Stablecoins could reach $2 trillion in market cap in the next three years and provide major competition for banks, reveals a recent report from the United States Treasury.

Its Digital Money missive suggests that the growing legitimacy of stablecoins could have positive and negative impacts on traditional banking.

On one hand, it could disrupt traditional banks by drawing away deposits, but on the other hand, could create new opportunities for banking innovation.

Stablecoin is cryptocurrency designed to have a relatively stable price, typically through being pegged to a commodity or currency or having its supply regulated by an algorithm.

It gained new respectability when the American Guiding and Establishing National Innovation for US Stablecoins Act was signed into law this year, establishing a federal framework for stablecoin regulation.

Digital Money said the potential impact on bank deposits could depend on whether stablecoins are yield-bearing or if they offer other operational payment features relative to the yield and functionality offered by other products.

“In light of potentially exacerbated competition, banks may be required to increase interest rates to maintain funding or find alternative funding sources,” Digital Money said.

Banks will face more and more competition for funding from non-banks and other institutions.

Kroll Bond Rating Agency Financial Intelligence, an analysis platform, has said that as much as $6.6 trillion in demand deposits and other checkable deposits could face partial disintermediation pressure from stablecoin alternatives.

While the loss of deposits or more competition for funding could threaten bank lending margins, it is difficult to forecast the extent, KFI said.

It also said that transaction fees could be particularly vulnerable to disruption in the coming years.

Stablecoins could allow transactions to occur on a single blockchain ledger shared among all network participants.

“This runs counter to the current system, where each bank keeps its own version of account balances and must constantly exchange messages to reconcile them,” KFI said.

Interchange fees earned by banks produced more than $12.5 billion in non-interest income for American banks in the second quarter of 2025, KFI said — equivalent to almost 15 per cent of total non-interest income earned by banks in the quarter.

Structural erosion could also put wire fees under the gun. There is also the potential for the gradual drying up of traditional wire activity.

“This, having long served as the foundation for cross-border and foreign exchange payments, as well as sweeps and other liquidity operations, could cascade into lower revenues from treasury and cash management services, which depend on those same payment rails and carry their own associated fees,” KFI said.

It added that stablecoin removes the need for the complex messaging and reconciliation associated with wire transfers.

“Due to the shared ledger of a stablecoin network, final settlement is automatic and nearly immediate, not deferred to end-of-day or batch windows,” KFI said.

Draft fees could also be impacted.

“Banks generally allow temporary negative balances as a form of implicit short-term credit for a fee, but users of an on-chain wallet cannot transact beyond what their balance allows, removing the credit exposure that underlies overdraft fees,” KFI said. “Crypto wallets are also generally zero-fee, which could eventually impair income earned from a wide variety of account management fees that were already losing popularity among clients and depositories.”

Michael Barr, of the American Federal Reserve Board of Governors, has said increased certainty could lead to more rapid development of stablecoins and related products and services for businesses and households.

Speaking during DC Fintech Week in Washington last week, Mr Barr outlined the benefits of stablecoin for the financial services industry.

“Payments innovation is accelerating,” Mr Barr said. “Stablecoins, artificial intelligence, real-time payments and richer payment metadata offer significant improvements to the cost, speed and functionality of payments.”

Better payment functionality could help financial institutions and businesses manage liquidity more efficiently at lower cost, he said adding that it could also mean people receive their paycheques more promptly and manage their payments more effectively.

Mr Barr thought stablecoin could lessen some of the frictions in the payment system particularly in cross-border transactions.

“Some of these frictions are necessary and important, such as those associated with complying with relevant laws and regulations on money laundering and terrorist financing,” Mr Barr said. “But removing or mitigating other frictions may reduce costs and facilitate more efficient transactions.”