Bridging the Divide: The Hybrid Future of Stablecoins and Traditional Finance

Bridging the Divide: The Hybrid Future of Stablecoins and Traditional FinanceLink opens in a new window

Rhomaios Ram

August 2025

Summary:

This paper argues that the future of finance lies in a hybrid model where stablecoins operate on public blockchains with banks serving as regulated intermediaries, balancing innovation with compliance, stability, and the essential role of money creation.

Key Points:

• Stablecoins as a response to TradFi weaknesses: Stablecoins address core limitations of traditional finance—speed, cost, accessibility, and global reach—by leveraging blockchain technology and price stability through fiat pegs.
• Regulatory and economic challenges: A purely decentralized system faces hurdles with Anti Money Laundering/Counter-Financing of Terrorism compliance and undermines banks’ role in credit creation, prompting regulatory interventions and hybrid approaches.
• Role of banks in the new ecosystem: Rather than being displaced, banks are poised to act as critical on/off ramps, converting fiat to stablecoins and vice versa, potentially issuing tokenized deposits as alternatives, leveraging their inherent ability to provide interest.
• Emergence of a two-tier model: Public blockchains enable user-level efficiencies, while banks rely on a wholesale, blockchain-based interbank settlement layer (e.g., Fnality or wholesale CBDCs) to maintain liquidity and stability.
• Legislative and executive momentum: US Government support through the GENIUS Act passed on July 18 2025, signals a formal push to integrate stablecoins into the regulated financial framework.

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