Article by: Sebastien Davies
Article compiled by:Block unicorn
Foreword
There is an extremist problem in the financial world. I've met some extremists who firmly believe that blockchain will destroy all existing financial institutions. The traditional financial camp, on the other hand, equates Bitcoin with cryptocurrency, and vice versa. Regrettably, both camps lack the patience to understand the nuances.
I disagree with this either-or binary. As we've seen, the two are more likely to merge than clash. Visa and Mastercard are actively expanding their partnerships in the blockchain payments space. Traditional financial services giant Stripe has also launched a blockchain platform specifically for processing payments. Our team writes articles almost weekly exploring these convergence trends in the financial sector.
In cryptocurrency commentary, I often see people touting blockchain itself as a unique selling point (USP) because it enables fast and low-cost transactions. It's true that transferring funds via blockchain is cheaper. However, this alone isn't the key factor driving blockchain's widespread adoption, as traditional money transfer infrastructure, while relatively expensive, has withstood decades of testing.
Businesses won't switch banking partners overnight just because another bank offers a few basis points discount on transaction processing. Financial habits are deeply ingrained, and businesses need more than just cost savings; they need stronger reasons to change the way they transfer, hold, and invest their funds.
What matters here are quantifiable results. For the public to change the way money flows, they need to understand how to optimize the entire money flow. Therefore, the focus should be on how blockchain can seamlessly integrate with platforms, enabling users to easily hold, invest, and lend money.
In today's featured column, Sebastien Davies, a partner at Primal Capital, explores why cryptocurrency infrastructure has failed to achieve widespread adoption, and what would make it possible.
Infrastructure illusion
For much of the past decade, the global financial community has focused intensely on "orbits." Discussions surrounding digital assets have almost entirely centered on the mechanical throughput of blockchains, the cryptographic security of decentralized applications, and the theoretical sophistication of smart contract logic. This is the infrastructure phase, an era centered on building "containers." From 2020 to 2024, the entire industry has been racing to build pipelines, vaults, and gateways to modernize the flow of value.
During this period, the development of the cryptocurrency market primarily focused on infrastructure construction, as participation is simply impossible without it. We built an enterprise-grade custody platform, standardized exchange APIs, and on-chain compliance services to address five key gaps: custody, trading, execution, stablecoin usability, and regulatory reporting.
However, the financial industry is now facing a fundamental truth in financial history. Infrastructure is a necessary prerequisite for activity, but balance sheets determine who reaps the economic benefits. Simply having a faster or more transparent track does not change the center of gravity of the market. Infrastructure solves the mechanical problem of how institutions participate, but it does nothing about the more important question of who can extract value. In an era of booming infrastructure construction, the latter's answer remains traditional.
Centralized market makers profit from price spreads, early holders gain capital gains, and validators earn transaction fees. This phase failed to create new balance sheet structures to change where deposits are held, nor did it fundamentally alter the structure of credit creation.
A common counter-argument to this argument is that "infrastructure" is the primary driver of value because it lowers barriers to entry, thereby democratizing finance and naturally shifting economic power to marginalized groups. Proponents of this view argue that technology itself, due to its open-source and permissionless nature, is the force of change. While this is an appealing narrative for a retail-dominated, "crypto-native" world, it doesn't stand up to the test of institutional realities.
In complex financial markets, cost efficiency is far less important than capital efficiency and risk-adjusted returns. An institution might move a billion dollars not because of lower transaction costs, but because the balance sheet backing that money offers higher returns or more efficient collateral utility. Infrastructure is a barrier to entry; the balance sheet, however, is the strategic asset that determines the winner in interest rate spreads.
Financial history has repeatedly demonstrated that infrastructure is not the key to market power; balance sheets are. The rise of the Eurodollar market in the 1960s did not require new payment channels or financial technologies; it only required the transfer of dollar deposits out of the US banking system. Once these balance sheets were transferred, a parallel dollar system emerged, massive in scale and largely unregulated domestically.
We are now entering a new phase of institutional balance sheet restructuring, which will begin in 2025, when the "battleground" will shift from the agreement level to the liquidity allocation level. The first phase focused on building platforms; the next phase will focus on the movements of participants and their capital flows.
