Banks Must Evolve or Lose Deposits to Digital Alternatives

Banks Should Boost Rewards, Not Fear Stablecoins

The emergence of stablecoins—digital tokens pegged to traditional currencies such as the U.S. dollar—is reshaping the financial landscape and raising concerns among regional and community banks. Unlike volatile cryptocurrencies, stablecoins maintain a one-to-one value with fiat currencies, making them a convenient and stable tool for digital transactions. As their adoption accelerates, banks are being urged to respond not by resisting the trend, but by adapting their offerings to remain competitive.

Matthew Hougan, Chief Investment Officer at Bitwise, has argued that banks should address the threat of stablecoins not by lobbying for regulatory restrictions but by offering higher interest rates to retain their customer base. “If local banks are worried about competition from stablecoins, they should pay more interest on deposits,” he stated on X, challenging the idea that stablecoins represent an existential threat to traditional banking. Hougan criticized what he called “first-order thinking” about the potential harm of stablecoins, suggesting that such fears overlook the broader economic benefits, including better returns for savers and more efficient financial systems.

The concern stems from the fact that stablecoins offer significantly better returns than conventional savings accounts. For instance, platforms like Coinbase currently offer up to 4.1% interest on stablecoin balances, dwarfing the national average savings rate of 0.39%. This discrepancy, coupled with the low transaction fees and fast processing times associated with stablecoins, is drawing users away from traditional banks, especially for cross-border transactions and everyday payments. In the broader context, the total supply of dollar-pegged stablecoins has surged past $250 billion, with projections suggesting the market could reach $2 trillion in the next three years.

The potential impact is particularly acute for community and regional banks, which rely heavily on customer deposits to fund local lending activities such as farm and small business financing. Unlike their larger counterparts, these banks often lack access to wholesale markets and thus face a direct hit when deposits are redirected to stablecoins. According to a report in Bloomberg, the rise of stablecoins has shifted from a “theoretical” issue to a “very significant mainline competitor for bank funding” in a matter of months.

To mitigate this, some banks are exploring new strategies. For example, VersaBank in Canada has launched a pilot program testing “digital deposit receipts” that function like insured deposits but can be transacted on blockchain networks. The initiative aims to balance the benefits of digital finance with the security of traditional banking, offering a potential model for local banks to compete in the evolving landscape.

The challenge ahead for banks is not to eliminate stablecoins but to innovate. As Hougan noted, the economy will likely remain resilient, with individual savers gaining more control over their money and credit flowing through new channels. The real test will be whether banks can adapt their business models to remain relevant in an increasingly digital financial ecosystem.