Executive Summary
The stablecoin market is undergoing a structural shift as major financial institutions — including SoFi Bank, Western Union, Klarna, and others — are moving to issue their own reserve-backed, custom stablecoins. These assets are designed to optimize specific business operations such as payments, remittances, and settlement, rather than compete as general-purpose currencies. Regulatory frameworks in both the US and EU are actively shaping this trend, favoring bank-affiliated issuance models while prohibiting direct yield payments to holders—a constraint that channels yield generation to external venues such as Aave.
For Aave, this represents a strategic opportunity to reach large retail audiences through issuers’ pre-existing distribution networks. By serving as a yield and savings layer for custom stablecoins, Aave can address the core retention challenge these issuers face while driving meaningful liquidity growth. Aave V4’s Hub-and-Spoke architecture provides the technical framework for securely onboarding these assets, and PYUSD’s success on the protocol offers early validation. Realizing this opportunity will depend on the degree of DeFi interoperability issuers pursue, the avoidance of liquidity fragmentation, and the evolution of regulatory constraints across jurisdictions.
Introduction
Stablecoins represent a prominent asset class, with over $300 billion in onchain TVL, functioning not only as a widely used asset in DeFi but also as an efficient tool for storing and transferring fiat-pegged value. The growing issuance of custom stablecoins has introduced new market dynamics for the asset category, which has historically been dominated by USDT and USDC, collectively representing over 86% of the stablecoin market. Where stablecoins were once issued by entities such as Circle and Tether, custom stablecoins enable entities to issue their own branded stablecoins within a defined use case and configuration.
This piece explores the growing trend of reserve-backed stablecoin issuance by payment companies, banks, remittance services, and other financial institutions. It highlights recent announcements and custom stablecoin issuances, analyzes the operational and regulatory factors influencing this adoption, and discusses the strategic opportunities it presents for Aave.
Defining Custom Stablecoins
To understand the rise of custom issuances, it’s important to understand the benefits enabled by established stablecoins. Traditional fiat and its rails are encumbered by inefficiencies that stablecoins overcome, such as faster settlement times, lower cross-border payment costs, and more capital-efficient transactions. An example of this is the reduction in cross-border transfer time for corporate treasuries from days via traditional rails to hours, enabled by Stripe’s stablecoin infrastructure.
Source: Settlement speed rail comparison, Stablecoin
For enterprises, these onchain benefits only scratch the surface of potential business innovation. Standardized stablecoins are limited in their ability to perform specific functions while also maintaining control and security over assets, brands, and revenue streams. In an essay by Nick van Eck titled “To Whitelabel Or Not To Whitelabel?”, he identifies two stablecoin sub-categories, “Open-loop” and “Closed-loop”. Open-loop stablecoins describe stablecoins issued for a largely open ecosystem, user base, and use cases.
By contrast, closed-loop stablecoins are custom stablecoins issued for a primarily closed ecosystem, users, and intended for a specific use case. These stablecoins can be issued internally or via a whitelabel solution, differentiated by branding and operational control. The unifying aspect of these stablecoins is the reserve-backed collateral of cash, deposits, and short-term government securities that they are required to maintain.
Stablecoin Adoption
The advantages of issuing a custom stablecoin vary by entity, largely determined by the issuer’s business model and the functions the stablecoin performs in an entity’s operations. In some instances, issuing a stablecoin also serves as a means to counter the threat posed by open-loop stablecoins to an entity’s core business.
SoFiUSD by SoFi Bank
SoFi Bank announced the launch of SoFiUSD in December last year, aiming to serve as a payment stablecoin and as an infrastructure asset for whitelabel issuances by other banks and enterprises. SoFiUSD will not only reduce settlement costs and transaction times for SoFi Bank but also reduce the costs associated with interbank and cross-border transactions for stablecoins that use SoFiUSD as a reserve currency. SoFiUSD reserves are fully held in cash in SoFi Federal bank accounts; in this regard, SoFiUSD resembles a tokenized deposit product.
SoFiUSD absorbs the threat posed by stablecoins to its transaction and deposit functions, while benefiting from reduced latency and greater economic control over deposits. SoFi Bank embeds onchain infrastructure while maintaining internal off-chain liquidity.
