Not only for USDC and Circle, but for the whole debate over what stablecoins are and who they pose a threat to. Because that weekend in Dubai showed Wall Street executives, regulators, and the banking lobby that stablecoins had grown big enough to be significant in the actual financial system. This implied that the actual financial system would begin to retaliate.

Traditional finance can no longer afford to ignore the stablecoin market. Together, Tether’s USDT and Circle’s USDC control the vast majority of the market, which is currently valued at more than $273 billion. According to Standard Chartered’s analysis, the Treasury Borrowing Advisory Committee has estimated that amount could rise to $2 trillion by 2028. At a financial conference in November, Treasury Secretary Scott Bessent increased his own goal to $3 trillion. If even partially realized, those figures pose a direct threat to traditional banks’ most dependable and affordable source of funding—customer deposits.

Key Reference Data: The Stablecoin Market & Banking Conflict

It’s important to comprehend these mechanisms because they explain why banks have moved from bewildered skepticism to something more akin to alarm. By paying depositors as little as possible—typically 0.5% or less—and lending that money out at much higher rates, banks profit from the spread. The returns on their underlying Treasury reserve assets, which are closer to 5% in the current rate environment, can be passed through by stablecoins, especially yield-bearing ones. This year, the Bank Policy Institute, the lobbying arm of the biggest banks in America, released a report cautioning that if yield-bearing structures are permitted to spread, stablecoins may cause a $6.6 trillion withdrawal from traditional deposits. That isn’t speculative. Members of Congress are given a document outlining a business model threat.

The lobbying effort has been substantial and, in certain ways, surprisingly successful. The first real regulatory framework for stablecoin issuance in the US, the GENIUS Act, contains “loopholes” that banking groups have spent about $57 million trying to close. These loopholes could allow stablecoin issuers to distribute yields to holders under different “rewards” structures. Publicly, the debate centers on financial stability. In private, the dispute is about deposits. It’s possible that both statements are true at the same time, which makes it more difficult to settle the argument amicably.

In this context, JPMorgan’s recent decision to charge fintech companies “high fees” for API access to customer financial data—with a clear threat to completely block access for companies that don’t pay—reads as more than just a business ploy. In a joint letter to the Trump administration, Klarna, Robinhood, and Gemini described it as being anti-competitive. The co-founder of Gemini went so far as to refer to it as “Operation ChokePoint 2.0.” Although the framing may be exaggerated, the underlying conflict is genuine: stablecoins can operate without bank APIs. JPMorgan can profit from one fewer data relationship for each fintech business that switches to cryptocurrency payment rails. You can expedite the construction of new pipes by charging enough for the old ones.

Additionally, new pipes are being constructed. Stripe does not appear to believe that traditional payment infrastructure has a bright future, as evidenced by its acquisition of Bridge for stablecoin infrastructure, Privy for wallet onboarding, and now Tempo, a proprietary Layer 1 blockchain with a sub-second settlement chain that uses USDC as its native gas token. By choosing to acquire the settlement layer before anyone else, Stripe is essentially placing a wager that stablecoins will consume payment processing. Visa is reportedly considering issuing its own coins and has separately declared its goals to secure $2 trillion in stablecoin settlement volume. With Blackstone overseeing the reserves, MetaMask introduced mUSD. Citi is also assessing payment and custody services for stablecoins.

The specific irony in this situation is difficult to ignore. The banks did little to stop Tether’s offshore structuring, opaque reserve disclosures, and lax regulatory oversight for years. Following the SVB crisis, USDC’s market capitalization dropped from $43 billion to about $26 billion, while Tether’s increased from $72 billion to over $83 billion. Tether’s profit per employee is comparable to Goldman Sachs’ and occasionally surpasses it. It has acquired a portion of a GPU cloud operation owned by Northern Data Group, linking stablecoin profits to AI infrastructure in a manner unrelated to the regulated financial system and entirely focused on the acquisition of tangible assets.

Circle’s post-SVB positioning—cleaner reserves, mostly held at BNY Mellon, and more transparent attestations—reflects what a compliant US issuer looks like under the new regime. The GENIUS Act’s passage provided US regulators with the framework they needed to address the offshore stablecoin issue. It’s still unclear if Tether, operating outside of direct US regulatory reach, will benefit from compliance or if it will just be a cost.
The fact that the participants in the stablecoin wars are now more than just cryptocurrency companies debating which token has superior reserve management is evident. The biggest names in traditional finance, the most influential lobbying groups in Washington, and a group of payment infrastructure firms, including Stripe, Visa, and PayPal, are all involved. They are placing nine-figure bets that stablecoin settlement will become the norm within ten years.

Watching all of this happen at once gives me the impression that the banking sector is reacting to stablecoins in the same way that established companies typically react to something that poses a threat to them: by first dismissing it, then attempting to control it, and then stealthily creating their own version of it while continuing to advocate against the original. The pattern is recognizable. It’s not always effective.
The key question for the coming years in finance is whether traditional banks can effectively slow the adoption of stablecoins through lobbying, data fees, and regulatory pressure, or if those actions just hasten the development of financial infrastructure that doesn’t require them. Depending on who you ask and what they have constructed, the $6.6 trillion figure can be interpreted as either a warning or an inevitability.