Balance Sheet Battlefield

Article Author: Sebastien Davies

Article Compilation: Block unicorn

Introduction

There is an extremism problem in the financial world. I have seen some extremists who firmly believe that blockchain will destroy all existing financial institutions. Meanwhile, the traditional finance camp equates Bitcoin with cryptocurrency, and vice versa. Unfortunately, both camps lack the patience to understand the nuances.

I do not agree with this binary thinking of either/or. As we have seen, the two are likely to merge rather than collide. Visa and Mastercard are actively expanding their partnerships in the blockchain payment space. Traditional financial services giant Stripe has also launched a blockchain platform specifically for processing payments. Our team writes articles almost every week discussing the trend of integration between these two financial realms.

In cryptocurrency commentary, I often see people treating blockchain itself as a unique selling point (USP) because it enables fast and low-cost transactions. Indeed, transferring funds via blockchain is cheaper. However, this alone is not the key factor driving the adoption of blockchain, as the costs of traditional fund transfer infrastructure have withstood decades of scrutiny.

Businesses will not switch banking partners overnight just because another bank offers a few basis points discount on transaction processing. Financial habits are deeply ingrained; companies need more than just cost savings; they need more confident reasons to change the way they transfer, hold, and invest funds.

What is at play here are quantifiable results. To get the public to change the way funds flow, they need to understand how to optimize the entire flow of funds. Therefore, the focus should be on how blockchain can seamlessly integrate with platforms, enabling users to easily hold, invest, and borrow funds.

In today’s guest column, Sebastien Davies, a partner at Primal Capital, discusses why the infrastructure of cryptocurrency has failed to achieve mass adoption and what could make that happen.

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The Illusion of Infrastructure

For most of the past decade, the global financial community has been highly focused on "rails." Discussions around digital assets have almost entirely centered on the mechanical throughput of blockchain, 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 against time to build pipelines, vaults, and gateways aimed at modernizing the flow of value.

During this period, the development of the cryptocurrency market has primarily focused on infrastructure construction, as participation is impossible without it. We have built enterprise-grade custody platforms, standardized exchange APIs, and on-chain compliance services to address five key gaps: custody, trading, execution, stablecoin utility, and regulatory reporting.

However, the financial industry is now facing a fundamental truth in financial history. Infrastructure is a necessary prerequisite for conducting activities, but balance sheets determine who can capture economic benefits. Simply having a faster or more transparent rail does not change the market's focus. Infrastructure addresses the mechanical issue of how institutions participate, but it does nothing for the more important question of who can capture value. In an era of booming infrastructure development, the answer to the latter remains firmly rooted in tradition.

Centralized market makers capture spreads, early holders gain appreciation, and validators earn transaction fees. This phase has failed to create new balance sheet structures that would change where deposits are held, nor has it fundamentally altered the structure of credit creation.

A common rebuttal to this argument is that "infrastructure" is the main driver of value because it lowers the barriers to entry, thereby achieving financial democratization and naturally transferring economic power to marginalized groups. Proponents of this view argue that technology itself, due to its open-source and permissionless nature, is the force for change. While this is an engaging narrative for the retail-dominated "crypto-native" world, it does not withstand the test of institutional reality.

In complex financial markets, cost efficiency is far less important than capital efficiency and risk-adjusted returns. An institution transfers a billion dollars not because transaction costs are lower, but because the balance sheet supporting that capital can provide higher returns or more efficient collateral utility. Infrastructure is a barrier to entry; the balance sheet is the strategic asset that determines the winners of interest rate spreads.

Financial history repeatedly proves that infrastructure is not the key to determining market power; balance sheets are. The rise of the Eurodollar market in the 1960s did not require new payment channels or financial technology; it simply required dollar deposits to be moved out of the U.S. banking system. Once those balance sheets shifted, a parallel dollar system emerged, vast and largely free from domestic regulation.

We are now entering a new phase of institutional balance sheet restructuring, which will begin in 2025, when the "battlefield" shifts from the protocol level to liquidity allocation. The first phase focused on building platforms; the next phase will focus on the movements of participants and their capital flows.

