May 01, 2026

Banks in the Age of Stablecoins: Lessons from Their Historical Responses to Financial Innovations

Sam Hempel, JP Perez-Sangimino, and Jessie Jiaxu Wang¹

1. Introduction

The expansion of stablecoins has moved digital payment tokens from the periphery of financial markets to the center of policy discussions. With a global market capitalization in the mid-hundreds of billions of dollars and annual settlement volumes in the trillions as of 2025, stablecoins are increasingly viewed not merely as crypto‐market infrastructure but as potential competitors to traditional transaction accounts, particularly in payment processing, settlement functionality, and as short-term stores of value for transaction balances. Recent legislation, such as the GENIUS Act, has further signaled official recognition of stablecoins, alongside money market funds, as an increasingly important source of demand for short-term U.S. Treasury securities.²

While much of the debate focuses on how stablecoins might affect bank deposits and credit supply, particularly through direct deposit substitution, shifts toward less stable funding mixes, and potential credit contraction (e.g., Wang (2025)), the main goal of this note is to provide a historical perspective showing that banks typically respond to disintermediation threats from financial innovations not by passively accepting disintermediation, but by adapting through regulatory, product, and strategic responses. When new instruments compete with banks, whether money market funds (MMFs) in the 1970s which offered higher yields and competed for savings balances, or online payment platforms like PayPal and Venmo more recently which offered superior transaction technology and competed for payment volumes, banks initially face disintermediation pressures but historically adjust and remain active participants in the evolving financial ecosystem. Stablecoins are notable because they integrate balance-holding and payment functionality on unified digital rails and thus compete for both transaction balances and payment flows. This note adopts a historical lens, reviews banks' responses to these earlier innovations, and draws lessons for how banks may respond to stablecoins today.

2. Money Market Funds (MMFs)

Since their origin in the early 1970s, money market funds (MMFs) have been widely viewed as close substitutes for bank deposits, and recent research indicates that MMFs continue to play that role (Morgan et al. (2022); Im et al. (2025)). MMFs were created to allow moderately wealthy investors to earn market interest rates at a time when interest-rate caps prevented banks from meeting this demand (Bouveret et al. (2022)).

MMFs first emerged in 1971 and grew explosively during the high-inflation environment of the late 1970s and early 1980s, posing a significant disintermediation threat to commercial banks. Their growth was driven in part by regulatory asymmetries. Regulation Q capped interest rates on savings deposits at 5.25 percent and prohibited interest payments on demand deposits altogether. At the same time, the U.S. Treasury increased the minimum denomination for Treasury bills from $1,000 to $10,000, which effectively priced many retail investors out of direct government securities investments.³ While both factors contributed to MMF growth, most evidence suggests that Regulation Q interest rate ceilings were the primary driver, particularly during periods of high inflation when the gap between market rates and bank deposit rates widened dramatically. The Treasury bill denomination change played a secondary but important complementary role by limiting direct investment alternatives. Together, these regulatory asymmetries created ideal conditions for MMFs to flourish as deposit alternatives. MMFs filled this gap by pooling small investors and offering market-based returns, often exceeding 10 percent during peak inflation, while maintaining high liquidity.

As shown in Figure 1, by year-end 1982, MMF assets had grown from virtually nothing to about $220 billion (solid red line), equivalent to approximately 15 percent of bank deposits at the time (dashed dark blue line).⁴ Banks responded through a three-pronged approach. First, they pursued regulatory advocacy, lobbying for increased oversight of MMFs regulation and attempting to limit MMF powers, though regulatory changes ultimately came through broader reforms rather than MMF-specific restrictions. Second, they advocated for regulatory relief from Regulation Q deposit interest rate restrictions. Third, they engaged in product innovation, developing 'sweep' arrangements that automatically transferred excess balances from checking accounts into higher-yielding investment vehicles overnight.

More fundamentally, the competitive landscape shifted after the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St. Germain Act of 1982. These reforms phased out interest rate ceilings on deposits and authorized new financial products including NOW (Negotiable Order of Withdrawal) accounts, which allowed limited check-writing on interest-bearing accounts, and Money Market Deposit Accounts (MMDAs), which could offer market-competitive rates with federal deposit insurance.

