Golden USDC coins on dark background. 3d iluustration.

Recently, we have seen a spate of institutions announce the launch of their own stablecoins, including Societe General, Revolut, and now Bank of America is considering weighing in.

Recently, we have seen a spate of institutions announce the launch of their own stablecoins, including Societe General, Revolut, and now Bank of America is considering weighing in. One has to question why, though? USDT and USDC - the biggest stablecoins in the industry already account for $200 billion of crypto’s AUM.

Accepted widely across most blockchains, centralized and decentralized exchanges, Circle’s USDC and Tether’s USDT are serving the stablecoin market well. Far less volatile than other cryptocurrencies, they are allowing investors to move easily in and over crypto and preserve their wealth in countries with hyperinflation.

And so, why would a bank like Societe General need to launch its own stablecoin? The answer likely lies in the extremely attractive revenue model that stablecoins operate on. Tether, for example, made a cool $13 billion in profit last year - placing it in the gilded company of Goldman Sachs.

This is very impressive and certainly something a large bank would resent. Why pay an upstart third party to settle your transactions when you can do it yourself? Yet, while this may be a perfectly sound business decision, dilution of the stablecoin market would quite literally defeat the object of its existence.

Digital assets already suffer from a liquidity issue - with a market cap of around $3trn and the majority of that held in Bitcoin by long-term investors, crypto traders are often hamstrung by this lack of liquidity. Having two well capitalised, liquid stablecoins is a big bonus in this market and one we should be careful to tinker with.

Both USDT and USDC fought hard to win credibility and trust in the industry for many years. They have weathered some of the hardest financial storms while other coins haven't even scratched the surface compared to the majors. While many stablecoins such as DAI, PYUSD, and Sky Dollar have emerged within the last few years, none have proved themselves at the level these two have.

As such, many market participants continue to rely on these two tokens, with their dominance growing even in the face of rising competition. For reference (at the time of writing this), DAI's market cap is at around 5.3 billion, while PYUSD has a market cap of roughly $741 million. While impressive, this doesn't even scratch the surface of USDC's $60 billion and USDT's huge $142 billion market cap.

Despite this, though - and this only goes to serve as a stronger argument as to why banks should stay out of stablecoins – USDT now finds itself in hot water as it is allegedly not complying with the European Union's new rules on stablecoins. As such it is set to be delisted from major centralized exchanges like Binance, Crypto.com, Coinbase, and more for European customers.

Some might argue that this is a great moment to open the stablecoin market to competition, but if USDT with its decade of experience and billions of dollars of AUM can't get past the EU, what chance does a much smaller coin have? Granted, those coming out of banks will have an advantage, but they will still face regulatory hurdles that remain a moving target - especially in the US.

Of course, in this war of regulation, USDC has been winning for some time. Circle's laser focus on compliance and backing from institutional behemoths like BlackRock have made it the stablecoin of choice for traditional finance institutions (though crypto natives still view it with caution thanks to its willingness to bow to government sanctions).

And, perhaps unsurprisingly, founder Jeremy Allaire holds a similar view on the stablecoin market. In a recent interview in Hong Kong, Allaire stated there really is no need for CBDC's as the stablecoin market already exists. It is thriving, it is liquid and it is working. Rather, regulators should understand stablecoins and make better rules.

Stablecoins must be easily tradable and liquid. This is where having just two majorly traded coins wins. There is no time of the day or night that any trader cannot buy or sell USDT or USDC on any kind of platform (well, for now, at least). If we start to see the market segment into various stablecoins that perhaps larger institutions insist must be used inside their ecosystems, this will impact liquidity, trading, and costs.

Charges are likely to increase as without sufficient liquidity the cost of executing transactions tends to rise - as those who battled ETH gas prices in the summer of 2020 remember all too well. This can lead to an expensive, fragmented, and slow investor experience.

This should not be the future the stablecoin market or the cryptocurrency industry at large is marching into. Rather than fragmentation we need cohesion and deeper liquidity in order for stablecoins to be treated as a legitimate asset within the financial ecosystem.

That said, despite its dominance, USDT faces a fight for its life against new European regulation – Markets in Crypto-Assets (