Stablecoins for community and sponsor banks: what to offer

Community banks can start with USDC settlement, custody, issuer reserves and tokenized deposits under 2025 guidance. Issuing a payment stablecoin waits on GENIUS Act rules that aren't final yet.

Vantage Bank and Custodia Bank issued Avit, a tokenized bank deposit on a permissionless blockchain, in April 2025. In May 2025 the logistics firm DX Xpress, a Vantage customer, used it to send dollars between Mexico and the US in seconds, with the aim of paying drivers within an hour of a finished route (per the banks' announcement).

Community banks can offer stablecoin products safely by starting where Vantage did, with products that use powers a bank holds today: USDC settlement, custody, holding deposits for stablecoin issuers and tokenized deposits. The OCC, FDIC and Federal Reserve confirmed in 2025 that banks can run these without asking first.

Issuing a payment stablecoin through a subsidiary is the slower path, because the GENIUS Act rules for it are still proposals. Sponsor banks such as Cross River and Lead Bank settle card activity with Visa in USDC, and the fintech programs they sponsor can pay customers a return on USDC balances through a stablecoin vault such as Upshift.

Stablecoin products a community or sponsor bank can offer

Status as of 7 October 2026, from the regulators' letters and the companies' announcements linked in each section. General information, not legal advice.

Banks no longer need prior approval for most stablecoin work

The OCC's Interpretive Letter 1183 of 7 March 2025 rescinded the 2021 letter that made national banks get a supervisory non-objection first. It confirms that a national bank may provide crypto custody, hold deposits that serve as stablecoin reserves and run certain stablecoin payment activities.

The FDIC followed on 28 March 2025 with FIL-7-2025, which covers state nonmember banks. They may engage in permissible crypto activities, including holding stablecoin reserves, without prior FDIC approval, as long as they manage the risks.

On 24 April 2025 the Federal Reserve withdrew SR 22-6 and SR 23-8, the letters that had required state member banks to notify it or get a non-objection before dollar-token work. The three agencies now line up on this point. IL 1183 says the OCC will examine these activities as part of its ongoing supervisory process.

A community bank can reach these products through a partner. A core banking vendor, a custody provider or a sponsor bank runs the wallets and the chain connections, and the community bank keeps the customer, the deposit and the compliance file.

Tokenized deposits stay deposits

The GENIUS Act's definition of a payment stablecoin, in section 2(22)(B)(ii), excludes "a deposit ... including a deposit recorded using distributed ledger technology". A bank that tokenizes its deposits doesn't need a stablecoin licence, and the GENIUS Act's bar on issuer interest doesn't apply to them; ordinary deposit rules do. The FDIC's April 2026 proposal adds that deposit insurance "does not depend upon the technology or recordkeeping used to record" a bank's deposit liabilities. Tokenized deposits vs stablecoins compares the two instruments line by line.

A bank issuing one needs the following, and a partner can carry most of it:

1. A legal read that the token is a deposit under the bank's charter and state law, plus the account terms for holders.
2. A ledger: a permissioned chain, or a public one such as the permissionless network Avit uses or Base (JPMD, live for JPMorgan's institutional clients since 12 November 2025).
3. An allow-list of wallets the bank has onboarded, with sanctions screening on every transfer.
4. A core banking link that books the token and the ledger balance as one liability around the clock.
5. Somewhere to send it. A token that only moves between one bank's own customers does little, which is why Hazel lets Avit leave the member banks: outside the network it becomes a Custodia-issued stablecoin backed 1:1 by reserves, without FDIC cover.

Shared networks lower the cost for a small bank. On 25 August 2026, 39 state banker associations announced the BankChain Alliance, an industry-owned network for tokenized deposits, stablecoins and settlement, targeting a 2027 launch and still choosing a technology partner.

Issuing a payment stablecoin runs through a subsidiary and a rulebook still in draft

A bank can't issue a payment stablecoin itself. The GENIUS Act was signed on 18 July 2025. Section 2(23) limits permitted issuers to a subsidiary of an insured bank approved under section 5, a federal qualified issuer or a state qualified issuer. A state issuer with more than $10 billion of coins outstanding has to move to federal oversight.

The FDIC proposed its application process for subsidiaries of the banks it supervises on 19 December 2025 and the operating standards on 10 April 2026. The OCC proposed its rules on 2 March 2026, and Comptroller Gould said in August that it aims to have a final rule out by November.

The Federal Reserve published its two proposals on 29 September 2026. Treasury issued an interim final rule on state certification the next day, according to a Willkie Farr summary of 5 October 2026. The Act takes effect on 18 January 2027, or 120 days after the regulators' final rules if that comes first.

Under section 4(a)(11) the coin can't pay holders "any form of interest or yield", and the FDIC's proposal says reserve deposits "would not be insured to payment stablecoin holders on a pass-through basis". The reserve income stays with the issuer, and holders need a separate product to earn. How the GENIUS and CLARITY Acts reshape stablecoin yield covers the yield debate, and where stablecoin issuers keep their reserves shows which assets a reserve can hold.

Sponsor banks hold the dollar side of most fintech stablecoin flows

Visa launched USDC settlement in the US on 16 December 2025, with Cross River and Lead Bank as the first banks settling with it in USDC on Solana.

Visa put its stablecoin settlement volume at a $3.5 billion annualised run rate on 30 November 2025. Cross River launched the capability with the card issuing platform Highnote, settling card activity seven days a week.