The introduction of MMDAs proved particularly effective. Within just three months of their authorization in December 1982, banks attracted over $300 billion into these accounts, recapturing substantial market share (Keeley & Zimmerman (1985)). By 1986, the complete phase-out of Regulation Q interest rate ceilings allowed banks to compete freely on deposit rates. While MMFs remained a permanent feature of the financial landscape-growing to over $7 trillion by 2024, with bank-affiliated MMFs now accounting for over 40 percent of all U.S. MMF assets-banks successfully adapted by gaining regulatory flexibility, expanding their product offerings, and leveraging their advantages in transaction services and deposit insurance to maintain their core deposit base and customer relationships.⁵

Over time, the relationship between banks and MMFs evolved from direct competition to somewhat symbiotic. MMFs became significant investors in bank deposits and debt instruments, creating an interconnected ecosystem. This historical example demonstrates how financial innovation driven by regulatory arbitrage can reshape markets, and how incumbent institutions can effectively adapt through a combination of regulatory advocacy, product innovation, and strategic participation in the new market segments.

The response to MMF competition varied significantly across banking institutions. Large money center banks, with their greater resources and diversified business models, successfully developed competitive products and created their own affiliated MMFs. In contrast, smaller community banks often lacked the scale and resources to implement sophisticated sweep arrangements or offer equally competitive rates, putting them at a relative disadvantage during this transition period.

However, MMFs also introduced new financial stability risks. The industry experienced severe stress during the 2008 financial crisis when the Reserve Primary Fund "broke the buck," triggering runs on prime MMFs, and again in March 2020 when COVID-19-related uncertainty led to massive redemptions requiring Federal Reserve intervention (Schmidt et al. (2016); Li et al. (2021)). While banks adapted and maintained their intermediation role, the coexistence with MMFs created an ongoing source of shadow banking risk and systemic vulnerability that required continued regulatory attention. These historical patterns of bank adaptation to MMF competition offer valuable insights for understanding potential responses to stablecoins, where similar dynamics of disruption, adaptation, and eventual integration may unfold across different segments of the banking industry.

3. Online Payment Platforms

Since its founding in 1999, PayPal, which later acquired Venmo in 2013, introduced a new form of nonbank competition by disintermediating banks along two dimensions: first, by capturing transaction volume and associated fee income; and second, by offering stored-value accounts that functioned as deposit-like balances.

Within a year of launch, PayPal provided an intuitive digital interface that allowed users to send and receive money directly using existing bank products, such as deposit accounts, credit cards, or debit cards, at a time when banks only offered checks and money orders for peer-to-peer transfers. The increased convenience, speed, and perceived security made PayPal an immediate success.⁶

Over the subsequent two decades, PayPal (including Venmo) expanded rapidly. As shown in Figure 2, the platform now processes over $1.5 trillion in annual payment volume across over 400 million accounts worldwide. User balances held on the platform total roughly $40 billion, representing funds that function as close substitutes for transaction deposits, though outside the traditional banking perimeter. Venmo's role as a dominant payment brand among younger consumers has further accelerated the shift of peer-to-peer payment activity to nonbank platforms.

Banks' initial competitive responses did not materially alter market dynamics. In 2000, Wells Fargo partnered directly with eBay to develop a competing payment solution, but the effort failed to gain traction, and eBay ultimately acquired PayPal instead (CNET (2002b)). Citibank's C2it platform was discontinued shortly after launch due to a bad user interface and technical shortcomings (Fisher (2002)).

Banks also explored legal and regulatory avenues to impede PayPal's momentum. For example, in 2002, First USA Bank, now part of JPMorgan Chase, sued PayPal over patent claims, arguing that its use of phone numbers and email addresses to identify users infringed on Bank One's patents around assigning an alias to a customer.⁷ After a countersuit by PayPal, the dispute was eventually settled (PayPal (2003)). Around the same time, representatives of the American Bankers Association argued that online payment platforms should be regulated like banks (CNET (2002a)). However, the Federal Deposit Insurance Corporation concluded in a 2002 advisory letter that PayPal did not meet the definition of a bank under existing federal law, as "PayPal does not physically handle or hold funds placed into the PayPal service" (Wolverton (2002)).

