When banks join the stablecoin war: The twilight of the duopoly era and the reshuffle of the $100 billion market

# English Translation  

Original Author: nic carter  

Compiled & Translated by: Saoirse, Foresight News  

Circle’s equity valuation has reached $30.5 billion. Reportedly, the parent company of Tether (the issuer of USDT) is seeking financing at a $500 billion valuation. Currently, the total supply of these two leading stablecoins stands at a staggering $245 billion, accounting for approximately 85% of the entire stablecoin market. Since the inception of the stablecoin industry, only Tether and Circle have consistently maintained substantial market share—all other competitors have struggled to keep pace:  

- Dai’s market cap peaked at just $10 billion in early 2022;  

- Terra’s UST surged to $18 billion in May 2022, but this represented only ~10% of the market, proved short-lived, and ultimately ended in a collapse;  

- The most ambitious challenger was Binance’s BUSD, which hit a market cap peak of $23 billion (15% of the market) in late 2022 before being forcibly shut down by the New York State Department of Financial Services (NYDFS).  

## Relative Supply Share of Stablecoins (Source: Artemis)  

The lowest combined market share I could find for Tether and Circle was 77.71% in December 2021—at that time, Binance USD, DAI, FRAX, and PAX collectively held a more substantial market share. (Naturally, Tether had no market share before its launch, and earlier dominant stablecoins like Bitshares and Nubits failed to survive to the present day.)  

In March 2024, the two giants’ market dominance reached its peak, accounting for 91.6% of the total stablecoin supply, but has declined steadily since then. (Note: Market share here is calculated by supply, as this metric is easy to quantify; if measured by trading volume, number of trading pairs, real-world payment scale, or active addresses, their share would undoubtedly be even higher.) To date, the duo’s market share has fallen from last year’s peak to 86%, and I expect this trend to continue. The drivers behind this include: heightened willingness among intermediaries to issue their own stablecoins, intensifying "race-to-the-bottom" competition in stablecoin yields, and new shifts in the regulatory landscape following the introduction of the *GENIUS Act*.  

## Intermediaries Rush to Issue Proprietary Stablecoins  

In previous years, launching a "white-label stablecoin" (i.e., a stablecoin customized on an existing technical framework) required not only bearing exorbitant fixed costs but also relying on Paxos, a compliant fintech firm. Today, however, the landscape has completely changed: current options for issuance partners include Anchorage, Brale, M0, Agora, and Bridge (owned by Stripe). Within our investment portfolio, several small seed-stage startups have successfully launched their own stablecoins via Bridge—entry into stablecoin issuance no longer requires being an industry giant.  

Zach Abrams, co-founder of Bridge, explained the rationale for issuing proprietary stablecoins in an article on "open issuance":  

*For example, if you build a new bank using off-the-shelf stablecoins, you face three major problems:  

a) Inability to capture sufficient yield to offer competitive savings accounts;  

b) No ability to customize reserve portfolios to balance improved liquidity and yield growth;  

c) Having to pay a 10-basis-point (0.1%) redemption fee just to access your own funds!*  

His point is well-founded. With Tether, it is nearly impossible to generate yield to pass on to customers (yet customers now generally expect some yield when depositing funds); with USDC, while yield may be available, it requires negotiating a revenue split with Circle—and Circle takes a cut. Additionally, using third-party stablecoins imposes numerous restrictions: no control over freeze/seizure policies, no choice of which blockchains the stablecoin is deployed on, and potential arbitrary increases in redemption fees.  

I once believed that network effects would dominate the stablecoin industry, leaving only one or two mainstream stablecoins standing. But my view has since changed: cross-chain swapping efficiency is improving, and swapping between different stablecoins on the same blockchain is becoming increasingly convenient. Over the next year or two, many crypto intermediaries may display user deposits as generic "USD" or "USD tokens" (instead of explicitly labeling them as USDC or USDT) and guarantee users the ability to convert to any stablecoin of their choice.  

Today, many fintech firms and neobanks already adopt this model—prioritizing product experience over adherence to crypto industry traditions, they display user balances directly as "USD" and manage reserve assets in the background.  