Lead Bank is the banking partner that lets Bridge's stablecoin-linked Visa cards settle onchain. Those cards ran in 18 countries in March 2026, with a target of more than 100 by the end of the year (PYMNTS).

For a sponsor bank the stablecoin opportunity is mostly fee and deposit business on its own books: settlement accounts, on-ramp and off-ramp accounts, FBO accounts and reserve deposits for issuers. The customers' USDC sits in wallets the fintech or its custodian runs. Dollars in an FBO account and USDC in a wallet are two separate balances with separate rules, covered in FBO accounts and stablecoin yield.

Community bankers' main worry is deposit flight. The American Bankers Association has cited an April 2025 estimate from the Treasury Borrowing Advisory Committee that $6.6 trillion of transaction deposits could in theory move to stablecoins.

Writing in Fortune on 12 September 2026, Coinbase's John D'Agostino and Regions Bank's Chris Kennedy pointed to two studies. CRA International and the Council of Economic Advisers found no statistically significant link between stablecoin growth and community bank deposit outflows. They also noted that deposits at community banks rose about 26%, or $482 billion, between June 2019 and March 2026.

Customer USDC in a sponsored program can earn in a stablecoin vault

A fintech program that holds customer USDC has one pool of balances, and the program decides who earns on it. It can keep the yield, give each customer vault shares for their own balance, or pass the yield through minus a fee it sets. Upshift supplies the stablecoin vault for that pool.

A program starts in a Cash vault that holds 24/7 tokenized money market funds next to a USDC buffer, at an indicative 3-4% a year before fees on Upshift's yield options page (7 October 2026).

Core (indicative 5-7%) and Enhanced (8%+) vaults sit on the same integration for later, carrying lending and strategy risk that a T-bill fund doesn't. No band's return is guaranteed.

A vault can be limited to allow-listed wallets or a single depositor, or opened to anyone. Most Upshift vaults have a 72-hour withdrawal period, with instant exit up to the vault's USDC buffer for a fee of about 0.2%. Eligibility rules for the funds a vault holds still apply to the people who end up holding its shares; that's a question for the program's counsel.

The bank's part stays on the dollar side. In a typical setup the program holds the vault shares and redeems to USDC before cashing out through its sponsor bank. The bank's exposure is the program diligence it runs today. The contracts have had 11 smart contract audits by 6 independent firms, and the share price and holdings are visible onchain. Upshift has reached $550M+ in peak deposits across 50+ vaults on 30+ chains for 66,000+ users. Partners integrate through the SDK (npm package @augustdigital/sdk), the API or the Upshift app, and a new vault takes a few days to 2 weeks to launch. How neobanks and fintechs offer stablecoin yield and stablecoin yield without DeFi go further into the program design.

Risks

• Vault risk: smart contract, oracle and liquidity risk, and returns that move with markets.
• No deposit insurance on a stablecoin, a vault share or, under the FDIC proposal, the reserves behind a coin.
• Rules still moving: OCC, FDIC and Fed GENIUS rules are proposals as of 7 October 2026, and the CLARITY Act failed a Senate cloture vote on 15 September 2026.
• Partner risk at the bank: wallet providers, custodians and fintech programs all sit inside the bank's third-party oversight.

Always make sure to do your own research and be aware of the above and any other risks before depositing.

Fintech programs with customer USDC balances can see how Upshift works for neobanks and fintech apps.

Frequently asked questions

How can community banks offer stablecoin products safely?

Start with products the 2025 letters cover: USDC settlement through a card network or core vendor, custody, reserve deposits for issuers and tokenized deposits for business customers. Vantage Bank's first cross-border use of Avit was one business customer, DX Xpress, moving dollars between Mexico and the US.

What is the stablecoin opportunity for sponsor banks?

Settlement, ramp, FBO and issuer reserve accounts for fintechs that move money in USDC, plus card settlement with networks such as Visa. Lead Bank and Cross River were the first two US banks settling with Visa in USDC, in December 2025.

What does it take for a bank or exchange to issue a tokenized deposit?

Only a bank can issue one, because the token is a deposit liability. It needs a legal read under its charter, a ledger, an allow-list of onboarded wallets, a core banking link and a network to send the token on. An exchange can list or accept a bank's tokenized deposit, or issue a payment stablecoin through a licensed partner.

Can a bank pay interest on a tokenized deposit?

Yes. A tokenized deposit is outside the GENIUS Act's stablecoin definition, and ordinary deposit rules apply to the rate. A payment stablecoin from a bank subsidiary can't pay holders interest under section 4(a)(11).

Are stablecoin reserves held at a bank FDIC insured for coin holders?

Not on a pass-through basis under the FDIC's April 2026 proposal. The reserve deposit is the issuer's account, insured to the issuer up to the standard limit.

Can a community bank issue its own stablecoin?

Through an approved subsidiary once the GENIUS rules are final, or by joining a shared network such as Hazel, where Custodia issues the stablecoin version of the token for every member bank. The OCC aims to finish its rule in November 2026.

Keep reading

• Tokenized deposits vs stablecoins. Which one pays interest, and why.
• Stablecoin regulation. The GENIUS Act, MiCA and the rules around them.
• BaaS providers. The bank and middleware layer under fintech programs.
• Nostro vostro accounts vs stablecoin settlement. What changes for correspondent banking.
• Stablecoin treasury yield for companies. Business balances in USDC.