In 2024, when a finance executive was evaluating where to store cash, they could theoretically use established custody infrastructure to hold USDC, but from an economic perspective, traditional bank deposits were more advantageous because they offered FDIC insurance and competitive interest rates. The infrastructure was in place, but the balance sheet hadn't changed. This repositioning became possible as the regulatory environment moved from abstract policy design to concrete implementation.
The next phase of cryptocurrency adoption will no longer be determined by infrastructure, but by the direction of balance sheets.
Implementation Gate
For much of the past decade, institutional participation in digital assets has not been limited by a lack of imagination or technology, but rather by structural barriers to integrating digital assets into regulated balance sheets. Institutions need more than just a fully functional wallet. Legal clarity, specific accounting practices, and robust governance structures are fundamental requirements.
The lack of a universally accepted definition of "custody" or a clear compliance path makes the risk of "balance sheet contamination" too high to ignore for any regulated entity. Banks and asset management companies are awaiting a clear signal that they can deploy capital without incurring existential legal risks, thus the large-scale adoption of digital assets is in a state of "wait and see."
The era of policy debates is finally drawing to a close, replaced by the practical implementation phase. The GENIUS Act, passed in May 2025, played a decisive role, establishing a national regulatory framework for stablecoin payments and ultimately providing a legal basis for balance sheet allocation.
The bill transformed digital assets from speculative novelties into recognized financial instruments by providing a federal licensing process and requiring 100% reserve backing by government-approved instruments. In August 2025, the U.S. Securities and Exchange Commission (SEC) concluded its long-running investigation into the Aave protocol without taking any enforcement action, further solidifying this transformation and effectively removing the regulatory "barriers" that had previously hindered institutional participation in decentralized finance (DeFi).
Now, the focus has shifted to the regulatory authorities' rulebooks. In February 2026, the U.S. Office of the Comptroller of the Currency (OCC) released a comprehensive proposed rule aimed at implementing the GENIUS Act, establishing a framework for Approved Payment Stablecoin Issuers (PPSIs). This move is significant because it provides detailed prudential standards (covering reserve composition, capital adequacy, and operational resilience), enabling Chief Risk Officers or Asset and Liability Management Committees (ALCOs) to approve digital asset strategies. The passage of the GENIUS Act has already incorporated blockchain regulation into the governance structures of the world's largest financial institutions.
However, to understand why this shift is happening now, it's necessary to recognize the "balance sheet inertia" that governs institutional behavior. Banks operate under stringent regulatory capital adequacy ratios; every dollar of risk-weighted assets must be backed by capital. If a bank's deposits flow into stablecoins, it must proportionally reduce lending to maintain these capital adequacies. This is a painful and costly contraction with ripple effects across the entire economy. This also explains why the adoption of stablecoins has been so slow. Full technological integration takes six to eighteen months, while governance cycles such as audits and board reviews take even longer.
The current environment presents a trend of "compound acceleration." With pioneers like JPMorgan Chase, Citigroup, and U.S. Bancorp launching stablecoin settlement programs, they are sending a clear signal to the market: the risk of being a first mover has been replaced by the risk of falling behind. We are in a phase of competitive pressure, and the participation of interbank banks has reduced the adoption risk across the industry. As these institutional constraints are relaxed, the path for liquidity to migrate from traditional systems to new programmable containers in the digital age is becoming clearer. This shift forces us to rethink the nature of money and shift our focus to the "containers" that will carry the next generation of global liquidity.
Where liquidity is
To understand the scale of the current transformation, we must first recognize the historical stability of financial “containers.” In every monetary era, liquidity must ultimately find a home. This is merely the function of technological storage methods, but it satisfies the global long-term demand for safe, short-term assets. For centuries, this home has been significantly concentrated in a few distinct structures: commercial bank balance sheets, central bank reserves, and money market funds. These traditional “containers” all act as intermediaries, capturing the economic value generated by the capital they hold.
The mathematical principle of "reaping the benefits without sowing" suggests that financial intermediaries exist to address the problem of capital mismatch. Specifically, the cash flow generated by global operations exceeds its short-term production needs, creating a long-term liquidity surplus that seeks safety. Traditionally, commercial banks convert this surplus into deposits, invest in long-term assets such as mortgages or corporate loans, and earn substantial interest rate spreads. Net interest margin (NIM) is a guiding light for commercial and retail bankers. Bank shareholders are the primary beneficiaries of this spread, while depositors receive a portion of the gains in exchange for liquidity and government guarantees.
