Payments, Stablecoins, and the Radical Remaking of the Financial Industry

The worlds of traditional payments and stablecoins, the latter of which combine the price stability of fiat currencies with the speed, availability and programmability of blockchain, are poised for convergence within financial services. If things take off as market observers expect, it could mark the start of the radical remaking of the industry, and traditional financial (TradFi) companies stand to benefit from and be greatly challenged by the rise of stablecoins. With the recent passages of the GENIUS Act and the CLARITY Act, the financial industry is preparing for both, working to take a leading position in stablecoin cross-border payments, real-time settlement of business-to-business payments, integration with payment service providers, fintechs and card networks, merchant adoption in e-commerce, and the introduction of bank-issued stablecoins.

Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Bailey Reutzel (00:09):
All right. Hello everyone. Nice to see a crowded room here so early. Does everyone understand what digital assets are here? A "woo" would be fine. Good. Cryptocurrency? The "woos" are getting softer. Okay. Blockchain? Okay. And what about Stablecoins? It's sort of in the name, but certainly, that's what Stablecoin issuers are trying to do: have a stable digital currency. Although I would argue that last week's selloff—which sent certain stablecoins supposed to be pegged to a dollar down to 65 cents—shows that some folks are doing far better or far worse on that mission.But back to the architecture here; there's not just one stablecoin product pegged one-to-one with the US dollar. There are also crypto-backed stablecoins, Euro-backed stablecoins, and Yen-backed stablecoins.

(01:11):
There are also algorithmic stablecoins, right? So they're not backed by anything but math. There are also some synthetic dollars, and the list goes on. The digital asset space is a mess of new technology and wild ideas, and we are all here to help you understand that. I am Bailey Reutzel, Senior Director of Live Media at American Banker. I have been covering cryptocurrency for 13 years and yes, it's been a wild ride. Let me introduce my panelists: Rachel Anderika, Global Head of Operations and COO at Anchorage Digital; Irina Berkon, CFO of Metallicus; Ro Spaziani, a partner at Gibson Dunn; and Debopama Sen, Head of Payments and Services at Citi.

(01:55):
All right, let's get started. I feel like crypto was the stepchild for a long time in TradFi, and I'm wondering why we think that has changed and if it was only because of regulation. Let's talk through that and then we'll get into stablecoins and payments. I'm going to pass it to you, Rachel.
Rachel Anderika (02:32):
Sure. The question was: what's changed and how are we seeing institutions interact with crypto? For context, Anchorage Digital Bank is a trust bank. We were actually the first OCC-chartered crypto bank in the US; we got our charter in 2021. We are about to hit our fifth birthday, and our entire raison d'être is to provide custodial services for institutions to interact with the digital asset space. You can custody through our platform and engage in trading. We are also the first federally regulated stablecoin issuer in the US. I think what we've seen over the last 18 months is institutions really coming back into the space.

(03:39):
I think we're seeing use cases that are very meaningful in terms of operations. Particularly with stablecoins, we're seeing payments being transformed. We're seeing settlements and settlement finality being improved, along with international remittances. When you see a business use case where operations are meaningfully improved, that's when you see institutions commit. You have that along with a regulatory environment that is trying to provide clear laws and guardrails. That creates a perfect environment to experiment.

Bailey Reutzel (04:33):
Yeah, I think the regulation has been a huge boon for crypto and stablecoins. Debo, I'm going to pass it to you. I know Citi is thinking about doing digital asset custody. Why have you come around to that, and how did you get to this point? Surely it wasn't just when the regulation passed.

Debopama Sen (05:01):
Absolutely. I think a couple of things have come together. One is obviously the regulatory enabler has been very exciting. We're excited about the clarity and the fact that banks can now play in this space much more meaningfully. But at the same time, regulatory clarity is meaningless unless there's a client driver. That is the big thing that has changed for us. Whether it's the investment industry looking for something real-time and instant, or the world of commercial trade and commerce with more businesses moving online. In the past, it was only digital native clients who wanted real-time capability.

