Balance Sheet Battlefield

Ask AI · How Can the GENIUS Act Accelerate Stablecoin Integration into Mainstream Finance?

Article author: Sebastien Davies

Article compilation: Block unicorn

Introduction

There is an extremist problem in finance. I’ve seen some extremists who believe that blockchain will destroy every existing financial institution. Meanwhile, the traditional finance camp believes that Bitcoin is synonymous with cryptocurrency—and vice versa. Unfortunately, both camps lack the patience to understand the nuances.

I don’t subscribe to this either-or ideology. As we can see, the two are likely to converge rather than collide. Visa and Mastercard are actively expanding collaboration in blockchain payments. The traditional financial services giant Stripe has also launched a blockchain platform specifically for processing payments. Our team writes articles almost every week to discuss the convergence trend between these two areas of finance.

In crypto commentary, I often see people treat blockchain itself as a unique selling point (USP) because it enables fast, low-cost transactions. That’s true—moving money via blockchain is cheaper. But that isn’t the key factor driving blockchain adoption, because the cost of traditional funds transfer infrastructure is relatively high and has nevertheless stood the test of decades. Businesses won’t switch banking partners overnight just because another bank offers a few-basis-point discount on transaction processing. Financial habits run deep. Companies need more than cost savings; they need a more confident reason to change how they move, hold, and invest capital.

What matters here is quantifiable outcomes. If the public is going to change how money flows, they need to understand how to optimize the entire flow of funds. Therefore, the focus should be on how blockchain can integrate seamlessly with platforms, enabling users to hold, invest, and borrow funds effortlessly.

In today’s guest column, Primal Capital partner Sebastien Davies discusses why crypto infrastructure can’t achieve mass adoption—and what would.

The infrastructure illusion

For most of the past decade, the global financial industry has been intensely focused on “tracks.” Discussions around digital assets have been almost entirely centered on blockchain’s mechanical throughput, the cryptographic security of decentralized applications, and the theoretical elegance of smart contract logic. This is the infrastructure phase—a period centered on building “containers.” From 2020 to 2024, the entire industry was racing to build pipelines, vaults, and gateways to modernize how value moves.

During this period, the growth of the crypto market has largely focused on building infrastructure, because without infrastructure, participation simply cannot happen. We built enterprise-grade custody platforms, standardized exchange APIs, and on-chain compliance services to address five key gaps: custody, trading, execution, stablecoin utility, and regulatory reporting.

However, the financial industry is now facing a fundamental truth in financial history. Infrastructure is a necessary prerequisite for conducting activities, but the balance sheet determines who can capture economic value. Simply having a faster or more transparent “track” in itself can’t shift the market’s center of gravity. Infrastructure solves the mechanical problem of how institutions participate, but it does nothing for the more important question of who can capture value. In the era when infrastructure buildout was booming, the answer to that latter question still clung to tradition. Centralized market makers capture the spread, early holders benefit from appreciation, and verifiers earn transaction fees. This stage failed to create new balance sheet structures—so it didn’t change where deposits are stored, nor did it fundamentally alter the structure of credit creation.

In response to this argument, a common counterpoint is that “infrastructure” is the primary driver of value, because it lowers the barriers to entry, thereby enabling financial democratization and naturally shifting economic power to peripheral groups. Supporters of this view argue that technology itself is the force for change because it is open source and permissionless. While that makes for a compelling narrative in a retail-led “crypto-native” world, it doesn’t hold up against institutional reality. In complex financial markets, cost efficiency matters far less than capital efficiency and risk-adjusted returns. When an institution moves $12.6k, it’s not because transaction fees are lower; it’s because the balance sheet supporting that capital can provide higher returns or more efficient collateral utility. Infrastructure is a barrier to entry; the balance sheet is the strategic asset that determines the winners of the interest-rate spread.

Financial history repeatedly proves that infrastructure is not the key to market power—balance sheets are. The rise of the Eurodollar market in the 1960s didn’t require new payment rails or financial technology. It simply required dollar deposits to move out of the U.S. banking system. Once those balance sheets moved, a parallel dollar system emerged—massive in scale and largely outside domestic regulation.

