- Key insight: Banks are largely ignoring stablecoins to focus on deposit tokens. It's less a rejection of public blockchains and more the imperative to give their more profitable customers what they want: faster, cheaper transfers with the added convenience of programmability.
- What's at stake: It remains to be seen whether the existing financial structure can evolve fast enough to offset the development of critical mass at the innovative periphery, especially as the innovators start to scale the fortress walls.
- Forward look: Eventually, disruptors work their way into incumbent territory. We're already seeing this in last month's charter approval for tech-focused Erebor Bank which plans to launch a range of blockchain-based services including stablecoin issuance.
While stablecoins animate headlines with a flurry of
It's not that there's no activity — considerable quiet work is expanding trials and
(Note: I prefer the term deposit tokens to tokenized deposits for
One obvious explanation for the difference in pace is that banks move more slowly than stablecoin startups because they have more rules to navigate as well as legacy reputations to protect. Of course, what they lack in agility they make up for in scale. All stablecoins combined can't match the economic heft of, say, JPMorgan or Bank of America. The structural moat of modern banking, reinforced by regulation and legacy trust, reassures us that the plumbing of finance can continue to prioritize safety over speed for the foreseeable future.
But applying a different lens reveals a different picture.
In 1997, Harvard professor Clayton Christensen published his seminal book "
It's not that incumbents don't innovate. It's that their version of innovation is about entrenching legacy systems. Large firms, Christensen points out, tend to optimize for their most profitable customers who are generally not interested in adopting the new, shiny idea — they want to keep doing what they do, only better.
For this reason, innovation happens in low-margin, niche segments as they tend to be nimbler in their consumption. Their overall spend is less as is their average transaction size, which frees them up to experiment more widely — less to lose if something doesn't work out. They also tend to have more diverse networks of association which exposes them to new ideas sooner.
In the case of banks, the most profitable customers are institutions. Like banks, many are constrained by regulations, boards and fear of reputational risk. Like banks, they tend to prefer the incremental over the disruptive, the improvement over the new.
And this is why, with a few notable exceptions, banks have been largely ignoring stablecoins in order to focus on deposit tokens. It's less a rejection of public blockchains and more the imperative to give their more profitable customers what they want: faster, cheaper transfers with the added convenience of programmability. What's more, banks are used to thinking in terms of moats: my client, my service. This is especially obvious with the large banks and their vast networks. Focusing on their own fortress should be more than enough to satisfy shareholders that increasingly think short-term.
This is where deposit tokens shine — they enable a bank's clients to move funds faster, cheaper and outside banking hours, while keeping deposits and services within the bank's moat. The largest such network, JPMorgan's Kinexys Digital Payments, allows instant 24/7 transfers between JPMorgan clients anywhere in the world and
All this is of course positive — more efficiency is good. But it's not exactly innovative — banks are doing what they've always done, in a similar structure but different format.
Kraken Financial's receipt of a limited Federal Reserve master account is leading some industry observers to question whether the approval creates a new avenue for master account-seekers or whether it's a preview of the proposed "skinny" account.
The real innovation, as always, has been taking place at the margins, the vast, rugged and often fertile fields that the large banks tend to overlook as they are beyond the fortress walls and too fragmented to profitably plow.
This is where stablecoins have been doing their thing. At first, the
The common thread is fragmented and seemingly unrelated use cases connected by the flexibility of public blockchains and the assets that move on them.
With stablecoins, the same asset can potentially reach a multitude of applications and user types, eventually pushing it into an even larger market than that enjoyed today by the big banks. The trade-off is less control of connections and destinations, concepts not present in banks' mental models.
This is the innovator's dilemma at work. Incumbents may think they're innovating; but in focusing on their most profitable clients, they miss the looming threat of growing preference for a new type of structure.
Of course, there are always exceptions among incumbents. Smaller banks with
Eventually, however, disruptors work their way into incumbent territory. We're already seeing this in
Can the incumbents push back against the tide of innovation washing in from the margins? Probably, at least for a while. The existing financial infrastructure holds a sacrosanct place in this rapidly changing world given its essential role in keeping the wheels of commerce turning. And large institutions are usually run by smart people who often understand what is happening beyond their walls and can use their influential connections to get more shovels for deeper moats.
But candle factories never retooled to make light bulbs, livery stable owners did not become car mechanics, typewriter manufacturers were unable to launch word processors.
It remains to be seen whether the existing financial structure can evolve fast enough to offset the development of critical mass at the innovative periphery, especially as the innovators start to scale the fortress walls.