Digital asset infrastructure has introduced a new type of "container" that directly competes for funding. These economic restructurings go far beyond simple technological upgrades. The fundamental shift in who reaps the rewards occurs when liquidity moves from banks to stablecoin reserves or tokenized government bond funds. For example, in stablecoin reserves, issuers (such as Circle or Tether) earn the spread between the underlying government bond yield and the interest paid to token holders, which is typically zero. This effectively transfers the economic benefits of "holding costs" from commercial banks to digital asset issuers.
Furthermore, these new containers offer transparency and programmability unmatched by traditional structures. Tokenized Treasury bonds, with a market capitalization exceeding $11.5 billion in March 2026, represent a structural evolution where the returns on the underlying assets accrue directly to the holders. This creates strong economic incentives.
Savvy financial executives no longer need to choose between the safety of banks and the returns of funds; they can hold tokenized funds that serve as both yield assets and high-speed settlement mediums. By redefining the ownership of liquidity, digital infrastructure is not merely building new tracks; it is creating a competitive market for the balance sheets that underpin the global economy.
Stablecoins drive migration
The blockchain-based dollar represents the first large-scale migration of liquidity to the balance sheets of these new financial assets, marking the transformation of digital currencies from a novelty into a core component of the financial system. The stablecoin market is nearing its all-time high, reaching $311 billion, with an annual growth rate of 50% to 70%. This growth completely refutes the claim that stablecoins are a speculative phenomenon. We are witnessing a real "transfer" of the dollar from traditional banking infrastructure to programmable settlement systems.
The most obvious economic impact of this migration is in deposit substitution. When a company or institutional investor transfers $100 billion from traditional bank deposits to stablecoin containers like USDC, the profitability of the banking system suffers a huge loss. Under the traditional model, this $100 billion could support bank lending, generating approximately $3 billion in net interest margin annually. However, when this money is transferred to the reserves of stablecoin issuers, these gains are stripped away. Banks lose deposits and the ability to lend, while the interest rate spread is captured by the stablecoin issuers.
This shift has profound implications for credit creation and financial stability.
A study published by Federal Reserve economists in late 2025 highlights that high adoption rates of stablecoins could lead to a $65 billion to $1.26 trillion decrease in bank deposits. This reduction has the potential to reshape the way credit is supplied in the economy. Regional banks that heavily rely on stablecoin deposit bases for local lending are most vulnerable to this shift. As retail and corporate depositors seek the advantages of 24/7 settlement with stablecoins, the appeal of traditional “floating funds” (i.e., earning interest spreads on payments in transit) that banks have long relied on is rapidly declining.
In response, the banking industry has shifted from skepticism to engagement.
JPMorgan Chase, Citigroup, and U.S. Bancorp announced plans to launch their respective stablecoin settlement infrastructures by the end of 2025 and early 2026. This isn't intended to "disrupt" their own businesses, but rather to maintain their crucial position as liquidity containers. These institutions recognize that future economic conditions favor issuers of digital containers. By becoming issuers, banks hope to capture reserve returns that would otherwise flow to new entrants. Of course, this first large-scale transfer of funds is just the beginning. As these new liquidity containers stabilize, the focus of competition is shifting to the more complex areas of collateral and leverage—the very cornerstone of global finance.
Programmable collateral
If the transfer of cash via stablecoins represents the first wave of this transformation, then the migration of collateral represents a more fundamental restructuring of the core leverage mechanism of the financial system. Modern financial markets are essentially a vast network of collateral. The U.S. repurchase agreement market (responsible for lending securities) alone sees daily trading volumes of $2 trillion to $4 trillion. However, this critical infrastructure remains constrained by the traditional "discrete settlement windows" of banks.
Under the current circumstances, collateral can only be transferred during bank business hours, and decentralized custody means that securities held by one bank cannot be immediately used to meet the margin requirements of another bank. This friction results in capital being locked up, unable to be used effectively, and unable to cope with real-time market fluctuations.