We are now entering a new stage of institutional balance sheet reorganization, beginning in 2025, when the “battlefield” shifts from the protocol layer to the liquidity allocation layer. The first phase focuses on building platforms; the next phase focuses on where participants move and how their capital flows. In 2024, a treasurer theoretically could use mature custody infrastructure to hold USDC, but economically, traditional bank deposits have the advantage because they provide insurance from the Federal Deposit Insurance Corporation (FDIC) and competitive interest rates. Infrastructure is ready, but the balance sheet hasn’t changed yet. As the regulatory environment moves from abstract policy design to concrete implementation, this re-positioning becomes possible.

The next phase of stablecoin adoption will no longer be determined by infrastructure; it will be determined by where balance sheets go.

The gate to implementation

For most of the past decade, institutional involvement in digital assets has not been constrained by a lack of imagination or technology—it has been constrained by structural barriers to integrating digital assets into regulated balance sheets. Institutions need more than a fully functional wallet. Clear legal definitions, specific accounting treatment methods, and rigorous governance structures are basic requirements. Because there is no widely accepted “custody” definition or clear compliance path, the risk of “balance sheet pollution” is too high to ignore for any regulated entity. Both banks and asset managers have been waiting for a clear signal that they can deploy capital without taking existential legal risk—so the process of mass adoption of digital assets has been stuck in a “wait-and-see” mode.

The era of policy debate is finally coming to an end, replaced by the phase of real-world execution. The GENIUS Act, passed in May 2025, played a decisive role: it established a national regulatory framework for stablecoin payments and ultimately provided a legal basis for balance sheet allocation. By providing a federal licensing process and requiring that 100% reserves be supported by government-approved instruments, the bill transformed digital assets from speculative novelties into recognized financial instruments. In August 2025, the U.S. Securities and Exchange Commission (SEC) ended its long-running investigation into the Aave protocol and took no enforcement action, further solidifying this shift and effectively removing the regulatory “barriers” that previously hindered institutional participation in decentralized finance (DeFi).

Now, the focus has shifted to the rulebooks of regulators. In February 2026, the Office of the Comptroller of the Currency (OCC) issued a comprehensive proposed rule aimed at implementing the GENIUS Act and establishing a framework for “approved payments stablecoin issuers” (PPSI). This is significant because it provides detailed prudential standards (covering reserve composition, capital adequacy ratios, and operational resilience), enabling a Chief Risk Officer or an Asset Liability Committee (ALCO) to approve digital asset strategies. The passage of the GENIUS Act has brought blockchain regulation into the governance structure of the world’s largest financial institutions.

However, to understand why this shift is happening now, we need to recognize the “balance sheet inertia” that shapes institutional behavior. Banks are constrained by strict regulatory capital adequacy requirements, meaning every dollar of risk-weighted assets must be backed by capital. If deposits flow out of a bank into stablecoins, the bank must proportionally reduce lending to maintain those capital adequacy ratios. This is a painful and costly contraction that ripples through the entire economy. That also explains why stablecoin adoption has been so slow. Even with full technical integration requiring six to eighteen months, governance cycles such as audits and board reviews take even longer to complete.

The current environment shows a “compound acceleration” dynamic. As early movers such as JPMorgan, Citibank, and U.S. Bank begin rolling out stablecoin settlement plans, they send a clear signal to the market: the risk of being first is being replaced by the risk of being left behind. We are in a competitive pressure phase, where peer banks’ participation reduces industry-wide adoption risk. As these institutional constraints loosen, the path for liquidity to migrate from traditional systems to the new programmable container era also opens up. This shift forces us to rethink the essence of capital and shift the focus to the “containers” that will carry the next generation of global liquidity.

Where liquidity lives

To understand the scale of the shift taking place, we must first recognize the historical stability of financial “containers.” In every era of money, liquidity eventually has to find a home. This is simply a function of how technical storage works, but it satisfies the long-term global demand for safe short-term assets. For centuries, this home has been concentrated in a few well-defined structures: commercial banks’ balance sheets, central bank reserves, and money market funds. These traditional “containers” all play an intermediary role, capturing the economic value generated by the capital they hold.