Banks' competitive responses to online payment platforms were notably delayed. While PayPal launched in 1999 and Venmo gained traction in the early 2010s (leading to PayPal's 2013 acquisition), the banking industry's competitive responses did not prove effective until much later. This extended lag allowed nonbank platforms to capture substantial market share and establish strong brand recognition, particularly among younger consumers.

Despite early setbacks, banks gradually developed more effective adaptation strategies. They modernized their payment infrastructure by investing in real-time clearing and 24/7 settlement capabilities, most notably through the Clearing House's Real-Time Payments (RTP) network and, more recently, the Federal Reserve's FedNow Service. These systems enabled instant funds transfer between participating institutions, reducing the speed advantage previously held by fintech platforms. Banks also significantly improved mobile-banking interfaces, integrating person-to-person payments directly into customer accounts. In addition, banks formed industry consortia to develop bank-owned digital instant-transfer payment networks to improve user experience.

The most prominent example is Zelle, which emerged from the rebranding of ClearXchange-a consortium initially formed by Bank of America, Wells Fargo, and JPMorgan Chase in 2011 (Maag (2011); Toh (2016)). After limited early adoption, the network was relaunched as Zelle in 2016 and expanded participation across financial institutions (Sidel (2016)). Today, Zelle processes over $1.5 trillion in annual total payment volume and facilitated over 3 billion transactions in 2024 (Figure 3), demonstrating that despite delayed entry, banks' structural advantages enabled them to recapture significant market share and provide a bank-centric alternative to PayPal and Venmo for many customers.

Alongside direct competition, banks increasingly pursued strategic partnerships and data-sharing agreements with fintech companies, and incorporated digital-payment features into their own applications. Mobile-banking platforms became central hubs for bill payment, person-to-person transfers, and merchant payments, often embedding or mirroring features pioneered by fintech platforms. This adaptability allowed banks to retain significant payment volumes within the regulated banking perimeter, limiting PayPal's erosion of both banks' deposit franchise and their central role in payments despite the platform's continued success. Unlike MMFs, PayPal and similar payment platforms presented minimal systemic stability concerns, as they typically interfaced with rather than replaced the core banking infrastructure and faced limitations on their ability to create money-like instruments. The adaptation was notably uneven across the banking sector, with large institutions developing sophisticated digital offerings much earlier than smaller community banks, many of which relied on third-party providers to close the technological gap.

This episode illustrates a pattern similar to the MMF experience. Nonbank platforms initially gained an advantage by offering superior technology and user experience on top of existing bank infrastructure. Early bank responses, including legal challenges and fragmented competitive efforts, often proved ineffective. Unlike the case of MMFs, where banks faced a clear regulatory barrier (rate caps) that constrained their ability to compete, banks' response to payment innovation did not appear to be restricted primarily by regulation but instead by technological challenges. In other words, banks knew how to compete with MMFs - raise deposit rates - but their hands were tied until Congress enacted regulatory relief. Banks' eventual adaptation to PayPal was notably slower than in the MMF case-taking nearly two decades to mount an effective competitive response-but over time, however, coordinated technological upgrading, consortium formation, and selective partnership allowed banks to adapt and reassert their position within the evolving payments ecosystem. These historical cases offer complementary lessons for stablecoins, which combine regulatory arbitrage (like MMFs) with technological innovation (like payment platforms)-suggesting banks will need both regulatory advocacy and technological adaptation to effectively respond to this emerging challenge.

4. Lessons for Stablecoins and Banks' Emerging Strategic Responses

These historical episodes offer valuable insights into how banks respond to disintermediation threats from financial innovations. Importantly, these innovations competed along different dimensions: MMFs offered higher yields, competing primarily for savings balances when banks faced Regulation Q constraints; PayPal offered superior transaction technology, competing primarily for payment volumes and customer relationships. Across both episodes, banks initially faced significant competitive challenges that threatened core business functions. With MMFs, banks lost substantial deposit volume due to regulatory constraints on interest rates; with PayPal, they risked losing payment transaction volumes and, more importantly, the associated customer relationships.

