When Stablecoins Tear Down Banks’ Interest Margin Moats — A Third Look at the U.S. “Genius Act” on Stablecoins

I previously published an article titled “Will the Stablecoin Act Trigger a Financial Tsunami?”, which focused on the risks posed by stablecoins. The follow-up piece, “Stablecoins: America’s Path to Defending Financial Hegemony”, was written in response to questions raised by the “tsunami” article. Since then, readers have asked me to explain a statement from the “hegemony” piece: “America’s Genius Act aligns with the tide of history. As a result, slow-moving banks and other financial institutions will be the first to die.” The answer lies in this: stablecoins are dismantling the three pillars that banks rely on for survival—funding pools, the money multiplier effect, and financial intermediation privileges.

Stablecoins Are Not Just Payment Tools—They Are Currency

Currency has three core functions:

· Store of value

· Medium of exchange (payment tool)

· Unit of account (pricing measure)

After stablecoins emerged, officials in the U.S. and Hong Kong claimed they were merely payment tools. Why? Because the legislation prohibits stablecoins from paying interest. This artificially strips stablecoins of their store-of-value function, preventing them from being recognized as full-fledged currency.

The Genius Act does not explicitly ban lending of stablecoins, but it imposes many restrictions on related activities, making it difficult for issuers to engage in lending.

However, how can lending be prohibited after stablecoins change hands multiple times? There are already many crypto lending protocols—such as Morpho, Compound, and Aave—that offer annual interest rates of 3% to 8% on stablecoin loans.

In practice, stablecoins in the crypto world possess all the attributes of currency.
Legislators are deliberately protecting banks, giving them time to transform and develop new, compatible business models.

Issuers Can Earn Interest on Fiat Assets—But Not Share It with Stablecoin Takers

The Act allows issuers to earn interest on the fiat assets backing stablecoins but prohibits them from passing that interest on to stablecoin takers. This restriction is easy to bypass: holders can use their stablecoins to buy tokenized U.S. Treasury bonds in the crypto market and earn returns. This is no different from using fiat currency to buy Treasuries. In fact, crypto lending yields are often higher than Treasury yields.

Large stablecoin holders must find ways to earn interest. There are many workarounds, and the market will inevitably render this restriction ineffective. Other examples of such impractical rules abound.

These regulations are frankly absurd. The same U.S. dollar, depending on its usage, either earns interest or doesn’t. The Act tries to strip stablecoins of their store-of-value function by banning interest payments, demoting them to mere “payment tools.” But market practices (like DeFi lending) and user demand (for yield) will inevitably restore their full monetary attributes: store of value + medium of exchange + unit of account.

The Act fantasizes that banning interest will neuter stablecoins’ store-of-value function. But it ignores a basic fact:

· The same dollar earns 2–3% interest in a bank account

· But earns 0% as a stablecoin—creating a massive arbitrage opportunity akin to opening a floodgate

History has already shown this pattern:

· In the 1970s, interest rate controls led to the birth of trillion-dollar money market funds

· Today, the same forces are driving DeFi innovation—Aave’s USDC pool had an average interest rate of 4.07% in Q2 2025

The harder regulators try to block the main channels, the more the market will carve out underground rivers. This is the real reason why slow-moving banks will be the first to die.

The true intent is still to protect banks. But this protection period will inevitably be broken by innovation.
Some slow-moving banks and financial institutions will lose in the competition.
Why? Because the underlying logic of currency issuance has changed, and the traditional business model of commercial banks is being challenged.

Stablecoins Challenge Banks’ Business Model

1. The Profit Model of Bank Interest Margins Is Under Threat

The core business model of commercial banks is earning interest margins—paying depositors low interest and lending out at higher rates.

· In China, banks’ net interest margins range from 1.27% to 1.87%, with major banks around 1.4%.

· In the U.S., banks operate under a mixed model, and net interest margins are higher—2% to 3.5%.

Banks exchange fiat currency for stablecoins with users, then use the fiat to buy bonds for stable returns. This is essentially an investment banking activity.
If a bank earns 4.5% from U.S. Treasuries, excluding market volatility, a 4% net return is highly feasible. If the bank gives 2% to the stablecoin holder, the impact on its net interest margin is minimal. This seems like a profitable business for banks and shouldn’t be restricted.

The problem is that banks’ core business is lending. Loans to businesses aren’t spent immediately; the funds remain in the bank, forming a funding pool that can be re-lent. Banks operate like supermarkets profiting from inventory turnover:

· Traditionally, deposits (inventory) turn over 4-5 times per year (V = 4–5).

