The future of digital currencies and lending: New opportunities for banks and credit unions
The advent of the second Trump administration has created a true sea change in how the federal government is addressing digital currencies in the United States. It is creating a number of new opportunities across the whole lending world, but to really take advantage, banks, credit unions and other financial institutions need to understand existing and emerging regulations before launching new products and services.
The definition of digital currencies
Digital currencies refer to currencies that use cryptography to secure transactions. They typically run on decentralized systems, notably blockchains, and were originally designed for peer-to-peer transactions.
Although the original intent was to eliminate financial intermediaries, banks are now beginning to take their first steps into digital currencies to avoid getting left behind.
Representative digital currencies include coins, which are native digital currencies such as Bitcoin that run on their own blockchains, and tokens, which are built on existing blockchains.
A third example is stablecoins, which are pegged to fiat currencies including the U.S. dollar, helping to reduce volatility by tethering coins to a resource that is real and tangible.
The last example, tokenized deposits, are simply digital representations of traditional bank deposits and are insured under Federal Deposit Insurance Corporation (FDIC) rules.
Crypto and digital currencies are becoming mainstream
The federal government and individual states are moving forward with formal regulations for crypto and digital currencies. What was once fringe activity is becoming foundational in the banking sector.
When President Trump’s administration took office for the second time, it declared that the U.S. would become the crypto capital of the world, signaling a major federal policy shift at the federal level. At the same time, institutional acceptance of digital currencies has accelerated.
One example is that the Trump administration has directed Fannie Mae and Freddie Mac to consider crypto as a reserve asset for home loans.
Another example is the federal Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, which seeks to create a comprehensive regulatory framework for stablecoins in order to reduce their risk profile.
Market demand is also evolving, with younger customers in particular becoming more interested in digital currencies and the convenience, diversity and flexibility provided to them when managing their money.
Digital currencies enable faster, cheaper, and more efficient transactions, such as instant payments. Competitive pressure from fintechs and non-banks, which are further along the road in the digital currency space is also ramping up.
The regulatory backdrop to digital currencies
Traditional banks that want to stay relevant need to adapt to this changing world and understand more about regulatory nuances.
The first federal regulatory guidance on crypto assets appeared in 2020/2021 as three interpretive letters. They stated that national banks could provide custodial services for their customers, including holding unique cryptographic keys; that banks could hold stablecoin reserves for customers; and that banks were permitted to use new technologies such as blockchains to perform those functions.
These letters were followed up by further guidance stating that if banks were going to engage in such services, they would need to notify the Office of the Comptroller of the Currency (OCC) in advance and seek permission.
A further letter from FDIC directed all FDIC-approved supervisions to notify it before they became involved in any crypto or digital banking service. That was followed in 2022 by an executive order from President Biden ensuring the responsible development of digital assets.
The Federal Reserve, FDIC and the OCC issued a further joint statement saying that associated business activities were risky and unlikely to be consistent with safe and sound banking practices.
Then came the complete 180° turn in the current federal government's attitude towards digital assets and cryptocurrencies, including a series of letters from the OCC rescinding their earlier positions – meaning that national banks were no longer required to get permission before engaging in crypto banking services.
The current position
While the FDIC also rescinded its earlier position on seeking permission, guidelines have emerged stating, amongst other points, that banks could test different platform options before fully engaging in services and would be required to satisfy high regulatory expectations for safekeeping activities.
These include compliance with all applicable laws, especially Bank Secrecy Act (BSA), anti-money laundering (AML), counter-terrorism, and Office of Foreign Assets Control (OFAC) requirements.
In the meantime, there has been some fragmentation in state-level regulation. New York and California have very robust licensing frameworks for their digital asset laws, for example, while other states are coopting existing regulation, such as money transmitter laws, to cover cryptocurrencies.
As a result, any financial institution engaging in digital currency-based business needs to understand that there are different requirements from state to state.
Wyoming is the first state to issue its own stablecoin, for instance. The Wyoming Frontier Stable Token (FRNT) is backed by U.S. dollar reserves, can be deployed on different blockchains, and is usable from anywhere in the world.
The role of GENIUS
GENIUS creates a new regulatory framework for issuing and holding U.S. dollar-pegged stablecoins. It overlays the existing banking regulatory world, and is intended to unify the patchwork of regulations that have developed over the past few years.
While the GENIUS Act requires some further definition by the OCC, the FDIC, the Federal Reserve Board and the National Credit Union Administration (NCUA) before it is fully implemented, the act has already spelled out the broader elements of what the sector can expect.