Tokenization transforms collateral from static, geographically restricted assets into programmable, highly liquid instruments.
By converting U.S. Treasury bonds and other real-world assets (RWAs) into on-chain tokens, institutions can transfer these assets and perform atomic settlements around the clock. This market is growing rapidly; as of April 1, 2026, the tokenized RWA market was worth approximately $28 billion, with tokenized Treasury bonds accounting for about half. This growth is primarily driven by institutional-grade products such as BlackRock's BUIDL and Franklin Templeton's BENJI, which allow holders to earn 5% yield from the underlying government bonds while the tokens themselves remain liquid and deployable.
The real innovation lies in "collateral efficiency".
In traditional repurchase agreements, investors may have to accept significant impairment or face delays of several days before unlocking securities and transferring them between custodians. In contrast, tokenized collateral offers "composability." Institutional investors can hold $100 million worth of BUIDL tokens, deposit them at a 95% loan-to-value (LTV) ratio into protocols like Aave, and immediately borrow stablecoins to capitalize on investment opportunities. The collateral is always present in a digital environment. Instead, it is continuously revalued through automated price information, and any margin calls are processed via instant automated liquidation.
This shift moves the “economics of the trader” to the “economics of the agreement”.
In the traditional repo market, large transaction banks act as intermediaries, earning a spread of approximately 50 basis points by borrowing at one rate and lending at another. In the tokenized ecosystem, however, collateral holders can self-match in DeFi lending markets, using software as an intermediary to capture the entire spread. While large-scale adoption is still years away, this shift could potentially move billions of dollars in annual revenue away from traditional dealers and into the hands of protocol governance and asset holders.
To gain a deeper understanding of the scale of the shift from cash to collateral, we must examine the institutional mechanisms that have historically driven these shifts. For decades, the global financial system has operated on a "T+X" settlement logic, where "T" represents the transaction and "X" represents the several days of delay caused by manual reconciliation and interbank clearing cycles. In traditional repurchase markets, this delay amounts to an invisible tax on capital.
When dealer banks facilitate repurchase agreements, collateral must be physically transferred between custodian institutions, which typically requires human intervention to verify the discount and ownership of the collateral. This creates a "liquidity moat" around the largest dealer banks, whose power stems not only from their large balance sheets but also from their control over these proprietary settlement systems.
The mechanism of tokenized collateral dismantles this moat through atomic settlement. This transition unfolds step-by-step within the institutional process as follows:
Tokenization: Transferring high-quality liquid assets (HQLA), such as U.S. Treasury bonds, to digital wrappers (such as BlackRock's BUIDL), making them tokens that are mobile 24/7.
Instant Funding: No need to wait for a wire transfer on Monday morning; the finance team can submit these tokenized collateral to the lending protocol or prime broker by 10 p.m. on Sunday.
Real-time valuation: Smart contracts utilize decentralized oracles to perform market valuations of collateral every few seconds (instead of once a day), which can significantly improve the loan-to-value ratio (LTV) because continuous monitoring can reduce the risk of valuation “flash crashes”.
Preservation of yield: Crucially, investors continue to receive the underlying government bond yield while their assets are used as collateral, thus creating the opportunity of "yields on top of yields," which is cumbersome to operate in traditional systems.
For corporate finance teams or asset managers, this shift represents a fundamental revaluation of their idle assets.
In the traditional model, CFOs manage a small, low-interest cash "buffer" to ensure they can handle unexpected margin calls or operational needs. With tokenized collateral, this "buffer" can continue to be entirely invested in yield-generating government bonds, as holders know these assets can be liquidated in seconds rather than days. This eliminates the "liquidity discount" previously faced with long-term asset holdings.
The impact on the banking industry is equally profound.
Banks have long profited from the "floating rates" in the repo market and the intermediary spreads. This profit model will disappear as collateral becomes programmable and self-matching. This is why institutional "pipeline systems"—such as Anchorage's Atlas Network or JPMorgan Chase's internal tokenization initiatives—are crucial. They represent financial institutions attempting to build new information silos before the old system faces competition. The shift from cash to collateral signifies a move from a series of "discrete events" to "continuous flows" in the financial system, and institutions that fail to adjust their balance sheets to accommodate this new velocity will find their capital increasingly static (and therefore increasingly expensive).
