Balance Sheet: The Next Phase of the Liquidity Battlefield in Cryptocurrency

Written by: Sebastien Davies, Partner at Primal Capital

Compiled by: Luffy, Foresight News

Over the past decade, global finance has been obsessed with building “rails” such as payments and trading infrastructure. Discussions around digital assets have almost entirely focused on: blockchain throughput, the cryptographic security of decentralized applications, and the theoretical elegance of smart contract logic. This is the infrastructure era—an age of frantic “container” construction. From 2020 to 2024, the industry went on a rampage building pipelines, vaults, and gateways, trying to modernize how value moves.

During this period, crypto market growth was intensely focused on infrastructure, because without it, institutional participation was simply impossible. We built an enterprise-grade custody platform, standardized exchange APIs, and on-chain compliance services—addressing five core gaps: custody, trading, execution, stablecoin utility, and regulatory reporting.

But the industry is now facing a fundamental truth of financial history: infrastructure is a necessary condition for financial activity, but the balance sheet determines who captures economic value.

Having faster, more transparent rails by itself does not change where the market’s gravitational center lies. Infrastructure solves the technical problem of “how institutions participate,” yet it overlooks a more critical question: who captures value.

In the age of re-building infrastructure, value allocation still followed the traditional pattern: centralized market makers earned the spread, early holders enjoyed appreciation, and validators received transaction fees. In this stage, no new balance-sheet structure was created—so the location of deposited funds didn’t change, nor did the structure of credit creation fundamentally change.

A common rebuttal is: “Rails” are the core value driver, because they lower entry barriers, realize financial democratization, and naturally shift economic power toward the edges. Supporters argue that open-source, permissionless technology itself is a force for change. This makes for an engaging narrative in a retail-led, crypto-native world, but it can’t withstand institutional reality.

In mature financial markets, institutions care more about capital efficiency and risk-adjusted returns than cost efficiency. An institution won’t move billions of dollars just because fees are lower; it moves capital because the balance sheet where that capital sits can deliver better returns or more efficient collateral utility.

Infrastructure merely makes entry possible; it’s the balance sheet that is the strategic asset that determines who wins the spread.

Financial history repeatedly proves this: infrastructure is not the key to market power—balance sheets are. The rise of the Eurodollar markets in the 1960s did not require new payment rails or financial technology; it only required dollar deposits flowing out of the U.S. banking system. Once those balance sheets migrated, a parallel dollar system emerged—massive in scale and largely unconstrained by U.S. domestic regulation.

We are now entering a brand-new phase beginning in 2025: a period of institutional balance sheet reconstruction. The battlefield has moved from the protocol layer to the liquidity allocation layer. The previous phase focused on building platforms; the next phase will focus on participants’ movements and the flow of capital.

In 2024, when a treasurer chose where to hold cash, it was already technically possible to hold USDC using mature custody infrastructure—but economically, traditional bank deposits with FDIC insurance and attractive interest rates were more compelling. Infrastructure was ready, but the balance sheets had not migrated yet. As the regulatory environment moved from abstract policy design to concrete implementation, this reconfiguration became possible.

The next stage of crypto adoption is not determined by infrastructure, but by where balance sheets move liquidity.

The entry point for real-world execution

For much of the past decade, institutional participation was constrained—not because of a lack of imagination or technology, but because they couldn’t integrate digital assets into regulated balance sheets. What institutions need is not just a wallet that can hold funds; clear legal certainty, concrete accounting treatment methods, and strict governance structures are the bare minimum requirements.

Without a universally accepted definition of “custody” and a clear compliance path, any regulated entity cannot take on the risk of “contaminating” its balance sheet. Large-scale adoption turned into a “waiting game”: banks and asset managers waited for unambiguous signals confirming that capital could be deployed without triggering fatal legal risk.

The era of policy debates has finally ended, replaced by an operational rollout phase. The “GENIUS Act” passed in May 2025 became the decisive catalyst, establishing a nationwide regulatory framework for stablecoin payments—ultimately providing the legal basis for balance sheet allocation.

The bill establishes a federal licensing process and requires stablecoins to be supported by 100% reserves backed by government-recognized instruments, transforming digital assets from speculative novelties into recognized financial instruments. In August 2025, the SEC concluded its long-running investigation of the Aave protocol without taking enforcement action, completely dispelling the regulatory haze that had suppressed institutional DeFi participation.