For intermediaries (whether exchanges, fintech firms, wallet providers, or DeFi protocols), there is a strong incentive to shift user funds from mainstream stablecoins to their own proprietary stablecoins. The reason is simple: if a crypto exchange holds $500 million in USDT deposits, Tether profits approximately $35 million annually from the "float" (i.e., idle deposited funds)—while the exchange earns nothing. To convert this "idle capital" into a revenue stream, there are three paths:  

1. Request stablecoin issuers to share a portion of yield (e.g., Circle offers revenue splits with partners through incentive programs, but Tether, to my knowledge, does not distribute yield to intermediaries);  

2. Partner with emerging stablecoins (such as USDG, AUSD, or Ethena’s USDe) that are designed with built-in revenue-sharing mechanisms;  

3. Issue proprietary stablecoins to internalize all yield.  

Take exchanges as an example: the most straightforward strategy to persuade users to abandon USDT for their proprietary stablecoin is to launch "yield programs"—e.g., paying users a yield tied to U.S. short-term Treasury rates while retaining a 50-basis-point (0.5%) profit margin. For fintech products serving non-crypto-native users, even yield programs may be unnecessary: simply display user balances as generic USD, automatically convert funds to proprietary stablecoins in the background, and swap back to Tether or USDC on-demand when users withdraw.  

Currently, such trends are already emerging:  

- Fintech startups widely adopt the "generic USD display + backend reserve management" model;  

- Exchanges actively strike yield-sharing agreements with stablecoin issuers (e.g., Ethena successfully promoted its USDe on multiple exchanges via this strategy);  

- Some exchanges have jointly formed stablecoin alliances, such as the "Global Dollar Alliance," whose members include Paxos, Robinhood, Kraken, and Anchorage;  

- DeFi protocols are also exploring proprietary stablecoins. The most notable example is Hyperliquid (a decentralized exchange), which publicly tendered for a stablecoin issuance partner with the explicit goal of reducing reliance on USDC and capturing reserve asset yield. Hyperliquid received bids from institutions including Native Markets, Paxos, and Frax, ultimately selecting Native Markets (a decision that sparked controversy). Currently, USDC balances on Hyperliquid amount to approximately $5.5 billion, accounting for 7.8% of USDC’s total supply—while Hyperliquid’s USDH cannot replace USDC in the short term, this public tender process has already damaged USDC’s market image, and more DeFi protocols may follow suit in the future;  

- Wallet providers have also joined the proprietary issuance trend. For instance, Phantom (a leading wallet in the Solana ecosystem) recently announced the launch of Phantom Cash—a stablecoin issued via Bridge with built-in yield and debit card payment features. While Phantom cannot force users to adopt this stablecoin, it can guide migration through various incentives.  

In summary, as the fixed costs of stablecoin issuance fall and yield-sharing partnerships become more prevalent, intermediaries no longer need to cede float-related profits to third-party stablecoin issuers. For entities with sufficient scale and credibility to earn user trust in their white-label stablecoins, proprietary issuance has become the optimal choice.  

## Intensifying "Race-to-the-Bottom" in Stablecoin Yields  

If we examine the stablecoin supply chart excluding Tether and USDC, we can see that the market structure of "other stablecoins" has undergone significant changes in recent months. A batch of short-lived popular stablecoins emerged in 2022 (e.g., Binance BUSD, Terra UST), but the Terra collapse and credit crisis triggered an industry shakeout—paving the way for new stablecoins to emerge from the "ruins."

# Stablecoin Supply Excluding USDT and USDC (Source: RWA.xyz)  

Currently, the total supply of stablecoins not issued by Tether or Circle has reached an all-time high, with issuers becoming more fragmented. The mainstream emerging stablecoins in the current market include:  

- Sky (the upgraded version of Dai launched by MakerDAO);  

- USDe issued by Ethena;  

- PYUSD issued by PayPal;  

- USD₁ issued by World Liberty.  

In addition, other emerging stablecoins such as Ondo’s USDY, USDG issued by Paxos (as a member of the alliance), and Agora’s AUSD also deserve attention. In the future, stablecoins issued by banks will also enter the market. Existing data already indicates a clear trend: compared with the previous stablecoin boom, there are more credible stablecoins in the current market, and their total supply has exceeded that of the last bull market—even though Tether and Circle still dominate market share and liquidity.  