Looking at a basic timeline, the act was signed into law in July 2025 and is due to take effect 18 months later, in January 2027. Primary regulators are required to issue regulations to implement the GENIUS Act by July 2026. Such short deadlines are indications that the administration aims to bring the GENIUS Act to fruition as quickly as possible.
The timeline also provides a window for every organization currently operating in the digital currencies space to get licensed to operate. Market participants have until July 2028 for a three-year transition period before the prohibition kicks in on any non-permitted payment stablecoin issuers.
Finally, BSA AML Treasury has issued a request for information to help identify innovative or novel methods, techniques and strategies that regulated institutions can use to help detect illicit activity in the new world of stablecoins.
Understanding payment stablecoins
A payment stablecoin is defined as a digital asset that is designed to be used as means of payment or settlement, and the issuer of said coins is obligated to convert, redeem or repurchase at a fixed amount of money.
Importantly, a payment stablecoin maintains a stable value relative to the value of a fixed amount of monetary value. It is not a national currency, bank deposit, interest bearing instrument under federal securities laws.
The only organizations that will be able to issue payment stablecoins will fall into three categories:
- A subsidiary of an insured depository institution that has been approved to issue stablecoins under the GENIUS Act
- A federally qualified non-bank payment stablecoin issuer, which has to be approved under the act separately
- A state qualified payment stablecoin issuer
Any issuer will have to demonstrate a strong financial condition, provide background information on its officers and directors, and satisfy all the relevant safety and soundness factors established by the regulators. Once that information is submitted the regulators (the OCC, the FDIC, the Federal Reserve Board and the NCUA) will have 120 days to make a decision.
There are then certain requirements for payment stablecoins that stand out. The first relates to liquid assets held in reserve, the second is related to monthly disclosures certified for accuracy by the CEO and CFO of each institution. Larger institutions will be required to undertake an annual audit as well.
By publishing monthly audited accounts, banks can verify that their reserves are still in place and that customers can ask a permitted payment stablecoin issuer to provide U.S. dollars in exchange. As a result, it’s expected that customers move away from the perception that stablecoin issuers are operating in a volatile crypto environment.
Opportunities for financial institutions
There are three immediate areas of opportunity for banks and credit unions. The first includes custodial and stablecoin services, beginning with digital wallet services, which are a relatively easy, low risk way to step into the world of digital currencies.
The second is providing instant payments via digital currencies, which are already available as a low-cost service and becoming quite common. Banks already understand the payments scenario, so they can apply all their existing systems to ensure safe transactions.
Regardless of the product or service that an institution elects to offer around digital currencies, one challenge that everybody is going to face is how to apply existing laws. Again, banks are more than used to the regulatory world, so a third area of opportunity will be to help customers remain compliant.
It’s a chance to get involved more quickly than organizations that are not experienced financial institutions and that don’t understand this world as well as banks do.
Tokenized deposits may well be another straightforward way to occupy part of the growing digital currency market, since financial institutions are the only ones able to take deposits.
What’s next for digital currencies?
It’s clear that as the federal government creates the new regulatory framework through the GENIUS Act, we will start to see a normalization of digital currencies within our industries. The primary challenge will be adding new products and services while still applying all the existing and emerging laws and regulations.
From Finastra’s point of view, we will ensure that LaserPro will be enhanced in four key ways:
- Loan collateral: creating a security interest in digital assets by incorporating Controllable Electronic Records (CERs) as loan collateral to various loan documents
- Perfection by filing: adding CER collateral to the UCC Financing Statement
- Perfection by control: delivering a digital asset Control Agreement to govern control of CERs between borrowers, lender and digital asset custodian
- Loan payments: changing the loan document payment language to allow for borrower payments via digital assets such as stablecoin
As we see growth in customer demand for new types of services, especially around the ability to make transactions using payment stablecoins, most institutions are going to be pulled into digital currencies in some form or another, even if they're not producing stablecoin on their own.
And hopefully, the GENIUS Act will provide a strong legal framework and regulatory guidelines which will give banks the confidence to provide new services safely and soundly, get involved with digital currencies and provide value for their customers.
Above all, banks need to consider competing in this new payment format to avoid it being monopolized by non-bank lenders. It’s no longer a question of ‘if’ a financial institution will be impacted by digital currencies, particularly stablecoins, but ‘how’ and ‘when’.
Written By
