U.S. Banks Face $6.6 Trillion Deposit Loss to Stablecoins

U.S. banks are increasingly concerned about the potential loss of up to $6.6 trillion in deposits to stablecoins, as highlighted in a Treasury Department report released in April. This anxiety has been amplified by the recent passage of the GENIUS Act, which establishes legal guidelines for stablecoins in the U.S. The House of Representatives approved the bill with a significant majority, and it was subsequently signed into law by President Donald Trump.

The primary concern for banks is the potential for a massive cash drain. Stablecoins, which are digital assets pegged to the value of a stable reserve asset like the U.S. dollar, offer benefits such as faster and cheaper cross-border payments without the volatility typically associated with other cryptocurrencies. This makes them an attractive alternative for consumers and businesses seeking to store value or facilitate transactions.

Banks are particularly worried about the impact on their traditional turf of payments, especially cross-border transfers, which currently involve high fees and take days to process. Stablecoins, on the other hand, can handle these transactions more efficiently. Despite the GENIUS Act banning stablecoin issuers from paying interest, banks remain skeptical that this measure is sufficient to prevent stablecoin issuers from finding ways to reward holders.

For instance, Coinbase offers customers a 4.10% reward for holding USD Coin (USDC), which is issued by Circle. Circle shares the yield it earns from government-backed securities with Coinbase, a practice that critics argue is akin to paying interest. Coinbase maintains that the rewards program is separate from its deal with Circle, but banks are not convinced and have called for tighter regulations to prevent firms from circumventing the law.

Another area of concern for banks is the capital requirements for stablecoin issuers. Federal regulators still need to decide how much capital these issuers must hold, and banks fear that if stablecoin issuers face lower capital or liquidity requirements, they could operate with less oversight while attracting more funds. This could create an uneven playing field, with stablecoin issuers enjoying the benefits of the Fed’s backstop tools during market stress without facing the same regulatory burdens as banks.

The question of Federal Reserve access has also become a contentious issue. Currently, only banks have access to the Fed’s backstop tools during market stress. The GENIUS Act does not explicitly block nonbanks from accessing the Fed, leaving the decision to the Fed itself. Banks argue that anyone benefiting from the Fed’s tools should also face the same regulatory requirements, ensuring a level playing field.

If consumers shift their funds from FDIC-backed accounts to stablecoins, the money might still end up in a bank, but in a single account that exceeds the $250,000 FDIC insurance limit. This creates a new layer of risk, as fewer people keeping their money in traditional bank accounts could make it harder for banks to extend loans, particularly to smaller businesses and households. Banks are urging the Fed to intervene and level the playing field before stablecoins gain too much traction.

Despite these risks, some of the largest U.S. banks are exploring the idea of launching their own stablecoin through a joint effort. They aim to control the rails rather than be left behind by competitors like Walmart, Amazon, and other multinationals that are experimenting with stablecoins. Payment companies, on the other hand, seem more interested in integrating stablecoins into their existing systems rather than viewing them as direct competitors.

The potential loss of $6.6 trillion in deposits to stablecoins presents a significant challenge for U.S. banks, but it also offers an opportunity for the financial sector to embrace new technologies and adapt to the demands of a digital economy. By addressing the regulatory and operational challenges posed by stablecoins, banks can position themselves to thrive in a rapidly changing financial landscape.