The “free lunch” math principle shows that the existence of financial intermediaries is to solve the problem of mismatched funding. Specifically, the cash flows generated by economic activity exceed what’s needed for their short-term production uses, leading to long-term liquidity surplus that seeks safety. Traditionally, commercial banks convert these excess funds into deposits, invest in long-term assets such as collateralized loans or corporate loans, and earn substantial net interest margins. Net interest margin (NIM) is the guiding light for commercial banks and retail bankers. Bank shareholders are the primary beneficiaries of the “spread,” while depositors receive part of the return in exchange for providing liquidity and government-backed support.

Cryptoasset infrastructure introduces a new type of “container” that directly competes for capital. This economic reshaping goes far beyond a mere technology upgrade. When liquidity migrates from banks to stablecoin reserve pools or tokenized Treasury funds, the party capturing yield changes fundamentally. For example, in a stablecoin reserve pool, the issuer (e.g., Circle or Tether) earns the spread between the underlying Treasury yield and the interest paid to token holders, while the latter typically receives zero. In effect, the economic value of “holding costs” moves from commercial banks to the digital asset issuer.

In addition, these new containers offer transparency and programmability that traditional structures can’t match. Tokenized Treasury funds surpassed $11.5 billion in market value in March 2026, representing a structural evolution in which the returns from the underlying assets accrue directly to holders. This creates powerful economic incentives. Savvy treasurers no longer need to choose between bank safety and fund yield; they can hold tokenized funds that serve both as yield-bearing assets and as high-speed settlement media. By redefining the attribution of liquidity, digital infrastructure is not only building new rails—it is creating a competitive market for the balance sheets that support the global economy.

Stablecoin drives migration

Blockchain dollars represent the first large-scale migration of liquidity onto these new financial balance sheets, marking digital currencies’ shift from a novelty to a core component of the financial system. The stablecoin market is near its historical peak, reaching $311 billion, with year-over-year growth of 50% to 70%. This growth thoroughly refutes the claim that stablecoins are merely speculative. We are witnessing a real “transfer” of dollars from traditional banking infrastructure to programmable settlement systems.

The most visible economic impact of this migration shows up in deposit substitution. When a company or institutional investor moves $100 billion from traditional bank deposits into stablecoin containers such as USDC, the profitability of the banking system takes a massive hit. In the traditional model, these $100 billion support the bank’s lending, generating roughly $3 billion in net interest margin each year. But when this money moves to the reserves held by stablecoin issuers, that yield gets stripped away. Banks lose deposits and their ability to make loans, and the spread is captured by stablecoin issuers.

This shift has far-reaching implications for credit creation and financial stability.

Research published by Federal Reserve economists at the end of 2025 emphasized that high stablecoin adoption could reduce bank deposits by $65 billion to $1.26 trillion. This reduction could reshape the way the economy supplies credit. Regional banks that heavily rely on stable deposits for local lending are the most vulnerable to this shift. As retail and corporate savers seek stablecoin settlement advantages around the clock, the long-standing appeal of traditional “float” (i.e., earning spreads on in-transit payments) is rapidly declining.

In response, the banking industry has moved from skepticism to an active participation posture.

JPMorgan, Citibank, and U.S. Bancorp announced that they will roll out their own stablecoin settlement infrastructure by the end of 2025 and the beginning of 2026. This is not intended to “disrupt” their own business; it’s intended to maintain their important position as liquidity containers. These institutions recognize that future economic conditions will favor digital container issuers. By becoming issuers, banks hope to capture reserve yield that would otherwise flow to new entrants. Of course, this first large-scale transfer of capital is only the beginning. As these new liquidity containers gradually stabilize, the competitive focus is shifting toward more complex territories of collateral and leverage—the very foundation of global finance.

Programmable collateral

If moving cash via stablecoins represents the first wave of this transformation, then collateral migration represents a more fundamental reorganization of the core leverage mechanism of the financial system. Modern financial markets are, at their core, a massive network of collateral. Even just the U.S. repo market (which involves borrowing and lending securities) trades $2 to $4 trillion per day. Yet this critical infrastructure is still constrained by the traditional bank “discrete settlement windows.” In the current setup, collateral can only be moved during bank operating hours. And with custody distributed, securities held by one bank can’t immediately be used to meet another bank’s margin requirements. This friction locks up capital, preventing it from being used effectively and from responding to real-time market volatility.