On the surface, it may just appear to be an increase in settlement speed, but in reality, it represents a reallocation of capital deployment, valuation, and intermediary methods.
S-curve of adoption rate
The migration of institutional balance sheets is not instantaneous, but rather a gradual process of absorption that eventually accelerates. This is the reality of the "Web 2.5" era, where blockchain technology is integrated into existing financial architectures rather than replacing them. Currently, institutional adoption of blockchain technology is constrained by "balance sheet inertia," with regulatory capital requirements, risk committee approvals, and traditional technology systems posing significant obstacles. For example, banks cannot simply switch off assets. They must maintain strict Tier 1 capital adequacy ratios and ensure that any transfer of deposits to digital platforms does not lead to a costly contraction in their lending operations.
Despite these obstacles, the adoption of digital asset infrastructure is following a documented historical S-curve, similar to the decades-long rollout of credit cards and the internet.
Between 2015 and 2024, the market was in a period of "experimentation" and "regulatory turmoil," with growth constrained by uncertainty. Now, we have entered a period of "competitive pressure" (2025-2026), characterized by clearer regulations and more standardized infrastructure. In this phase, the "you're not the first, but you're not the last" mentality becomes a primary driver for institutional treasury executives. As more banks see peers participating in stablecoin settlements or tokenized government bond funds, risk perception will decline sharply.
The current market size lays the foundation for accelerated compound growth. Fireblocks secures over $5 trillion in digital asset transfers annually, and the institutional tokenized asset market is also growing rapidly. The underlying architecture of the new system is already production-ready. This infrastructure standardization allows banks to build upon mature systems without having to develop proprietary ones from scratch.
Looking ahead to 2027 and beyond, several policy levers could further accelerate this migration. If stablecoin issuers gain direct access to the Federal Reserve's master account, or if the GENIUS Act's interest rate restrictions on payment-type stablecoins are relaxed through coalition "rewards" mechanisms, the shift of deposits from traditional bank ledgers to digital containers could accelerate significantly.
The system is poised to create a feedback loop: more stablecoin liquidity will attract more decentralized finance (DeFi) applications (most likely permissioned applications), which in turn will attract more institutional capital, ultimately leading to a restructured financial landscape where the "battle for the track" will be settled, and all attention will be focused entirely on the strategic management of the balance sheet.
NIM winners
The transition from the infrastructure phase to the balance sheet phase marks a shift in the discussion of "digital assets" from the technological periphery to the core of the global macroeconomy. For years, the industry has believed that building better infrastructure would inevitably lead to a more complete system. Now we understand that infrastructure is merely an invitation.
Transformation only truly occurs when capital itself shifts. The “infrastructure war” has already been won by standardized, institutional-grade money payment centers, tokenized Treasury bonds, and federally regulated stablecoin frameworks. The new battle—one that will shape the financial landscape for the next decade—is the struggle for control of global liquidity and collateral balance sheets.
Looking ahead to 2027-2030, structural advantages will accrue to those companies capable of managing these new “digital containers” most effectively. As depositors increasingly value 24/7 settlement and the greater utility of stablecoin yields, we expect commercial banks’ net interest margins (NIMs) to continue narrowing. Large enterprises and institutional investors are likely to shift their primary savings and treasury management functions to DeFi and RWA markets, where protocol transparency minimizes intermediary spreads. This is not the end of traditional banking, but rather the end of the era of banks as static, unchallenged, cheap warehouses of capital.
In this new era, the winners will be "Web 2.5" hybrid enterprises, or institutions that realize they are no longer just lenders, but programmable liquidity managers. It is projected that by 2030, when the stablecoin market approaches $2 trillion, the lines between "cryptocurrency" and "finance" will essentially disappear.
The entire system will fully integrate track efficiency into balance sheet stability. In this restructured landscape, financial power will no longer belong to the companies with the most innovative technologies, but rather to those who control global liquidity and the ultimate container for collateral. The battlefield has been set, and for the first time, the economic landscape has become a contested arena.
Over the past decade, the development of cryptocurrencies has focused on building infrastructure that enables institutional participation. The next decade will determine where institutional balance sheets will ultimately reside.
That's all for today. See you in the next article.
