This Week in Stablecoins: Interoperability vs Competing Interests

Interoperability, the concept that has been promoted as essential for stablecoins to achieve commercial scale, is facing a new challenge. While the initial goal was to determine if stablecoins could become legitimate financial infrastructure, the next question may revolve around who controls the infrastructure that enables different digital currencies to work together.

Thirty-nine U.S. state banking associations are supporting the BankChain Alliance, a bank-owned network aiming to facilitate tokenized deposits, stablecoins, and programmable payments. Major banks like J.P. Morgan, previously indifferent to stablecoins, are now contemplating whether to create their own digital currencies. Even the British government is backing the Bank of England with the mandate to foster innovation in payments and digital currencies, including stablecoins.

Traditionally, the most successful companies in the payments industry have not achieved success by inventing new ways to represent money. Instead, they have succeeded by acting as intermediaries, connecting fragmented systems and making them function as a network. This trend is now evident in the stablecoin debate, with banks moving beyond the question of whether stablecoins or tokenized deposits will win and preparing for the possibility that both could exist.

While banks and cryptocurrency companies were once at opposing ends of the debate, they are now collaborating on interoperability. JPMorgan, for instance, is reportedly considering a stablecoin alongside its tokenized-deposit infrastructure, while other banks such as Bank of America and Wells Fargo are exploring a multi-currency stablecoin initiative. At the same time, these banks are also developing tokenized-deposit capabilities.

The primary difference between tokenized deposits and stablecoins lies in their liquidity and risk management. Tokenized deposits are institution-specific liabilities, while stablecoins can move more freely among wallets, applications, and blockchain environments. This makes stablecoins more attractive for multinational treasuries seeking a unified currency for their operations, minimizing costs, liquidity, and risk.

However, the question of interoperability introduces a new layer of complexity for banks. While they desire interoperable tokenized deposits, they also want a stake in the underlying infrastructure. By labeling the alliance "owned" rather than "blockchain," banks aim to maintain control over the ecosystem. Interoperability, therefore, presents commercial opportunities for banks, but it also complicates their relationship with stablecoins.

As the stablecoin landscape evolves, banks will need to balance their interests with those of the broader ecosystem, creating a dynamic and competitive environment for the future of digital money.