In 2024, a CFO evaluating where to hold cash could theoretically use mature custody infrastructure to hold USDC, but economically, traditional bank deposits are more advantageous because they offer FDIC insurance and competitive interest rates. The infrastructure is ready, but the balance sheets have not yet changed. As the regulatory environment shifts from abstract policy design to concrete implementation, this repositioning will become possible.

The next phase of cryptocurrency adoption will no longer be determined by infrastructure but by the direction of balance sheets.

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The Gateway to Implementation

For most of the past decade, institutional participation in digital assets has not been limited by a lack of imagination or technology but by structural barriers to integrating digital assets into regulated balance sheets. Institutions need more than just a fully functional wallet. Legal clarity, specific accounting treatments, and rigorous governance structures are basic requirements.

Due to the lack of a recognized definition of "custody" or a clear compliance pathway, the risk of "balance sheet contamination" is too high for any regulated entity to ignore. Banks and asset management firms are waiting for a clear signal that they can deploy capital without incurring existential legal risks, causing the process of mass adoption of digital assets to be in a state of "wait and see."

The era of policy debate is finally coming to an end, replaced by the phase of practical operations. The passage of the GENIUS Act 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 act transforms digital assets from speculative novelties into recognized financial instruments by providing a federal licensing process and requiring 100% reserves to be backed by government-approved instruments. In August 2025, the SEC concluded its long investigation into the Aave protocol without taking any enforcement action, further solidifying this shift and effectively eliminating the regulatory "barriers" that previously hindered institutional participation in decentralized finance (DeFi).

Now, the focus has shifted to the regulatory rulebook. In February 2026, the OCC released a comprehensive proposed rule aimed at implementing the GENIUS Act, establishing a framework for "Permitted Payment Stablecoin Issuers" (PPSI). This is significant because it provides refined prudential standards (covering reserve composition, capital adequacy, and operational resilience) that enable chief risk officers or asset-liability committees (ALCO) to approve digital asset strategies. The passage of the GENIUS Act has integrated blockchain regulation into the governance structures of the world's largest financial institutions.

However, to understand why this shift is happening now, one must recognize the "balance sheet inertia" that determines institutional behavior. Banks operate under strict regulatory capital adequacy constraints, where every dollar of risk-weighted assets must be backed by capital. If deposits flow out of banks into stablecoins, they must proportionately reduce loans to maintain those capital adequacy ratios. This is a painful and costly contraction that can have a ripple effect on the entire economy. This also explains why the adoption of stablecoins has been so slow. Full technical integration takes six to eighteen months, while governance cycles such as audits and board reviews take even longer to complete.

The current environment presents a "composite acceleration" trend. As pioneers like JPMorgan, Citibank, and US Bank begin to roll out stablecoin settlement plans, they send a clear signal to the market: the risk of missing the boat has been replaced by the risk of falling behind. We are in a phase of competitive pressure, where peer bank participation reduces the adoption risk for the entire industry. As these institutional constraints loosen, the path for liquidity to migrate from traditional systems to new programmable containers of the digital age also becomes clear. This shift forces us to rethink the nature of funds and shifts the focus to the "containers" that will support the next generation of global liquidity.

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Where Liquidity Resides

To understand the scale of the transformation currently underway, one must first recognize the historical stability of financial "containers." In every monetary era, liquidity must ultimately find a home. This is merely a function of how technology stores value, but it meets the long-term demand for safe short-term assets globally. For centuries, this home has been significantly concentrated in a few distinct structures: the balance sheets of commercial banks, central bank reserves, and money market funds. These traditional "containers" serve an intermediation role, capturing the economic value generated by the capital they hold.