A common feature of these new stablecoins is their universal focus on "yield pass-through." For example, Ethena’s USDe generates yield through crypto basis trading and passes a portion of this yield to users; its supply has now surged to $14.7 billion, making it the most successful emerging stablecoin this year. Additionally, stablecoins like Ondo’s USDY, Maker’s SUSD, Paxos’ USDG, and Agora’s AUSD were designed with yield-sharing mechanisms from the outset.  

Some may question: "The GENIUS Act prohibits stablecoins from offering yields." To some extent, this is correct—but a look at the recent exaggerated statements from bank lobbying groups reveals that this issue is far from settled. In fact, the GENIUS Act does not prohibit third-party platforms or intermediaries from paying rewards to stablecoin holders—and the funds for these rewards come precisely from the yields that issuers pay to intermediaries. Mechanically, it is even impossible to close this "loophole" through policy provisions, nor should it be closed.  

As the GENIUS Act advances and takes effect, I have noticed a trend: the stablecoin industry is shifting from "directly paying yields to holders" to "passing yields through intermediaries." A typical example is the collaboration between Circle and Coinbase—Circle pays yields to Coinbase, and Coinbase then passes a portion of these yields to users holding USDC. There is no sign of this model stopping. Almost all new stablecoins have built-in yield strategies, and the logic is easy to understand: to convince users to abandon Tether (which has strong liquidity and high market recognition) and switch to new stablecoins, a sufficiently attractive incentive is necessary—and yield is the core appeal.  

I predicted this trend at the 2023 TOKEN 2049 Global Crypto Summit. Although the introduction of the GENIUS Act delayed the timeline, the trend is now clearly visible.  

For the less flexible incumbent giants (Tether and Circle), this "yield-oriented" competitive landscape is undoubtedly unfavorable: Tether offers no yields at all, while Circle only has yield-sharing partnerships with a handful of institutions like Coinbase, with unclear cooperative relationships with other institutions. In the future, emerging startups may squeeze the market space of mainstream stablecoins through higher yield splits, leading to a "race-to-the-bottom in yields" (which is actually a "race-to-the-top in yield caps"). This pattern may benefit institutions with scale advantages—just as the ETF industry once experienced a "race-to-zero in fees," eventually forming a duopoly of Vanguard and BlackRock. But here’s the question: if banks eventually enter the fray, can Tether and Circle still be the winners of this competition?  

# Banks Can Now Officially Participate in Stablecoin Business  

After the implementation of the GENIUS Act, the Federal Reserve and other major financial regulators have adjusted relevant rules—banks can now issue stablecoins and conduct related businesses without applying for new licenses. However, under the GENIUS Act, stablecoins issued by banks must comply with the following rules:  

- Be 100% collateralized by high-quality liquid assets (HQLA);  

- Support 1:1 on-demand redemption into fiat currency;  

- Fulfill information disclosure and auditing obligations;  

- Accept supervision from relevant regulatory authorities.  

At the same time, stablecoins issued by banks are not considered "deposits protected by federal deposit insurance," and banks are not allowed to use the collateral assets of stablecoins for lending.  

When banks ask me, "Should we issue stablecoins?" my usual advice is, "It’s not necessary"—they only need to integrate existing stablecoins into their core banking infrastructure, rather than issuing them directly. Even so, some banks or bank alliances may still consider issuing stablecoins, and I believe such cases will emerge in the next few years. The reasons are as follows:  

- Although stablecoins are essentially a form of "narrow banking" (only accepting deposits, not engaging in lending), which may reduce banks’ leverage ratios, the stablecoin ecosystem can bring various revenue opportunities, such as custody fees, transaction fees, redemption fees, and API integration service fees;  

- If banks find that deposits are being lost to stablecoins (especially those that can provide yields through intermediaries), they may issue their own stablecoins to stop this trend;  

- For banks, the cost of issuing stablecoins is not high: no regulatory capital needs to be held for stablecoins, and stablecoins are "fully reserved, off-balance-sheet liabilities," making them less capital-intensive than regular deposits. Some banks may consider entering the "tokenized money market fund" sector, especially given Tether’s continued profitability.  

