Banks Fear Stablecoin Surge Could Drain Trillions from Traditional Deposits
In a stark warning to the financial sector, Citigroup has highlighted the potential for stablecoins to disrupt traditional banking by luring away customer deposits with attractive interest rates. This concern echoes historical shifts in the industry and has sparked a heated debate between banks and the cryptocurrency ecosystem [1].
Background on Stablecoins and Their Threat to Traditional Finance
Stablecoins are a type of cryptocurrency designed to maintain a stable value, typically pegged to fiat currencies like the U.S. dollar. Unlike volatile assets such as Bitcoin, stablecoins like USDT (issued by Tether) and USDC (issued by Circle) offer reliability, making them popular for trading, remittances, and as a store of value in the crypto world. They are backed by reserves, often including U.S. Treasury bonds, cash equivalents, and other assets [2].
The threat to traditional finance (TradFi) stems from stablecoins' ability to combine the benefits of digital assets with features that rival bank deposits. In TradFi, banks hold customer deposits and use them to fund loans, earning profits from the interest spread. However, stablecoins can offer yields through mechanisms like staking or interest-bearing accounts on crypto exchanges, often at rates higher than those provided by banks due to lower operational costs and direct investment in high-yield assets.
This dynamic creates a competitive edge for stablecoins. If users can earn interest on stablecoins held on platforms like crypto exchanges—while enjoying instant, low-cost transfers across borders—it could incentivize a shift away from bank accounts. Historically, similar innovations have reshaped finance: in the 1980s, money market funds exploded in popularity, growing from $4 billion to $235 billion in assets over seven years, leading to a net outflow of $32 billion from banks, according to Federal Reserve data. Experts now draw parallels, warning that stablecoins could accelerate a similar "disintermediation" of banks, reducing their lending capacity and forcing higher loan rates for consumers and businesses.
Citi's Warning and Industry Echoes
Ronit Ghose, head of financial services at Citi, likened the rise of interest-bearing stablecoins to the money market fund boom, predicting a potential "mass exodus" of deposits from banks. In a report cited by the Financial Times, Ghose emphasized how stablecoins could siphon funds if they offer competitive returns, mirroring past disruptions.
This sentiment is echoed by Sean Virkuts, a consultant at PwC, who argues that banks may need to hike deposit rates to retain customers, ultimately passing on higher costs through pricier loans. "A shift by clients to higher-yielding stablecoins will force banks to raise deposit rates," Virkuts noted, highlighting the ripple effects on the broader economy.
Regulatory Battle Over the GENIUS Act
At the heart of the conflict is the recently passed GENIUS Act, which regulates stablecoins but includes provisions that banks view as unfair. The law bars stablecoin issuers—including banks—from paying interest directly to holders of their own coins. However, it does not restrict crypto exchanges from offering rewards or interest on stablecoins from third-party issuers like Circle or Tether.
Banking groups, led by the Bank Policy Institute, have urged lawmakers to revisit the legislation, labeling this disparity a "loophole" that creates uneven competition. They warn of a potential outflow of up to $6.6 trillion [3] from the banking system, as per U.S. Treasury estimates. Such a shift, they argue, could undermine lending, elevate interest rates, and limit credit access for businesses and individuals.
Crypto Sector Pushes Back
The cryptocurrency industry has dismissed these concerns as protectionism. In a joint letter to senators, the Crypto Council for Innovation and Blockchain Association accused banks of stifling competition to preserve their dominance, at the expense of innovation and consumer options [4].
Paul Grewal, chief legal officer at Coinbase, was more direct on X (formerly Twitter): "This was no loophole, and you know it. Most lawmakers rejected your attempt to avoid competition."
Potential Benefits and Risks for the U.S. Economy
Amid the warnings, some see upside in stablecoins' growth. U.S. Treasury Secretary Scott Bessent has expressed hope that issuers like Tether and Circle could aid in managing the nation's ballooning $35 trillion debt by increasing demand for U.S. government bonds. Citigroup forecasts the stablecoin market could reach $3.7 trillion in capitalization [5] over the next five years, providing a steady buyer for Treasuries post-GENIUS Act.
However, experts caution against overreliance. Economist Garrett Jones from Bluechip rating agency noted, "It won’t hurt. But an additional 10% demand for bonds won’t solve the long-term fiscal problems of the US," especially with projections of an additional $2.8 trillion in debt by 2034.
Further risks include political influence from large issuers holding trillions in bonds, as well as market instability if a major stablecoin fails. Ben Reynolds of BitGo warned that private companies are "less stable than governments," and a collapse could trigger a fire sale of bonds. Jones added that top stablecoin projects might become "too big to fail," complicating future debt management.
Luca Prosperi, co-founder of the M0 Foundation, views the trend as inevitable: "It is a macroeconomic and technological trend that even a hostile administration cannot stop."
In a related development, Wyoming has pioneered the first state-issued stablecoin, the Frontier Stable Token (FRNT), available on seven blockchains, signaling growing institutional adoption. As stablecoins bridge crypto and TradFi, the debate underscores a pivotal moment for finance, where innovation clashes with established systems. Banks' fears may drive further regulatory scrutiny, but the momentum behind digital assets suggests change is on the horizon.