The focus is now shifting to regulatory details. In February 2026, the U.S. Office of the Comptroller of the Currency (OCC) released comprehensive proposed rules to implement the “GENIUS Act,” establishing a framework for “compliant payment stablecoin issuers.” This is significant: it provides specific prudential standards covering reserve composition, capital adequacy ratios, and operational resilience—allowing a Chief Risk Officer or an Asset-Liability Management Committee to formally approve digital asset strategies. The “GENIUS Act” embeds blockchain regulation into the governance systems of the largest financial institutions in the world.

But to understand why change is happening now, we must also recognize the balance-sheet inertia that defines institutional behavior. Banking operations are constrained by strict regulatory capital adequacy requirements; every dollar of risk-weighted assets must be backed by capital. If bank deposits flow into stablecoins, banks must proportionally reduce lending to maintain those capital adequacy ratios. This is a painful, costly contraction that sends ripples through the entire economy. That also explains why stablecoin adoption has been so slow: technical full integration takes six to eighteen months, while governance cycles such as audits and board reviews take longer to complete.

The current environment is entering a phase of compounding acceleration. Early movers such as JPMorgan Chase, Citigroup, and Bank of America began rolling out stablecoin settlement solutions, sending a clear signal to the market: the risk of being early has been replaced by the risk of falling behind.

We are in a competitive pressure phase, where peer participation reduces overall industry adoption risk. As these institutional constraints loosen, the path for liquidity to migrate from traditional systems into the programmable containers of the digital era is being opened up. This transition forces us to rethink where the essence of capital belongs, shifting attention to the “containers” that will carry the next generation of global liquidity.

Where liquidity resides

To understand the scale of this transformation, we must first recognize the historical persistence of the financial “containers.” In every monetary era, liquidity ultimately needs a destination. This is not only a technical storage need, but also the world’s long-term demand for safe short-term assets.

For hundreds of years, liquidity has been concentrated in a small number of clear structures: commercial bank balance sheets, central bank reserves, and money market funds. Each traditional container acts as an intermediary, capturing the economic value generated by the capital it holds.

This is what determines why financial intermediaries exist: to resolve mismatches. Operational cash generated globally far exceeds funds that can be immediately deployed for productive uses, creating a permanent liquidity surplus. Those funds seek a safe place to go.

Traditionally, commercial banks attract this surplus in the form of deposits, investing in long-term assets such as mortgages and corporate loans to earn a substantial spread. This net interest margin is a core metric for commercial banks. Bank shareholders are the primary beneficiaries of the spread; depositors receive only a small portion in exchange for liquidity and government-backed deposit insurance.

Digital asset infrastructure introduces an entirely new type of “container,” directly competing for this capital. This economic reshaping goes far beyond a technical upgrade. When liquidity shifts from banks to stablecoin reserve pools or tokenized Treasury fund vehicles, the main entity capturing returns changes fundamentally.

For example, in a stablecoin reserve pool, the issuer (e.g., Circle, Tether) earns the spread between underlying Treasury yield and the interest paid to token holders (typically zero). In effect, it transfers the “residing economic value” from the commercial banking sector to the digital asset issuer.

In addition, these new containers have transparency and programmability far beyond what traditional structures can match. In March 2026, the market value of tokenized Treasury fund vehicles surpassed $11.5 billion, representing a structural evolution in which the yield of the underlying assets accrues directly to holders.

This creates powerful economic incentives: senior treasurers no longer need to choose between bank safety and fund returns. They can hold tokenized funds that combine yield-bearing assets with fast settlement media functionality. By redefining where liquidity goes, digital infrastructure is not just building new rails—it is creating a competitive market for the balance sheets that support the global economy.

Stablecoin-driven capital reconfiguration

Stablecoins represent the first large-scale migration of liquidity to a new financial asset-balance sheet, marking a shift for digital money from novelty to a core component of financial infrastructure.

Stablecoin market size is approaching its historical peak at $311 billion, with year-over-year growth of 50%–70%. This growth breaks the narrative that it is “just speculation.” We are witnessing a real “reallocation of dollars”: capital leaving traditional banking infrastructure and entering programmable settlement systems.

The economic impact of this migration is especially evident through the deposit substitution effect.

When a company or institutional investor moves $100 billion from traditional bank deposits into a stablecoin container like USDC, the banking system’s earning power is severely harmed. In the traditional model, that $100 billion supports lending and generates about $3 billion in annual net interest margin. When the funds migrate to a stablecoin issuer’s reserves, those earnings are disintermediated. Banks lose deposits, their lending capacity contracts, and the spread is captured instead by the stablecoin issuer.