· But when stablecoins pull 15–20% of demand deposits (per the Fed’s Digital Dollar Impact Report, Q1 2025), it’s like 20% of the shelves being emptied.

This causes a 30% drop in system turnover capacity, triggering a chain reaction:

· Shrinking funding pool → less “inventory” for lending

· Lower V → reduced interest income from the same capital

· Profit collapse: FDIC data shows U.S. community banks’ net interest income fell 26.8% in 2024

Stablecoins reduce the money multiplier V, and banks relying on lending bubbles will see profits decline. Not sharing bond interest with stablecoin holders helps offset this loss. But what if bond yields drop? What if bond yields approach zero?

2. The Fisher Equation Needs Redefinition

Stablecoins have changed the dynamics of currency issuance.

· Base money (M) is issued by central banks

· Stablecoins are part of broad money (M2) and represent currency creation

Stablecoins don’t yet have an established turnover rate like banks (4–5 times/year), and this difference affects the Fisher Equation. 

The famous Fisher Equation evaluates the rationality of money issuance:

MV = PT ……(1)

Where:

· M = base money

· V = velocity of money (multiplier)

· P = price level

· T = total transaction volume

This equation links money supply to total value (i.e., goods and services traded).
The left side represents finance; the right side represents real value. Stablecoins have a different multiplier than fiat. Let’s define the stablecoin multiplier as V₁.
Stablecoins belong on the left side of the equation. Let S represent the stablecoin supply. Assuming PT remains constant, the Fisher Equation becomes:

M*V + S*V₁ = PT ……(2)

This modified equation reflects the post-Genius Act relationship between money issuance and total value. Stablecoin quantities are transparent in crypto—easier to track than bank-created money. V₁ can be calculated from crypto PT/S, making S·V₁ a measurable value of stablecoin-driven monetary circulation. This value is independent of and may partially replace M·V, the traditional bank-driven circulation. The ability to measure V₁ highlights the transparency advantage of stablecoins. In traditional finance, V is theoretical and hard to track. On-chain data makes S·V₁ traceable in real time, while M·V remains a black box—suggesting banks need greater transparency too.

If banks engage in both fiat and stablecoin businesses, the impact is minimal.
But currently, stablecoins are not banks’ strong suit. To succeed, banks must innovate.

3. Personal “Banks” Enter the Competition

Crypto practice shows lending occurs peer-to-peer via smart contracts. You can collateralize assets like USDT, USDC, Bitcoin, or Ethereum to borrow. Users earn interest income, often much higher than bank deposit rates. Protocols like Morpho, Compound, and Aave are mature, decentralized lending intermediaries. Unlike banks, they charge fees instead of interest margins. For example, Aave charges:

Converted to fiat, total fees are under 1%.

Without bank markups, retail users earn rates close to lending rates—effectively competing with banks. If banks adopt the stablecoin model from Equation (2) and shift to lending protocols, they have customer trust and credit as advantages. But their fee income will be lower than traditional interest margins, leading to declining core business profits.

In Aave, no identity checks are needed—not even knowing who the borrower is.
Post-Genius Act, anonymity will be harder, posing a regulatory challenge. Still, the concept is sound, and solutions will emerge.

Private lending doesn’t require a license. Crypto borrowers deal with individuals, not banks. Money is lent without bank intermediation—effectively disintermediating banks. Crypto’s core principle is collateralized smart contract lending, which avoids bubbles. Banks, by contrast, lend on fractional reserves—“10 toilets, a few lids”, as the saying goes. No bubble lending means less economic froth, reducing the risk of financial crises.

Who Gains Power as Banks Weaken? Crypto’s philosophy: “Your money, your control.” Clearly, crypto wallets are rising as the new “personal banks.”

Crypto Wallets Put Pressure on Banks

1. Crypto Wallets Surpass Banks in Functionality

Today’s crypto wallets commonly include currency exchange and wealth management features, and they can also connect to exchanges. Their overall functionality far exceeds that of traditional banks, so calling them “personal banks” is not an exaggeration. The reason crypto isn’t yet widespread isn’t just legal—it also faces three key challenges.

2. Wallets Are Personal Banks, Not Platforms

A wallet is personal. It connects to various crypto platforms and serves as a gateway to them, but it is not a platform itself. Current blockchain platforms are mostly B2B and don’t have close ties to wallet holders. The business model of a personal bank is sound, and building a great gateway is a massive opportunity. The “Genius Act” already reflects how governments protect banks—irrationally so. So even with the right business model, success isn’t guaranteed.

The “Clarity Act” is still under debate. Regulators wield a heavy stick: “Same business, same regulation.” Isn’t that fair? Just enforcing real-name verification alone would eliminate purely anonymous ecosystems, inevitably causing major upheaval in the crypto world.

