Traditional Banks Face Greater Risk from Stablecoin Regulatory Limbo Than Crypto Companies: Industry Expert

Traditional Banks Face Greater Risk from Stablecoin Regulatory Limbo Than Crypto Companies: Industry Expert

The lack of clear stablecoin regulations may put traditional financial institutions at a competitive disadvantage, while cryptocurrency companies forge ahead despite regulatory ambiguity.

The absence of clear regulatory guidelines surrounding stablecoins may position traditional banking institutions at a more significant competitive disadvantage compared to cryptocurrency enterprises, according to Colin Butler, executive vice president of capital markets at Mega Matrix.

Butler noted that traditional financial institutions have already committed substantial resources toward building digital asset infrastructure, yet find themselves unable to fully utilize these systems as policymakers continue deliberating the proper classification framework for stablecoins.

Their general counsels are telling their boards that you cannot justify the capital expenditure until you know whether stablecoins will be treated as deposits, securities, or a distinct payment instrument

he told Cointelegraph.

A number of leading banking institutions have already constructed components of the technological infrastructure required to facilitate stablecoin operations. JPMorgan developed its Onyx blockchain payments network, BNY Mellon launched digital asset custody services, and Citigroup has tested tokenized deposits.

The infrastructure spend is real, but regulatory ambiguity caps how far those investments can scale because risk and compliance functions will not greenlight full deployment without knowing how the product will be classified

Butler argued.

In contrast, cryptocurrency companies, which have navigated regulatory gray zones for years, would likely continue doing so.

Banks, by contrast, cannot operate comfortably in that gray area

he added.

Yield gap could drive deposit migration

An additional point of concern centers on the widening disparity between yields accessible through stablecoin platforms versus those provided by conventional bank accounts. Cryptocurrency exchanges frequently provide between 4% and 5% on stablecoin balances, Butler said, while the average US savings account yields less than 0.5%.

He said history shows depositors move quickly when higher yields become available, pointing to the shift into money market funds in the 1970s. Today, the process could happen even faster, as transferring funds from bank accounts to stablecoins takes only minutes and the yield gap is larger.

Meanwhile, Fabian Dori, chief investment officer at Sygnum, said the competitive gap between banks and crypto platforms is meaningful but not yet critical. He said a large-scale deposit flight is unlikely in the immediate term, as institutions still prioritize trust, regulation and operational resilience.

But the asymmetry can accelerate migration at the margin, especially among corporates, fintech users, and globally active clients already comfortable moving liquidity across platforms

Dori said.

Once stablecoins are treated as productive digital cash rather than crypto trading tools, the competitive pressure on bank deposits becomes much more visible

he added.

Restrictions on yield could push activity offshore

Butler also warned that attempts to restrict stablecoin yield could unintentionally drive activity into less regulated areas. Under current US law, stablecoin issuers are prohibited from paying yield directly to holders. However, exchanges can still offer returns through lending programs, staking or promotional rewards.

Should legislators enforce more comprehensive restrictions, capital could migrate toward alternative frameworks such as synthetic dollar tokens. Products like Ethena's USDe generate yield through derivatives markets rather than traditional reserves. These mechanisms can offer returns even if regulated stablecoins cannot.

Should this trend gain momentum, regulators might encounter the inverse result of their intentions as greater amounts of capital flow into opaque offshore frameworks offering diminished consumer safeguards, according to Butler.

Capital doesn't stop seeking returns

he said.