(06:01):
Today, every industry's business model is being transformed. If you're an auto manufacturer, five years ago you only dealt with large suppliers and made online batch payments; you could manage liquidity with a day's lag. Today, you might be offering a subscription model to a consumer who needs an embedded payment solution, which moves your entire treasury function. If you're selling cars in 60 countries and need to move liquidity around the world, commerce is pushing treasury flows to be online, real-time, 24/7. You might need to move money on Labor Day to pay a supplier in Vietnam instantly. That client driver combined with the regulatory enabler has given us this ability. From a Citi perspective, we have been experimenting with the technology for a while.

Bailey Reutzel (07:12):
Fair. Irina, I'm going to pass it to you. You focus on credit unions. Why are they getting involved? Is there a specific reason they are more interested in stablecoins and crypto rails than others?

Irina Berkon (07:27):
Maybe I'll start with the history of Metallicus. We started in 2016 with a consumer app where you could buy and sell Bitcoin with fiat money. That was not an easy thing to do, and it still isn't. We've been through multiple waves of regulation and governments that were demonizing crypto; now they are embracing it. We found that consumers are very interested, but it's not easy to buy. People whose banks weren't friendly to crypto were looking for places to go. Credit unions have been ahead of the game; their regulator has been very friendly to this and they are agile enough to offer these services.

(08:21):
We started telling credit unions that either their current members are buying crypto and taking their deposits elsewhere, or people are looking for places to put money so they can easily access Bitcoin. That's where we started talking to them about stablecoins and making crypto available to their members.

Bailey Reutzel (09:17):
It's interesting that they were ahead of the game. Ro, I'll pass it to you to talk about how important this regulatory regime was. It felt like as soon as that happened, all the banks became interested in custody.

Ro Spaziani (09:39):
I think banks were in a holding pattern. Many were working on this for years, but there was critical feedback from US regulators regarding banks even supporting clients in the crypto sector. As that changed and regulations came out, a few things happened. Banks that were investing heavily in blockchain technology and use cases suddenly got more free reign to move forward. I don't believe the Genius Act did too much in terms of the actual rule set for what banks are doing—they aren't going to be stablecoin issuers by and large because they already accept deposits—but it leads to more flexibility to explore technology without the regulatory pushback experienced over the last seven years.

(10:33):
For new entrants looking to issue stablecoins and bring them mainstream, the Genius Act was really important because it set up a framework they could operate within. Prior to that, they were in a holding pattern because they didn't know where the framework would land. To be fair, we are still uncertain how the entire regulatory framework will evolve, as regulations haven't been adopted yet. But there is at least a sense of which charters will work and how we facilitate foreign entrance into the US. There is movement forward.

Bailey Reutzel (11:40):
I've been interested in the regulation in that it doesn't really define a lot of this technology, which can get complicated. What stablecoins are we talking about here?

Ro Spaziani (12:00):
There are two sides to defining technology in regulation. From a statutory perspective, I tend to favor not defining too much because technology evolves. Part of the reason for the holding pattern was that regulators were locked into legacy technology. When you looked at new initiatives, it was a square peg in a round hole trying to comply with regulations built for old systems. In terms of defining stablecoins, they made an effort in the statute, but I think the regulations will be much more specific.

(12:52):
They defined it narrowly; you're really looking at fiat, and it won't have the same flexibility as other types. That's likely going to land more on the market infrastructure side. Rachel, do you want to comment?

Rachel Anderika (13:07):
I'll echo that. The Genius Act is for payment stablecoin issuers. They are clear on what that is, what types of charters can issue it, and what reserves can back it. You're not going to see an algorithmic or crypto-backed stablecoin proliferate as a "payment stablecoin" when you're trying to use it as a unit of account. I want to talk about the larger players. We have been talking to banks since 2020 about how to engage with digital assets in a safe and sound manner. Risk management and controls in banking are not new.

(14:19):
The agencies are going into rule-writing now, and there are things in the Genius Act—operational and ministerial matters—that are not well defined. As we were trying to issue our first stablecoin, we looked at things like reserve management and the operational implications of liquidity. I think the regs will address some of that, but much of it will likely be left to guidance and supervisory matters because you don't want to codify how a technology works.