In an extreme scenario, if the stablecoin industry completely prohibits yield-sharing and all "loopholes" are closed, issuers would gain "quasi-money-printing power"—for example, earning 4% asset yields without paying any returns to users. This would be even more profitable than the net interest margin of "high-yield savings accounts." In reality, however, I do not believe these yield "loopholes" will be closed; issuers’ profit margins will gradually decline over time. Even so, for large banks, as long as they can convert a portion of deposits into stablecoins, even retaining a profit margin of just 50-100 basis points (0.5%-1%), it can bring substantial revenue—after all, large banks have deposit scales of trillions of dollars.  

In conclusion, I believe banks will eventually join the stablecoin industry as issuers. Earlier this year, The Wall Street Journal reported that JPMorgan Chase (JPM), Bank of America (BoFA), Citigroup (Citi), and Wells Fargo have held preliminary discussions on forming a stablecoin alliance. For banks, the alliance model is undoubtedly the optimal choice—a single bank cannot build a distribution network sufficient to compete with Tether, but an alliance can integrate resources and enhance market competitiveness.  

# Conclusion  

I once firmly believed that the stablecoin industry would eventually be left with only one or two mainstream products, at most six, and repeatedly emphasized that "network effects and liquidity are king." But now I am beginning to reflect: do stablecoins really benefit from network effects? Unlike Meta, X (formerly Twitter), Uber, and other businesses that rely on user scale—the real "network" here is the blockchain, not the stablecoin itself. If users can deposit and withdraw stablecoins frictionlessly, and cross-chain swaps are convenient and low-cost, the importance of network effects will be significantly reduced. When switching costs approach zero, users will not be forced to stick to a single stablecoin.  

Undoubtedly, mainstream stablecoins (especially Tether) still have a core advantage: among hundreds of exchanges worldwide, the trading spreads (bid-ask spreads) between Tether and major foreign exchange pairs are extremely small, and this is difficult to surpass. However, more and more service providers are now enabling the exchange of stablecoins and local fiat currencies (both on and off exchanges) at "wholesale foreign exchange rates" (i.e., inter-institutional trading rates)—as long as a stablecoin is credible, these service providers do not care which specific one is used. The GENIUS Act has played an important role in regulating the compliance of stablecoins, and the maturity of infrastructure benefits the entire industry—except for the incumbent giants (Tether and Circle).  

Multiple factors are jointly breaking the duopoly of Tether and Circle: more convenient cross-chain swaps, nearly free on-chain stablecoin swaps, clearinghouses supporting cross-stablecoin/cross-blockchain transactions, and the GENIUS Act promoting the homogenization of U.S. stablecoins. These changes all reduce the risk for infrastructure providers to hold non-mainstream stablecoins and drive stablecoins toward "fungibility"—which offers no benefit to the existing giants.  

Today, the emergence of a large number of white-label issuers has reduced the cost of stablecoin issuance; non-zero Treasury yields have incentivized intermediaries to internalize float yields and crowd out Tether and Circle; fintech wallets and neobanks have taken the lead in practicing this trend, followed by exchanges and DeFi protocols—every intermediary is eyeing users’ funds and thinking about how to convert them into its own revenue.  

Although the GENIUS Act restricts stablecoins from directly offering yields, it has not completely blocked the path of yield pass-through, which provides room for competition among emerging stablecoins. If the yield "loophole" persists, a "race-to-the-bottom in yield sharing" will be inevitable. If Tether and Circle respond slowly, their market positions may be weakened.  

Furthermore, we cannot ignore the "off-exchange giants"—financial institutions with balance sheets of trillions of dollars. They are closely monitoring whether stablecoins will trigger deposit outflows and how to respond. The GENIUS Act and adjustments to regulatory rules have opened the door for banks to enter the market. Once banks officially participate, the current total market value of stablecoins (approximately $300 billion) will seem negligible. The stablecoin industry is only 10 years old, and the real competition has just begun.  

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