The mathematical principle of "sitting back and enjoying the benefits" indicates that the existence of financial intermediaries is to solve the problem of fund mismatches. Specifically, the cash flows generated by the world exceed what is needed for short-term production purposes, leading to a long-term liquidity surplus that seeks safe harbor. Traditionally, commercial banks would convert this surplus into deposits, investing in long-term assets such as mortgages or corporate loans, and earning substantial interest spreads. Net interest margin (NIM) is the guiding light for commercial banks and retail bankers. Bank shareholders are the primary beneficiaries of the "spread," while depositors receive a portion of the returns in exchange for liquidity and government guarantees.

Digital asset infrastructure introduces a new type of "container" that directly competes for funds. These economic reconstructions are far more than mere technological upgrades. When liquidity shifts from banks to stablecoin reserve pools or tokenized treasury funds, the beneficiaries of the returns fundamentally change. For example, in a stablecoin reserve pool, the issuer (such as Circle or Tether) earns the spread between the underlying treasury yields and the interest paid to token holders, which is often zero. This effectively transfers the economic benefits of "holding costs" from commercial banks to digital asset issuers.

Moreover, these new containers offer transparency and programmability that traditional structures cannot match. The market capitalization of tokenized treasury funds exceeded $11.5 billion in March 2026, representing a structural evolution where the returns of the underlying assets go directly to the holders. This creates powerful economic incentives.

Savvy CFOs 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-generating assets and fast settlement mediums. By redefining the ownership of liquidity, digital infrastructure is not just building new rails; it is creating a competitive market for the balance sheets that support the global economy.

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Stablecoins Drive Migration

Blockchain dollars represent the first large-scale migration of liquidity to these new financial balance sheets, marking the transformation of digital currencies from novelties to core components of the financial system. The stablecoin market has approached historical highs, reaching $311 billion, with annual growth rates of 50% to 70%. This growth fundamentally negates the notion that stablecoins are a speculative phenomenon. We are witnessing a tangible "migration" of dollars from traditional banking infrastructure to programmable settlement systems.

The economic impact of this migration is most evident in deposit substitution. When a company or institutional investor moves $100 billion from traditional bank deposits to stablecoin containers like USDC, the profitability of the banking system will suffer significant losses. Under traditional models, this $100 billion could support bank lending, generating approximately $3 billion in net interest margin annually. However, when this capital shifts to the reserves of stablecoin issuers, those earnings are stripped away. Banks lose deposits, lose the ability to lend, and the interest spread is captured by stablecoin issuers.

This shift has profound implications for credit creation and financial stability.

A study released by Federal Reserve economists at the end of 2025 emphasized that the high adoption rate of stablecoins could lead to a reduction in bank deposits by $65 billion to $1.26 trillion. This reduction could reshape the way credit supply is provided in the economy. Regional banks, which heavily rely on stable deposit bases for local lending, are most susceptible to this shift. As retail and corporate depositors seek the advantages of stablecoin settlement around the clock, the appeal of traditional "floating funds" (i.e., earning spreads on payments in transit) that banks have long relied on is rapidly diminishing.

In response, the banking industry has shifted from skepticism to participation.

JPMorgan, Citibank, and US Bank have announced plans to launch their respective stablecoin settlement infrastructures by the end of 2025 and early 2026, not to "disrupt" their own businesses but to maintain their important position as liquidity containers. These institutions recognize that the future economic landscape favors issuers of digital containers. By becoming issuers themselves, banks hope to capture reserve earnings 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 more complex collateral and leverage areas, which are the cornerstones of global finance.

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Programmable Collateral

If transferring cash via stablecoins represents the first wave of this transformation, then the migration of collateral signifies a more fundamental restructuring of the core leverage mechanisms of the financial system. Modern financial markets are essentially a vast network of collateral. In the U.S. alone, the repo market (responsible for securities lending) has daily trading volumes of $2 trillion to $4 trillion. However, this critical infrastructure remains constrained by traditional banks' "discrete settlement windows."

Under current conditions, collateral can only be transferred during bank operating hours, and the fragmented custody means that securities held by one bank cannot be immediately used to meet another bank's margin requirements. This friction locks up capital, preventing it from being effectively utilized and unable to respond to real-time market fluctuations.