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

Research published by Federal Reserve economists in late 2025 emphasized that a high-adoption scenario for stablecoins could reduce bank deposits by $65 billion to $1.26 trillion. This could reshape how economic credit is supplied. Regional banks that heavily rely on stable deposits to support local lending are likely to be most vulnerable. As depositors chase the 7×24 settlement advantages of stablecoins, the attractiveness of the “in-transit funds spread” that banks have long depended on declines rapidly.

In response, the banking industry has moved from suspicion to participation.

JPMorgan Chase, Citigroup, and Bank of America announced in late 2025 to early 2026 that they would launch their own stablecoin settlement infrastructure—not to “disrupt” their own businesses, but to preserve their importance as liquidity containers. These institutions recognize that future economic value will tilt toward digital container issuers. By issuing themselves, banks aim to capture the reserve-related earnings that would otherwise flow to new entrants.

Of course, this large-scale cash reallocation is only the prelude. As the new liquidity containers stabilize, the battlefield is shifting to a more complex collateral domain and the leverage systems that underpin global finance.

Programmable collateral

If the cash migration enabled by stablecoins is the first wave of transformation, then the migration of collateral represents a more fundamental reconstruction of the financial system’s core leverage mechanism.

Modern financial markets are essentially a massive network of collateralized debt. In the U.S. alone, the daily scale of the repo market for securities lending is $2–4 trillion. But this critical infrastructure is still held back by traditional banks’ “discrete settlement windows.” Under current conditions, collateral can only move during bank business hours; fragmented custody means that securities held by one bank cannot be immediately used to satisfy another bank’s margin requirements. This friction locks up capital, creates inefficiency, and leaves the system unable to respond to real-time market volatility.

Tokenization transforms collateral from static, geographically constrained assets into programmable, high-turnover instruments.

By converting real-world assets (RWAs) such as U.S. Treasuries into on-chain tokens, institutions can move these assets around the clock and settle atomically. Market growth is rapid: as of April 1, 2026, the tokenized RWA market is about $28 billion, with tokenized Treasuries accounting for nearly half. This growth is driven by institutional-grade products such as BlackRock’s BUIDL and Franklin Templeton’s BENJI. Holders can earn the 5% yield from underlying government securities while maintaining token liquidity and deployability.

RWA asset value source: RWA.xyz

The true innovation is collateral efficiency.

In traditional repo trades, investors may have to accept a significant haircut or wait days to unlock and transfer securities between custodians. In contrast, tokenized collateral is composable. An institutional investor holding $100 million in BUIDL tokens can borrow stablecoins instantly on protocols like Aave at a 95% ratio to capture tactical opportunities. Collateral doesn’t need to leave the digital environment; instead, it is continuously revalued via automated price oracles, and any margin calls are handled through immediate, automated liquidation.

This shift moves “dealer economics” toward “protocol economics.”

In the traditional repo market, large dealer banks act as intermediaries—borrowing at one rate, lending at another—earning roughly a 50-basis-point spread. In the tokenized ecosystem, collateral holders can match themselves in DeFi lending markets, with software acting as the intermediary and capturing the entire spread. Although scaled implementation may take years, this shift could move tens of billions of dollars in annual earnings from traditional dealer departments to protocol governance and asset holders.

The mechanics of tokenized collateral dissolve the liquidity moat of large dealers through atomic settlement. The institutional workflow looks roughly like this:

Tokenization: Highly liquid assets such as U.S. Treasuries are digitally wrapped (e.g., BUIDL) into 24-hour transferable tokens.

Instant submission: The finance team can submit tokenized collateral to a lending protocol on Sunday night at 10 p.m., without waiting for a Monday morning wire transfer.

Real-time valuation: Smart contracts use oracles to reprice collateral every few seconds, not just once per day, significantly improving the loan-to-value ratio.

Keeping the yield: Investors continue earning underlying Treasury yield while the asset is locked up as collateral—achieving “yield stacking.”

For corporate finance or asset management teams, this is a fundamental revaluation of the value of idle assets.

In the traditional model, treasurers need to hold large buffers of low-interest cash to handle sudden margin calls and operational needs. With tokenized collateral, this buffer can be continuously invested in yield-bearing Treasuries, because these assets can be liquidated within seconds rather than days. This eliminates the historical “liquidity haircut” associated with long-term assets.