(15:53):
We've seen regulation developed around "V1" technology where you're following a checklist that is no longer relevant. Regulators have signaled an openness to work with the industry to have smart, collaborative regulation.

Bailey Reutzel (15:57):
It's a good point not to codify a specific technology. Debo, I'll pass it to you next.

Debopama Sen (16:06):
I agree with Rachel and Ro. I just want to add an international flavor. When money crosses borders, you have to think about regulations in other parts of the world, and there is no homogeneity right now. Every market is in a different stage of evolution. In some countries, crypto is still banned. We are big proponents of consistency and standards around safety, soundness, and roles. I think that will evolve a lot over the next few years.

Bailey Reutzel (16:59):
Irina, did you want to jump in?

Irina Berkon (17:02):
We hear from banks and credit unions, "How is my examiner going to look at this?" We have to educate them on how an exam works for an institution that issues stablecoins or holds crypto. Banks already have the structure in place: KYC, BSA policies, and OFAC screenings. None of that is going to be different. Banks and credit unions just need to apply their existing controls to this new technology.

Bailey Reutzel (18:17):
Fair. Let's switch gears and talk about use cases. If we aren't trying to codify specific technology, what other use cases are you looking at for digital assets or blockchain broadly?

Debopama Sen (18:44):
We are looking at it broadly. It's less about the instrument and more about how we can leverage the technology. For the last couple of years, we've been working on Citi Token Services, which is based on blockchain. It is currently offered to our clients with US dollar accounts to move liquidity across treasury centers 24/7 in real-time. Billions of dollars have been transacted, so we know it works at scale. We made it easy for clients to use; they don't have to create a blockchain interface on their end.

(19:31):
They interface with us the way they always have—using electronic banking, APIs, or SWIFT. We interlinked it with our current payment, KYC, OFAC, and AML controls. We also built it to be compatible with ERC-20 standards so that in the future, when clients want to access a Citi Token Services coin externally, we won't have to rebuild the technology. Clients are using it to manage treasuries and pay suppliers on US holidays. We're creating that 24/7 capability.

Bailey Reutzel (20:41):
Interesting. Irina, if smaller banks or credit unions adopt this technology early, what do they gain? Do they get a competitive advantage over bigger banks?

Irina Berkon (21:04):
When AWS went down, blockchains didn't. We were talking about this internally yesterday. We operate a decentralized exchange on a blockchain and it did not skip a beat. Any applications built using AWS functioned poorly, but the blockchains kept running. Because Citi is building on blockchains, those applications will keep running even if something else happens. For smaller banks, the technology helps them provide the products their customers are looking for.

(22:22):
Whether it's a big bank or a community bank, users want to know they can buy stablecoins, participate in DeFi lending or international money movements, and borrow assets. People are looking for their banks to provide these products because they feel more secure doing it through a bank.

Bailey Reutzel (22:56):
I agree, but once you learn how to use crypto without the banks, why go back? The banks are going to take a fee. If you learn DeFi on your own, why pay the bank?

Irina Berkon (23:21):
"Not your keys, not your crypto," right? There is a limited number of people who really want to manage their own keys. We hear about people losing keys all the time. There is a group that is very good at it and will never go to a bank, but eventually, they have to buy milk and bread. They want to make sure the bank they use understands them and provides the interaction they need, rather than having to go to a third party that might be more risky. Banks are still banks.

Bailey Reutzel (24:16):
It's risky, but it makes you feel alive. Maybe keep a little in a paper wallet and the rest in the bank.

Rachel Anderika (024:27):
Many people don't want to feel "alive" that way. When it comes to wallet share, if I want to hold Bitcoin in the same place I hold the rest of my money, I should be able to. Regulation is starting to say these assets are the technological equivalent of existing banking activities. Banks can grab that wallet share if they do it in a safe and sound manner. Anchorage Digital Bank doesn't service retail; we service large institutions. When they are dealing in hundreds of millions of dollars, they don't want to be fooling with their own private keys.

Bailey Reutzel (25:58):
Ro, what have you seen regarding use cases for your clients?

