The plumbing of modern banking is a monument to complexity. Over decades, layer upon layer of software has been piled onto the humble deposit account. Keeping it all running has become a multi-billion-dollar industry. Now blockchain technology threatens to unravel the bundle.

America's new GENIUS Act allows decentralized applications (dApps) to hold stablecoins on behalf of users. In practice, that means retail customers could soon park their cash directly on-chain and spend it within an expanding ecosystem of services. If every dApp can act like a bank, what becomes of the high-street lender, weighed down by creaking systems, high fees and inflexible packages?

DeFi versus the Deposit Machine

Banking has long thrived on bundling. Open an account and you get a full menu: deposits, loans, cards, custody, payments, wealth management, and more. Customers rarely need everything on the plate, but the price is set as though they did. Service delivery, moreover, proceeds on the bank's timetable, not the client's.

Crypto strips away the frills. It provides what every customer actually values, safekeeping money and moving it around, with the added bonus of programmability. Digital cash can be tailored into payroll streams, micro-loans or subscription services at the speed of software updates.

Such freedoms, once fringe, now have Washington's blessing. By granting stablecoins legal standing, lawmakers have turned crypto from a curiosity into a competitor. That spells trouble for institutions that rely on cheap deposit funding and struggle under the weight of dated IT and compliance. To many consumers, decentralized wallets may soon resemble better bank accounts.

New building blocks

A new crop of firms is assembling the toolkit. Slash lets small businesses open a dollar account without the hassle of forming an LLC, sidestepping both costs and closure risks. Fireblocks operates a token-processing engine that mints and reconciles stablecoins across more than 80 blockchains, already securing trillions for ABN AMRO, BNP Paribas and BNY Mellon. Anchorage Digital, the first chartered digital-asset bank, provides custody for heavyweights such as Franklin Templeton, settling trades instantly instead of over two days. Safe, a wallet infrastructure provider, offers software that allows dApps to adopt multi-signature logins and payroll streaming, managing some $100bn in treasuries.

Taken together, such services point towards a new form of decentralized bank: not a monolith, but a re-bundling of modular tools that mimic, and in places surpass, the traditional model.

The economics of disruption

Promise, however, is not profit. Fintech challengers like Monzo and Revolut have won plaudits for slick apps yet struggled to capture deposits, the raw material of lending. Scale, and with it margins, has eluded them.

Crypto's obstacles look equally forbidding. Circle, issuer of USDC, warned in its IPO filing that competition is "difficult and intensifying," with profitability hostage to interest-rate swings. Central-bank digital currencies, should they arrive, would all but smother stablecoin demand. Even without them, costs are formidable: Circle's operating expenses in 2024 reached $480m, with a further $1bn swallowed by distribution and transaction costs.

Nor do incumbents intend to cede ground. PayPal, the archetypal fintech, has begun luring deposits with 3.7% yields on stablecoin balances--barely below the Federal Reserve's rate. With margins so thin, stablecoins may have to serve as loss leaders, paving the way for more lucrative services later.

History rhymes

The script is familiar. The internet unbundled newspapers into blogs and search engines. Fibre optics prised apart cable bundles, giving rise to streaming platforms. MP3s dismantled albums into individual songs. Web browsers broke the grip of AOL and CompuServe.

Now banking faces the same fate. Traditional finance is already adopting blockchains as payment rails; crypto firms are inching into deposit-taking. Consumers may yet decide their money is better left in apps they control, with interest accruing to the service providers that aggregate their balances.

The take away

The contest between DeFi and TradFi will turn on two questions: whether blockchain can move money faster, and whether stablecoins can hold deposits safely under a recognised regime. If both conditions are met, today's banking giants could find themselves displaced by a system with radically different economics--lighter, more modular, and less forgiving to incumbents.

The old deposit machine has kept banks humming for centuries. But as money becomes software, the code may yet rewrite the model.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.