The Economist: The Real Threat of Cryptocurrency to Traditional Banks

The crypto industry is replacing Wall Street's privileged position within the American right-wing camp.

Source: The Economist

Translation: Chopper, Foresight News

“First they ignore you, then they laugh at you, then they attack you, and finally you win.” This phrase is often attributed to Mahatma Gandhi, but the leader of the Indian independence movement never actually said it. Nevertheless, this fabricated maxim has become a popular motto in the crypto industry. The pioneers of digital finance once endured the arrogance, ridicule, and disdain of Wall Street elites, but now, their influence is stronger than ever.

Over the past year, both bankers and digital asset practitioners have enjoyed a fruitful period. The crypto industry’s ability to gain a foothold is largely due to the GENIUS Act passed in July this year, which provided clear legal grounds for the legitimacy of stablecoins. Since Donald Trump won the election, the market has expected a more relaxed regulatory environment, and bank stocks have risen by 35%. Even though some bankers dislike Trump for other reasons, few of them favor the regulatory policies during Joe Biden’s administration.

Nevertheless, the tension between the old and new powers is intensifying, and the threat posed by crypto is far more severe than many bankers once imagined. While banks can benefit from regulatory easing, their privileged status as the “financial aristocracy” within the Republican camp is now on shaky ground. Sharing this status with the new crypto elite is undoubtedly a long-term threat to traditional banks.

The most pressing concern for bankers right now is the regulation of stablecoins. The GENIUS Act explicitly prohibits stablecoin issuers from paying interest to buyers. The original intention of this compromise was to prevent stablecoins from diverting demand for bank deposits, thereby weakening banks’ lending capacity. However, the market has found a workaround: stablecoin issuers like Circle, which issues USDC, share their profits with crypto exchanges such as Coinbase, which then distribute “rewards” to users who purchase stablecoins. Traditional banks are strongly demanding that this regulatory loophole be closed.

The interest issue is not the only point of contention. In other areas, crypto is also trying to break through the traditional financial barriers to entry. In October this year, Federal Reserve Governor and Fed Chair candidate Christopher Waller suggested that more institutions might be allowed access to the Fed’s payment system, a statement that worried bankers. However, Waller later retracted this statement, saying that applicants for such Fed accounts would still need to hold a banking license.

Finally, on December 12, the crypto industry successfully pried open the doors of the U.S. federal banking system. U.S. banking regulators approved national bank trust charters for five digital finance companies, including Circle and Ripple. Although this qualification does not grant these institutions the authority to accept deposits or conduct lending business, it does allow them to provide asset custody services nationwide without relying on state-level approvals. Previously, banks had lobbied regulators vigorously to oppose granting new licenses to these companies.

Each individual development—a speech, a bank license, a regulatory workaround by a stablecoin issuer—may seem insignificant on its own. But taken together, these trends pose a serious threat to traditional banks. In fact, the core position of traditional banks in lending and brokerage has long been eroded by private credit institutions and new market makers outside the banking system. Naturally, they are reluctant to lose even more ground.

Crypto companies argue that the preferential policies enjoyed by traditional banks create an unfair competitive environment and harm market competition. This claim may have some merit, but disguising interest payments on stablecoins as “rewards” is undoubtedly a blatant regulatory evasion. And just months ago, lawmakers who voted to ban interest payments on stablecoins have not taken action to stop such practices, which precisely reveals the real dilemma facing traditional banks: their political influence has been greatly diminished.

Traditional banks are no longer the most influential financial force within the Republican camp. On the contrary, the crypto industry has firmly established itself within the American right’s “anti-mainstream, anti-elite” political camp. The industry’s largest political action committee holds hundreds of millions of dollars, ready to be deployed in the 2026 midterm elections, and money has always been a powerful weapon in political games. Now, when the interests of traditional banks and the new crypto elite clash, the outcome is no longer a foregone conclusion—and may not even favor the traditional banks.

There was a time when bankers complained about the Biden administration’s strict regulation. Ironically, they now have to rely on the support of a group of Democratic senators. These Democrats are more concerned about the potential risks of disguised interest payments on stablecoins and the associated money laundering risks. In opposing crypto companies obtaining banking licenses, America’s largest banks have formed an alliance with labor unions and center-left think tanks. As with another famous saying Gandhi never actually uttered: “The enemy of my enemy is my friend.”