Ro Spaziani (26:07):
There are very different use cases for retail and institutional. Institutional use cases have more clarity and rationale for maintaining bank relationships. On the retail side, there is a question of how much investment community banks should make in retail competencies. They might be better off with "Banking as a Service" partnerships with fintechs that can provide those services at scale. The investment in technology, expertise, and risk management is substantial and hard to build at a community bank.

Rachel Anderika (27:19):
We partner with banks a lot, providing the backend for Banking as a Service. Providing safe custody of assets involves a huge responsibility to your client base. Security is difficult; we have over a hundred engineers and it's still hard to maintain the rigor needed to ensure assets are safe, exclusive to the client, and appropriately valued on a statement. You have to translate those assets into dollar units.

Bailey Reutzel (28:44):
If a bank wants to get into this, where do they start? How do they find a good partner?

Irina Berkon (29:13):
A few things: if you want to use a stablecoin, it must comply with the Genius Act—fiat-backed, not synthetic, and held in a qualified place. Don't underestimate the technology needed. You need a custody provider and tools to tell you if crypto is going to "bad places" or sanctioned wallets. You have to decide if you are going to build it yourself. We've seen banks partner with someone only to realize they only provided one piece of the puzzle. What about OFAC screening? What about who holds the keys? Partnering with the right companies means making sure all products are in one place.

Ro Spaziani (31:28):
The first question for a CFO or COO wanting to enter crypto is: "What is organic for you?" What is your business today, and what is the logical next step? Then you can look for partners. You can partner for a period of time to see if a use case is viable before making a massive investment.

Debopama Sen (32:10):
Staying true to what your clients are looking for is vital. Even if you have a partner, you must integrate this into your core risk systems. When looking at a client's activity, you have to look at both "on-chain" and "off-chain" activity. It's not good enough to monitor them independently; you have to see the connective story.

Rachel Anderika (33:07):
We provide custody for large ETFs, working with groups like BlackRock and 21Shares. The due diligence I had to go through for those clients was intense. We had to show how our technology stacks work, how we connect to their systems, and how we integrate with their compliance and security. The due diligence we produce for complex financial institutions is often more rigorous than what the OCC requires.

Bailey Reutzel (34:47):
We have five minutes. Are there questions from the audience?

Audience Member (35:11):
Is revenue outweighing the risk?

Debopama Sen (35:11):
Depending on who you speak to, you'll get different perspectives. We've been ruthless in staying close to what clients want. When we operationalize a solution that serves a real need, it starts to make sense. If you're doing it just to learn, you shouldn't expect immediate revenue. We see a world where institutional banks bridge TradFi and DeFi, which is a revenue play, but you have to stay true to client needs.

Ro Spaziani (36:13):
I don't think revenue outweighs the risk in the sense that no institution wants to take undue risk. Everyone is moving carefully. The risk is the most important thing to look at first; the revenue won't matter if you aren't handling the risk, because this is complicated.

Bailey Reutzel (37:00):
As a retail crypto user, we always hear you have to lose a bunch of money once to learn. I don't know if banks can do that.

Irina Berkon (37:18):
That's why people go to banks—the crypto people have already lost enough. If you aren't a "fast follower," the big banks will take the market share. As soon as Citi comes up with something everyone wants, that's where they will go. Smaller institutions need to watch closely.

Bailey Reutzel (38:03):
I'll push back a bit—people still go to community banks even though Chase and Citi exist.

Irina Berkon (38:20):
Exactly. Customers would prefer to go to their community bank if those services are provided, but if the bank isn't a fast follower, people will go where the products are.

Audience Member (38:42):
What are the next steps to deploying in your institution?

Debopama Sen (39:07):
It's a journey. We serve 1,500 banks moving dollars globally. Recently, we connected that network with Citi Token Services so clients can use blockchain rails to connect to our 24/7 global multibank network. Our next steps are the evolution of connecting the TradFi and DeFi worlds.

Bailey Reutzel (39:56):
All right, I've gone over time. Tread carefully, everyone, but thank you for your attention.