Across both cases, the banking industry's successful adaptation followed similar trajectories. Early responses, including regulatory advocacy, legal challenges, and individual competitive efforts, evolved over time into more effective multi-faceted strategies: product innovation (NOW accounts, MMDAs, mobile banking interfaces), strategic partnerships (integration with fintech platforms), the creation of collaborative industry solutions (Zelle), and regulatory reform (the phase-out of Regulation Q). One takeaway from these episodes is that when new innovation responds to market demand (e.g., retail access to market interest rates or digital payment technologies), effective responses meet that demand rather than resist it, whether through advocating for changes in regulation, developing new products, or forming partnerships.

Importantly, banks leveraged their inherent structural advantages-including deposit insurance, established customer relationships, regulatory credibility, and the integration of multiple financial services-which allowed them to recapture market share once they addressed their initial disadvantages. In neither case did banks completely eliminate the innovative competitors; rather, they adapted to coexist while preserving their core intermediation functions.⁸ It is worth noting, however, that successful adaptation and coexistence did not eliminate all risks. MMFs, for instance, introduced persistent shadow banking vulnerabilities, as evidenced by multiple run-prone stress episodes. Online payment platforms also introduced new operational risks, cybersecurity vulnerabilities, and consumer protection challenges.

Similar patterns are emerging in the context of stablecoins. Stablecoins share characteristics with both prior innovations: like MMFs, they represent balances held outside traditional deposit accounts; like PayPal, they operate on digital payment rails partly outside the traditional banking perimeter while relying on underlying banking infrastructure. Banks' strategic responses also bear similarities. For example, just as banks lobbied to restrict MMFs, banks have advocated for regulatory constraints on stablecoins, including restrictions on interest payments or economically similar yield substitutes (Williams (2025); Reynolds (2026)). In a 2021 Congressional testimony, banking representatives emphasized risks to bank deposits, concerns about illicit finance, and the principle of "same activity, same regulation" (American Bankers Association (2021)).

However, stablecoins also differ in important respects from both MMFs and online payment platforms. First, stablecoins' competitive model more closely resembles PayPal than MMFs. Like PayPal, stablecoins integrate balance-holding with payment functionality; unlike MMFs, which competed primarily on yield for savings balances, both PayPal and stablecoins compete for transaction balances held for payment purposes. However, stablecoins differ from PayPal in operating on blockchain rails that enable programmability, faster cross-border settlement, and compatibility with other digital applications, potentially creating a more direct competitive challenge to banks' transactional deposit franchise. The extent to which stablecoins pose a disintermediation threat to banks' deposit base depends on the extent to which stablecoin issuers deposit reserves at banks or purchase Treasury bills from dealers who then redeposit proceeds in banks. It's possible that the initial deposit outflow may be partially recycled back into the banking system if stablecoins hold bank deposits or buy securities from dealers, in which case stablecoins alter the composition of deposits and funding structure rather than causing a one-for-one contraction in aggregate bank deposits (Wang (2025)).⁹

At the same time, stablecoins introduce new dimensions of competition. By operating on programmable, cross-border digital rails with instant settlement, they may compete more directly for transactional balances than either MMFs (which competed primarily on yield for savings) or PayPal (which operated on centralized infrastructure with more limited programmability) historically did. Their growth is also less constrained by traditional distribution channels, allowing rapid scale expansion through digital platforms. Additionally, stablecoins have a significant international dimension absent from previous innovations: while domestic substitution may reduce U.S. bank deposits, foreign demand for dollar-pegged stablecoins, for example in countries with volatile local currencies, may increase deposits in U.S. banks if issuers hold reserves domestically, potentially offsetting some domestic outflows (Wang (2025)).