Tokenization turns collateral from static, regionally constrained assets into programmable, highly transferable instruments.

By converting U.S. Treasuries and other real-world assets (RWAs) into on-chain tokens, institutions can move these assets anytime and settle atomically. This market is growing rapidly. As of April 1, 2026, the tokenized RWA market is about $28 billion, with tokenized Treasuries making up roughly half. This growth is driven largely by institutional-grade products such as BlackRock’s BUIDL and Franklin Templeton’s BENJI, which allow holders to earn a 5% yield from underlying government bonds while keeping the tokens liquid and deployable.

The true innovation is “collateral efficiency.”

In traditional repo trades, investors may have to accept significant haircuts or face delays of days to unlock securities and transfer them between custodians. By contrast, tokenized collateral is “composable.” Institutional investors can hold $100 million worth of BUIDL tokens, deposit them at a 95% loan-to-value (LTV) ratio into protocols such as Aave, and immediately borrow stablecoins to seize investment opportunities. Collateral always exists in the digital environment. Instead of being repriced sporadically, it is continuously revalued through automated price feeds, and any margin top-up requirements are handled via immediate automated liquidation.

This shift moves “traders’ economics” to “protocol economics.”

In the traditional repo market, large trading banks act as intermediaries, borrowing at one rate and lending at another, earning roughly 50 basis points in spread. In tokenized ecosystems, collateral holders can self-match in DeFi lending markets, using software as the intermediary, and capture the entire spread themselves. While it may take several years before this reaches mass application, this shift could move billions of dollars in annual revenue from traditional dealers to protocol governance and asset holders.

To understand the scale of the shift from cash to collateral more deeply, we must examine the institutional mechanisms that have historically dominated these transformations. For decades, the global financial system has used “T+X” settlement logic, where “T” is the trade and “X” is the multi-day lag caused by manual reconciliation and bank-to-bank clearing cycles. In the traditional repo market, this delay is an invisible tax on capital. When dealer banks facilitate repo transactions, the collateral must be physically transferred between custodians, which usually requires manual intervention to verify collateral discounts and ownership. This creates a “liquidity moat” around the largest dealer banks—because their power comes not only from their thick balance sheets, but also from their control over these proprietary settlement systems.

The mechanism of tokenized collateral dismantles this moat through atomic settlement. At the level of step-by-step institutional workflows, the process looks like this:

1. Tokenization: Move high-quality liquid assets (HQLA), such as U.S. Treasuries, into digital wrappers (e.g., BlackRock’s BUIDL), making them tokens that can be moved 24/7.

2. Instant funding: Without waiting for Monday morning wire transfers, the finance team can submit these tokenized collateral assets to a lending protocol or a prime broker at 10:00 p.m. on Sunday.

3. Real-time valuation: Smart contracts use decentralized oracles to market-value collateral every few seconds (not once per day), which can significantly improve the loan-to-value (LTV) ratio because continuous monitoring reduces the risk of valuation “flash crashes.”

4. Yield preservation: Crucially, investors keep earning the underlying Treasury yield while their assets are used as collateral—creating an opportunity for “yield on yield,” which is difficult to achieve in traditional systems.

For corporate finance teams or asset managers, this shift is a fundamental revaluation of their idle assets.

Under the traditional model, a treasurer manages a thinly yielding cash “buffer” to ensure they can handle sudden margin calls or operational needs. With tokenized collateral, this “buffer” can remain fully invested in yield-bearing Treasuries, because holders know these assets can be converted to liquidity in seconds rather than days. This eliminates the “liquidity discount” that comes from long-term asset holding in the past.

For the banking industry, the impact is just as profound.

Banks have long profited from the “floating rate” in the repo market and from intermediary spreads. As collateral becomes programmable and self-matching, this profit model will disappear. That’s why the emergence of institutional “plumbing systems” (such as Anchorage’s Atlas network or JPMorgan’s internal tokenization initiatives) becomes crucial. They represent financial institutions’ attempt to build new information silos before competition arrives from the old system. The shift from cash to collateral marks a movement from a series of “discrete events” to “continuous flows.” Institutions that fail to adjust their balance sheets to this new speed will find their capital becoming increasingly static (and therefore increasingly expensive).