Tokenization transforms collateral from static, geographically constrained assets into programmable, highly liquid tools.

By converting U.S. treasuries and other real-world assets (RWAs) into on-chain tokens, institutions can transfer these assets around the clock and settle atomically. The market is growing rapidly; as of April 1, 2026, the tokenized RWA market has reached approximately $28 billion, with tokenized treasuries 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% returns from the underlying government bonds while the tokens themselves remain liquid and deployable.

The real innovation lies in "collateral efficiency."

In traditional repo transactions, investors may need to accept significant markdowns or face delays of several days to unlock securities and transfer them between custodians. In contrast, tokenized collateral possesses "composability." Institutional investors can hold $100 million worth of BUIDL tokens, deposit them with a 95% loan-to-value (LTV) ratio into protocols like Aave, and immediately borrow stablecoins to seize investment opportunities. Collateral always exists in the digital environment. Instead, it is continuously revalued through automated price information, and any additional margin requirements are handled through instant automated liquidations.

This shift turns the "economics of traders" into the "economics of protocols."

In the traditional repo market, large trading banks act as intermediaries, borrowing at one rate and lending at another to earn about a 50 basis point spread. In the tokenized ecosystem, collateral holders can self-match in DeFi lending markets, using software as intermediaries to capture the entire spread. While it may take years for widespread application, this shift could transfer billions of dollars in annual revenue from traditional traders to protocol governance and asset holders.

To understand the scale of the shift from cash to collateral, we must examine the institutional mechanisms that have historically dominated these transitions. For decades, the global financial system has operated on a "T+X" settlement logic, where "T" represents the transaction and "X" represents the multi-day lag caused by manual reconciliation and interbank clearing cycles. In the traditional repo market, this delay effectively imposes an invisible tax on capital.

When a dealer bank facilitates a repo transaction, collateral must undergo physical transfer between custodians, often requiring manual intervention to verify discounts and ownership of the collateral. This creates a "liquidity moat" around the largest dealer banks, whose power derives not only from their robust balance sheets but also from their control over these proprietary settlement systems.

The mechanism of tokenized collateral dismantles this moat through atomic settlement. In the gradual steps of institutional processes, the transformation unfolds as follows:

• Tokenization: High-quality liquid assets (HQLA), such as U.S. treasuries, are transferred to digital wrappers (e.g., BlackRock's BUIDL), making them continuously movable tokens.

• Instant Settlement: Without waiting for Monday morning wire transfers, finance teams can submit these tokenized collaterals to lending protocols or prime brokers on Sunday night at 10 PM.

• Real-Time Valuation: Smart contracts utilize decentralized oracles to market-value collateral every few seconds (rather than once a day), significantly increasing loan-to-value (LTV) ratios, as continuous monitoring reduces the risk of valuation "flash crash gaps."

• Yield Preservation: Crucially, investors continue to earn the underlying treasury yields while the assets are used as collateral, creating opportunities for "yield stacking," which is cumbersome to operate in traditional systems.

For corporate finance teams or asset managers, this transformation fundamentally revalues their idle assets.

In traditional models, CFOs manage a low-interest cash "buffer fund" to ensure they can meet unexpected margin calls or operational needs. With tokenized collateral, this "buffer fund" can remain fully invested in yield-generating treasuries, as holders know these assets can be converted to liquidity in seconds rather than days. This eliminates the "liquidity discount" that long-term asset holders previously faced.

The impact on the banking industry is equally profound.

Banks have long profited from the "floating rates" and intermediation spreads of the repo market. As collateral becomes programmable and self-matching, this profit model will cease to exist. This is why the emergence of institutional "pipeline systems" (such as Anchorage's Atlas network or JPMorgan's internal tokenization initiatives) is crucial. They represent financial institutions attempting to build new information silos before facing competition from the old system. The shift from cash to collateral marks a transition of the financial system from a series of "discrete events" to "continuous flows," and those institutions that fail to adjust their balance sheets to accommodate this new speed will find their capital increasingly static (and thus more expensive).