Banks' responses so far reflect both defensive and adaptive strategies. Echoing their responses to MMFs and fintech platforms, some institutions have moved to participate directly in the emerging market. Some banks have initiated efforts to develop their own bank-backed stablecoin to compete with more crypto-native stablecoins, as evidenced by groups of both larger banks (Heeb and Baer (2025)) and relatively smaller banks (Crawley (2022)). Others are developing tokenized deposits as an alternative design that preserves deposit status within the regulated perimeter while offering some of the technological advantages associated with stablecoins.¹⁰

Survey evidence supports this strategic shift. In the Federal Reserve's September 2025 Senior Financial Officer Survey (SFOS), roughly half of respondent banks reported prioritizing growth in at least one stablecoin or digital asset-related area over the next three years, especially the larger banks. About half of the large-bank respondents indicated plans to prioritize tokenized deposit issuance, directly addressing the disintermediation threat posed by stablecoins. About 40 percent reported plans to prioritize holding reserve assets for stablecoin issuers, suggesting that many banks view servicing the stablecoin ecosystem as a strategic business opportunity. Additionally, around a third of banks reported prioritization of retail custodial or wallet services for crypto assets, demonstrating a strategic approach to maintaining relevance in the evolving digital asset landscape.

Regulatory attention has evolved in parallel. In 2021, the President's Working Group on Financial Markets released a report on stablecoins which highlighted their run risk and recommended that stablecoin issuance and related activities be limited to insured depository institutions (President's Working Group (2021)). Unlike MMF run risk, which primarily impacts institutional investors and short-term funding markets, stablecoin run risk could propagate through additional channels. Stablecoins combine features of payment systems with those of investment vehicles, potentially affecting retail consumers, cross-border transactions, and cryptoasset markets simultaneously. Furthermore, stablecoins' 24/7 trading and blockchain-based settlement could accelerate run dynamics beyond what we've observed with MMFs, as redemptions can cascade without the circuit-breaking effect of market closures or settlement delays. Building on these concerns, in 2025, the GENIUS Act established a federal framework for defining and regulating payment stablecoins. Together, these developments reflect an ongoing process of institutional adaptation-by both banks and regulators-to a new form of digital financial intermediation.

Whether stablecoins ultimately become a major source of bank disintermediation will depend on scale, reserve structure, and regulatory design. As discussed in Wang (2025), if stablecoin reserves remain largely within the banking system or are invested in assets that recycle liquidity back to banks, the aggregate effect on bank balance sheet capacity and credit supply may be limited. In this case, stablecoins may alter the composition of deposits-shifting balances across account types-without necessarily causing a one-for-one contraction in total deposits.

More broadly, competitive effects may operate through pricing and funding structure rather than outright displacement. Increased competition for liquid balances could raise deposit rates or compress margins, and, as with MMFs, may introduce run vulnerabilities, but banks retain advantages in deposit insurance, lending integration, and relationship banking that support funding stability. Moreover, as survey evidence suggests, many banks are positioning themselves not only as competitors but also as service providers to the stablecoin ecosystem, including by holding reserve assets, offering custody services, or issuing tokenized deposits. The technological infrastructure underlying stablecoins-programmable, cross-border blockchain rails-combined with their integration of balance-holding and payment functionality explains both why they pose a distinct competitive challenge and why banks are pursuing multi-faceted responses. To the extent that stablecoins are integrated into the regulated financial system rather than fully detached from it, their growth may represent a reconfiguration of intermediation rather than its erosion.

5. Conclusion

Across earlier episodes-from MMFs to online payment platforms-banks have rarely displaced new competitors; instead, they have adapted and continued to perform their core intermediation role. The pattern is familiar: an initial phase of displacement driven by regulatory or technological disadvantages, followed by attempts at resistance, and ultimately a period of adaptation marked by product innovation, collaborative industry solutions, strategic partnerships, and regulatory recalibration.

Stablecoins seem likely to follow a similar script. Although they still represent a modest share of money-like instruments by outstanding value, their transaction volumes are already large and growing, and they are becoming an increasingly important competitor for transactional balances. As this competition intensifies, banks are responding with more targeted rate strategies, tokenized deposit offerings, faster and more user-friendly payment services, partnerships with stablecoin issuers, and engagement with policymakers over the future regulatory perimeter.

Importantly, history suggests that banks' adaptation responds not just to specific innovations but to underlying structural forces. Just as MMFs reflected demand for market-rate returns and PayPal reflected demand for digital payments, stablecoins reflect demand for programmable, globally accessible digital money. Whether this demand is ultimately served by stablecoins, tokenized deposits, or other instruments, banks' historical adaptability and enduring advantages-deposit insurance, regulatory trust, and integrated financial services-position them to remain central in the emerging digital money landscape.

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