This is a path full of risk, opportunity, and strategic battles—with enormous stakes. The entry of institutional players makes crypto entrepreneurship even harder.

3. Security and Usability Issues

Crypto wallets are either centralized or decentralized. Centralized wallets carry the risk of misappropriating user assets—and this happens frequently.

Decentralized wallets are split into cold and hot wallets. Hot wallets are connected to the internet and appear secure, but in theory, they lack the robust security measures of major exchanges like Binance or Coinbase. However, exchange wallets don’t give users full control over their funds. Experienced clients often store their crypto assets in offline “cold wallets.” The downside of cold wallets is their operational complexity.

4. Inheritance Issues

Crypto wallet funds are controlled via private keys. Whoever holds the private key controls the money. Therefore, private keys must never be leaked. Because private keys are hard to store securely, they’re often lost. If the key is lost, the funds in the wallet become inaccessible. If users share their keys before death, there’s no guarantee the funds will remain safe.

We need the same level of security and usability as banks—so that even in emergencies, funds can be retrieved.

If crypto wallets can’t match banks in security and usability, then “defeating banks” is just empty talk.

All technical problems can be solved. To address the issues above, we’ve designed the Chainless multi-signature wallet system.

Chainless: The Next-Gen Crypto Financial Operating System and Platform

1. Chainless Is a Unified Platform for Both Consumers and Businesses

Built on blockchain technology, the Chainless system is a foundational layer of digital civilization—like HTTP or TCP/IP for the internet. “Chainless” doesn’t mean there’s no blockchain; it means the chain is no longer a visible barrier to user experience. Just as we don’t worry about the underlying tech when depositing money at a bank,  since 15 years is already mature—Chainless shifts focus from the chain to the application.

Chainless is a unified platform for both To C and To B, similar to WeChat’s mini-program ecosystem, but focused on finance. It’s a financial mini-program platform. In the coming months, mini-program interfaces will gradually open, allowing lending and wealth management projects to integrate.

· SWIFT is a financial transmission protocol

· Aave is a crypto lending protocol

· Traditional banks connect via protocols, not financial platforms

· Vitalik created a smart contract-based financial platform—a shared ledger for financial applications. This was a groundbreaking innovation that reshaped finance.

· Stablecoins are a beautiful bloom on Ethereum, later adopted by other public chains.

Ethereum is a To B financial platform that doesn’t connect well with end-users. Chainless bridges that gap—it’s both a To B and To C platform. Traditional banks can become nodes or mini-programs on the Chainless platform, enjoying access to its shared ledger, which, like Ethereum’s, is public.

Beyond the platform, Chainless also tackles security, usability, and inheritance challenges.

The Chainless Wallet is multi-signature:

· Supports up to 12 multi-signatures

· Signature requirements can be set based on transaction amount

· The platform never touches user assets

· Security design follows multi-verification principles

Examples:

· Bitcoin uses 6-block confirmations

· Binance uses SMS + email + Google Authenticator

· Banks use SMS verification, but large transfers involve customer service confirmation—tiered fund management is a smart approach

Inspired by Binance, using 3 signatures is secure. Binance’s 3-step verification has proven effective in preventing security breaches.

Chainless multi-signature verification is completed via mobile phones. Unlike equal-signature crypto wallets, Chainless uses a primary control phone. The user’s main phone is bound to verification phones, enabling automated inheritance.

Only by exceeding banks in security and usability can financial transformation reach the next stage.

2. Chainless Breakthroughs

Using “bank-grade security” to solve crypto wallet’s fatal flaws:

Technical details are available in the official whitepaper.

Welcome to follow the Chainless official website. Explore 800,000 words of articles and videos to quickly understand the history and future of crypto:

· Chainless Official Site

· www.chainlessdw20.com

In the Coming Financial Revolution: What’s the Bank’s Edge?

How will banks retain customers? Will they rely on protective policies—or completely rebuild their business models?

3. The Life-or-Death Question Facing Banks

Banks now face a critical choice:

A. Cling to Policy Protection 
→ Risk becoming mere “stablecoin gateways”

B. B. Build Their Own Crypto Fortress 
→ Compete in the new arena with JPMorgan (JPM Coin) and DBS Bank (DDEx)

C. Transform into Chainless Nodes 
→ Use bank credit to endorse DeFi assets (earn certification fees)

Banks that choose the wrong path may become the next epitaph carved into the blockchain’s tombstone.

In the next article, we’ll offer possible solutions.

By Zhu Weisha, July 27, 2025

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