The impact on banking is just as profound.

Banks have long relied on repo markets’ “in-transit funds” and intermediary spreads for profitability. As collateral becomes programmable and self-matching, that toll will disappear. This is also why institutional-grade rails such as the Anchorage Atlas Network and internal tokenization projects at JPMorgan Chase are so crucial: they are attempts by financial institutions to build new moats ahead of competition when old barriers are challenged.

The shift from cash to collateral marks the financial system moving from a series of “discrete events” to “continuous flows.” Institutions that fail to adapt their balance sheets to these new flow rates will find their capital becoming increasingly static—and increasingly expensive.

At face value it’s just faster settlement; in essence, it’s a full-scale reconstruction of capital allocation, valuation, and intermediation models.

Adoption S-curve

The migration of institutional balance sheets is not a one-night disruption, but gradual absorption, followed by acceleration and a breakout phase. This is a “Web2.5” reality: blockchain technology is being integrated into existing financial infrastructure, not replacing it.

Institutional adoption is currently constrained by balance-sheet inertia: regulatory capital requirements, risk committee approvals, and legacy technology systems are all major drags. Banks cannot simply flip a switch to move assets; they must maintain strict Tier 1 capital ratios to ensure that deposits moving into digital containers won’t force lending activity to contract.

Despite these obstacles, the adoption of digital asset infrastructure is progressing along a clear S-curve, similar to how credit cards and the internet spread over decades.

Between 2015 and 2024, the market was in a phase of experiments and regulatory confusion, and growth was suppressed by uncertainty. We are now in the competitive pressure period (2025–2026), with clear regulation and standardized infrastructure. “You’re not the first, but you can’t be the last” becomes a core motivation for institutional treasurers. As more banks see peers participating in stablecoin settlement and tokenized Treasury funds, perceived adoption risk drops sharply.

Current market scale provides a base for accelerated growth: Fireblocks’ annual digital asset transfer volume surpassed $5 trillion, the tokenized institutional asset market is growing rapidly, and the new system rails are already ready at production-grade maturity. Infrastructure standardization enables banks to build on mature systems without having to redevelop proprietary ones.

Looking ahead to 2027 and beyond, there are still several “policy levers” that could further accelerate the migration. If stablecoin issuers can directly access Federal Reserve main accounts, or if a consortium “reward” mechanism relaxes the “GENIUS Act” restrictions on interest for payment stablecoins, the speed of deposits migrating from traditional bank ledgers to digital containers could increase significantly.

The system is ready to enter a positive feedback loop: more stablecoin liquidity attracts more DeFi applications, which then attracts more institutional capital, ultimately forming a reconfigured financial landscape. The “rails war” is over; attention has fully shifted to strategic balance sheet management.

The final winners

Moving from the infrastructure era to the balance sheet era means digital asset discourse has shifted from the technical fringe into the core of global macroeconomics.

For years, the industry assumed that building better rails would naturally lead to a better system. Now we understand this: rails are only an invitation letter; real change happens only when capital itself migrates.

In fact, the “rails war” has already been decided by a standardized, institutional-grade technology stack: MPC custody, tokenized Treasury fund vehicles, and the federal stablecoin regulatory framework.

The new battlefield is the balance sheets that hold global liquidity and collateral.

From 2027 to 2030, structural advantages will belong to the entities that can manage these new types of “digital containers” with the highest efficiency. As depositors increasingly value the 7×24 settlement and higher yield utility of stablecoins, commercial banks’ net interest margins will continue to face pressure. Large enterprises and institutional investors may shift their primary savings and finance functions toward the DeFi and RWA markets, while protocol transparency will compress intermediary spreads to the maximum extent.

This is not the end of traditional banking, but it does end the era where banks were a static, unchallenged repository of cheap capital.

The winners of the new era will be “Web2.5” hybrids—institutions that realize they are no longer just lenders, but programmable liquidity managers. By 2030, the stablecoin market is expected to approach $2 trillion, and the boundary between crypto and finance will essentially disappear. The system will fully integrate rail efficiency into balance sheet stability.

In this reconstructed landscape, financial power does not belong to technical innovators—it belongs to the entities that control the ultimate containers of global liquidity and collateral.

In the past decade, crypto has been building infrastructure for institutional participation. In the next decade, we will determine where institutional balance sheets ultimately reside.