SoFiUSD is stated to be issued by SoFi Bank, N.A., and SoFi Bank, N.A. is an FDIC-supervised national bank.
USDPT by Western Union
Western Union, the remittance and cross-border payment service company, announced plans to launch the U.S. Dollar Payment Token (USDPT). The stablecoin augments Western Union’s core business, enabling it to move money across borders faster and at lower cost than traditional rails. USDPT for Western Union would help preserve its remittance operations amid open-loop stablecoin adoption.
USDPT will allow Western Union to leverage its expansive network of over 500,000 agents as an onramp to move money onchain, accounting for its money transfers via USDPT, thereby optimizing liquidity usage.
USDPT is described by Western Union as being issued by Anchorage Digital Bank; Anchorage’s national trust bank charter status is confirmed by the OCC.
KlarnaUSD by Klarna
For Klarna, a payment service provider, KlarnaUSD represents a transactional tool, intended to reduce costs for both consumers and merchants. Their business model requires processing fees on transactions, earning a fee for facilitating their Buy Now Pay Later (BNPL) service. Introducing a custom stablecoin enables Klarna to reduce processing costs by internalizing transactions and relying less on traditional payment rails.
Resulting cost reductions and optimized settlement times will potentially enhance Klarna’s operations and margins, providing a better experience for customers and merchants.
KlarnaUSD is planned for mainnet launch in 2026. Klarna Bank AB’s status as a Swedish-licensed bank supervised by Finansinspektionen is confirmable, but Klarna’s materials do not, on their face, constitute confirmation that KlarnaUSD has yet been authorized for any specific stablecoin regime in the EU or US.
Other Notable Stablecoins and Onchain Assets
Standard Chartered announced its intention to apply for a stablecoin issuing license to launch its own stablecoin issued from Hong Kong.
JPM Coin, issued by J.P. Morgan, is a USD-denominated deposit token. Like SoFiUSD, reserves are held in cash, serving as an onchain representation of bank deposits. JPM Coin functions similarly to stablecoins, with J.P. Morgan clients able to use the token to transact onchain, currently enabling settlements between approved institutional clients and their customers.
Regulatory Constraints
MiCA’s practical implication is that EU-facing distribution will gravitate toward an EMT configuration (single-currency, “e-money-like”), because that path is the most operationally legible and (to date) the one actually being authorized in the market. If instruments such as SoFiUSD, USDPT, or KlarnaUSD were to be offered into the EU and positioned as euro- or dollar-referenced “stable value” tokens, the issuer would need to map them cleanly into MiCA’s EMT/ART taxonomy and comply with the associated constraints—most notably the prohibition on paying “interest” to holders (which narrows issuer-led “rewards” design space and pushes yield to separate products or venues) and, for EMTs, the prescriptive safeguarding and reserve investment constraints (including the 30% deposit requirement with credit institutions and tight limitations on the remainder). The likely result for these “custom” issuances is not simply “more clarity,” but more controlled circulation: tighter onboarding/KYC, potential transfer restrictions, and more conservative reserve/risk management, because those are the mechanisms by which MiCA compliance is maintained at scale.
Under GENIUS, the central implication is perimeter-driven: any payment-stablecoin-style product offered in the US at scale is issued by a “permitted payment stablecoin issuer” (bank-regulated lanes, OCC-supervised nonbank lanes, or qualifying state regime), subject to statutory reserve, transparency, and operational compliance requirements. That maps relatively cleanly to a bank-affiliated model like SoFiUSD (at least as publicly described), but it materially shapes the go-to-market options for nonbank brands that will typically need either a regulated-issuer structure or partnership model to reach US consumers compliantly; GENIUS also reinforces a stablecoin-level “no yield/interest to holders” posture similar in policy outcome to MiCA, even though it is constructed differently.
Opportunity for Aave
Custom stablecoins offer Aave a unique opportunity to reach retail channels that are traditionally unengaged with DeFi. This opportunity is driven by two key factors: issuers’ pre-existing consumer networks and their ability to abstract away DeFi’s complexity. Consider Western Union and Klarna—market leaders in their respective sectors. Western Union operates in over 150 countries, while Klarna serves over 100 million customers and facilitates $118 billion in annual GMV. Integrating their custom stablecoins into regular operations can maximize adoption by improving customer experience.