On the surface, it looks like an increase in settlement speed, but in reality it is a reconfiguration of capital deployment, valuation, and intermediation.

The S-curve of adoption

The migration of institutional balance sheets does not happen overnight—it’s a process of gradual absorption, followed by eventual acceleration. This is the reality of the “Web 2.5” era: blockchain technology is integrated into existing financial architecture rather than replacing it. Today, institutional adoption of blockchain technology is constrained by “balance sheet inertia.” Regulatory capital requirements, risk committee approvals, and traditional technology systems all present significant obstacles. For example, banks can’t simply switch a switch to move assets. They must maintain strict Tier 1 capital adequacy ratios and ensure that any deposit migration to digital platforms doesn’t cause an expensive contraction in their lending business.

Despite these obstacles, adoption of digital asset infrastructure is following a documented historical S-curve, similar to how credit cards and the internet were rolled out over decades.

Between 2015 and 2024, the market was in a “trial period” and a “regulatory confusion period,” with growth constrained by uncertainty. Now, we’ve entered a “competitive pressure period” (2025–2026), characterized by clearer regulation and more standardized infrastructure. In this phase, “you’re not the first, but you’re not the last” becomes the main motivation for institutional treasurers. As more banks see peers participating in stablecoin settlement or tokenized Treasury funds, perceived adoption risk drops sharply.

The current market size sets the stage for accelerated compounding growth. Fireblocks, moving more than $5 trillion in digital asset transfers per year, is accelerating. The institutional tokenized asset market is also growing rapidly, and the new system’s “underlying architecture” has reached production-ready status. This infrastructure standardization enables banks to build on top of mature systems rather than developing proprietary systems from scratch.

Looking ahead to 2027 and beyond, there are still several “policy levers” that could further accelerate this migration. If stablecoin issuers can directly access Federal Reserve main accounts, or if alliance “reward” mechanisms loosen the GENIUS Act’s interest limitations on payment-type stablecoins, the speed of deposit migration from traditional bank ledgers to digital containers could accelerate significantly. The system is already prepared to form feedback loops: more stablecoin liquidity will attract more decentralized finance (DeFi) applications (very likely permissioned applications), which will then attract more institutional capital, ultimately creating a restructured financial landscape in which the battle over “tracks” is decided—and all attention will fully converge on strategic balance sheet management.

The winners of NIM

The transition from the infrastructure phase to the balance sheet phase marks a shift in “digital assets” discussions from the technical periphery to the core of global macroeconomics. For years, the industry has believed that building better infrastructure inevitably leads to a better system. Now we understand that infrastructure is just an invitation. Real transformation happens only when capital itself moves. The “battle for infrastructure” has effectively already been won by standardized, institution-grade money payment centers under custody, tokenized Treasury funds, and the stablecoin framework regulated at the federal level. The next campaign (one that will determine the financial landscape for the next decade) is the battle over the balance sheets that control global liquidity and collateral.

From 2027 to 2030, structural advantages will belong to companies that can manage these new “digital containers” most effectively. As savers increasingly prioritize around-the-clock settlement and the higher practical utility of stablecoin yields, we expect commercial banks’ net interest margins (NIM) to continue narrowing. Large enterprises and institutional investors may shift their primary savings and treasury management functions to DeFi and the RWA markets, where the transparency of protocols maximizes the reduction of intermediary spreads. This is not the end of traditional banks, but the end of the era when banks were static, unchallenged, low-cost capital warehouses.

In this new era, winners will be “Web 2.5” hybrid enterprises—or institutions that realize they are no longer merely lenders, but programmable liquidity managers. By 2030, when the stablecoin market approaches $2 trillion, the line between “crypto” and “finance” will largely disappear. The entire system will fully integrate track efficiency into balance sheet stability. In this reorganized landscape, financial power won’t belong to companies with the most innovative technology; it will belong to those that control the final storage containers for global liquidity and collateral. The battlefield is already set, and for the first time, the economic landscape becomes a contestable prize.

Over the past decade, crypto development has focused on building infrastructure that enables institutions to participate. The next decade will determine where institutions’ balance sheets ultimately land.

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