On the surface, it seems like merely an increase in settlement speed, but in reality, it is a reconfiguration of how capital is deployed, valued, and intermediated.

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The S-Curve of Adoption

The migration of institutional balance sheets is not an overnight process but a gradual absorption that ultimately 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 barriers. For example, banks cannot simply flip a switch to transfer assets. They must maintain strict Tier 1 capital adequacy ratios and ensure that any transfer of deposits to digital platforms does not lead to costly contractions in their lending business.

Despite these barriers, the adoption of digital asset infrastructure is following a well-documented historical S-curve, similar to the decades-long promotion of credit cards and the internet.

From 2015 to 2024, the market was in a "testing phase" and "regulatory confusion phase," with growth constrained by uncertainty. Now, we have entered the "competitive pressure phase" (2025 - 2026), characterized by clearer regulations and more standardized infrastructure. In this phase, "you are not the first, but you are not the last" becomes the primary motivation for institutional CFOs. As more banks see peers participating in stablecoin settlements or tokenized treasury funds, the perceived risk of adoption will sharply decline.

The current market size lays the foundation for accelerated compounding growth. Fireblocks secures over $5 trillion in digital asset transfers annually, and the market for institutional tokenized assets is rapidly growing, with the "underlying architecture" of the new system reaching production-ready status. This standardization of infrastructure allows banks to build on mature systems without redeveloping proprietary systems.

Looking ahead to 2027 and beyond, there are still several "policy levers" that could further accelerate this migration. If stablecoin issuers could access the Federal Reserve's master accounts directly, or if interest restrictions on payment stablecoins under the GENIUS Act were relaxed through alliance "reward" mechanisms, the speed of deposits migrating from traditional bank books to digital containers could significantly increase.

The system is poised to form a feedback loop: more stablecoin liquidity will attract more decentralized finance (DeFi) applications (likely permissioned applications), which in turn will attract more institutional capital, ultimately reshaping the financial landscape, where the "battle for rails" will settle, and all focus will be entirely on the strategic management of balance sheets.

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Winners of NIM

The transition from the infrastructure phase to the balance sheet phase marks the discussion of "digital assets" moving from the technical periphery to the core of the global macroeconomy. For years, the industry has believed that building better infrastructure would inevitably lead to more sophisticated systems. Now we understand that infrastructure is merely an invitation.

Transformation only truly occurs when capital itself shifts. The "battle for infrastructure" has effectively been won by standardized, institutional-grade currency payment centers, tokenized treasury funds, and federally regulated stablecoin frameworks. The new battle (which will determine the financial landscape for the next decade) is for the balance sheets that control global liquidity and collateral.

Looking ahead to 2027 - 2030, structural advantages will accrue to those enterprises that can most effectively manage these new types of "digital containers." As depositors increasingly value the advantages of 24/7 settlement and the higher utility of stablecoin yields, we expect the net interest margin (NIM) of commercial banks to continue to narrow. Large corporations and institutional investors may shift their primary savings and cash management functions to DeFi and RWA markets, where the transparency of protocols minimizes the spreads of intermediaries. This does not signify the end of traditional banks but rather the end of an era where banks serve as static, unchallenged repositories of cheap capital.

In this new era, the winners will be "Web 2.5" hybrid enterprises, or those institutions that realize they are no longer merely lenders but programmable liquidity managers. By 2030, as the stablecoin market approaches $2 trillion, the lines between "cryptocurrency" and "finance" will largely disappear.

The entire system will fully integrate the efficiency of rails into the stability of balance sheets. In this restructured landscape, financial power will no longer belong to the enterprises with the most innovative technologies but to those that control the ultimate containers for global liquidity and collateral. The battlefield has been set, and the economic landscape has become a contestable object for the first time.

Over the past decade, the focus of cryptocurrency development has been on building infrastructure to enable institutional participation. The next decade will determine where institutional balance sheets ultimately reside.

This concludes today’s content; see you in the next article.