Furthermore, the unique use cases these stablecoins enable within each business provide a seamless on-ramp for new DeFi users, leveraging the companies’ established customer relationships. This strategy reduces entry barriers by offering assets with issuer-specific utility, all while building on Aave’s existing exposure to non-crypto-native institutions.
Source: V4 example of Custom stablecoin spoke
Aave V4’s Hub-and-Spoke design provides the ideal technical framework. A dedicated, conservatively risk-adjusted spoke for custom stablecoins could securely onboard yield-seeking users. In turn, this liquidity could be used by borrowers to fund specific operational needs (e.g., instant, compliant transactions) or other general DeFi opportunities.
Deposits could be enabled through the issuer’s platforms or via the Aave App. This strategy directly positions Aave’s savings yields as a compelling alternative to traditional accounts, leveraging the issuers’ distribution to seamlessly acquire users at scale.
Source: Aave App, Interest rate comparisons
Strategic Considerations
The nascent opportunity for custom stablecoins depends on several factors, but the potential for their integration into Aave has been demonstrated by PayPal USD (PYUSD). Notable factors include:
- DeFi Integration: It’s unclear to what extent these assets will be interoperable with Aave or other DeFi protocols. Issuers may see them as tools to optimize their operations, e.g., solely as an accounting tool. While some have indicated that they will initially limit access to their customers, these assets may be ring-fenced for internal use only to remain compliant.
- Fragmentation: Custom stablecoins create the potential for multiple stablecoins to be issued by entities, all aiming to derive some benefit. However, not every entity should issue its own stablecoin, as it may not align with the business or the market it operates in. Unnecessary stablecoins would create a fragmented liquidity experience for users, inhibiting growth and utilization (merchants would also be opposed to accepting them). This market scenario would offer little value for Aave.
- Issuance Models: Aave would need to access the different issuance models used. Including the issuance method (e.g., whitelabel solutions) and the networks on which these stables will be supported. Issuance models pose a risk when issuing services have access control rights to the stablecoins they issue. This creates a centralization risk; for example, it applies to PYUSD, the stablecoin issued by Paxos, which can freeze all USD stablecoins issued by them. Additionally, if a stablecoin is issued on a non-supported or private network, it offers little value for integration plans.
Current interest in stablecoin issuance bodes well for the market; however, its relevance across business use cases has yet to be broadly tested. PYUSD remains the sole positive indicator of custom stablecoin integration on Aave, with over $400M deposited and the borrow/supply caps filled. Onboarding to Aave should similarly make sense from a business perspective, as long-term sustainability will depend on these factors, among others.
Source: PYUSD growth on Aave, January 14th, 2026
Looking Ahead
Aave has a proven track record as a DeFi liquidity layer for institutionally issued assets, as demonstrated by the success of its Horizon market. The next logical step is applying this model to more retail-facing custom stablecoins.
While these stablecoins share operational similarities with institutional RWAs, they present a unique retention challenge: user adoption at scale. Issuers must answer two critical questions:
- What incentive will drive sustainable user adoption of these new assets?
- How can they compensate users for forfeiting the yield opportunities available with traditional fiat systems?
Aave’s integration with Fintech apps, which enables users to earn yield on stablecoins via automated deposits, demonstrates a ready-made embedded model that solves the retention challenge by providing a compelling financial incentive for users to hold and use custom stablecoins long term.
Conclusion
Custom stables represent a significant opportunity to introduce Aave to a wider retail audience. By leveraging institutional customer bases and positioning itself as a savings facility to support user retention, significant liquidity growth and network effects could be unlocked. The early interest in these issuances should be weighed against the stablecoin’s viability for improving business operations and user experiences, rather than merely as a branding tool. V4 offers a risk-configurable approach that would allow custom stablecoin issuers to integrate with Aave, creating a positive feedback loop that encourages not only adoption but also retention of these custom stables and Aave’s growth.
Regulatory constraints should also be taken into consideration, as the eventual form these assets largely take may preclude or limit this opportunity.
Disclaimer
This research was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.
