Banks Warn Stablecoin Yields Could Trigger 1980s-Style Deposit Exodus

U.S. banks are intensifying their lobbying efforts to restrict stablecoin yield mechanisms, arguing that the new regulatory landscape under the GENIUS Act creates an uneven playing field. The legislation prohibits stablecoin issuers from offering direct interest to holders but allows affiliated exchanges to provide yield through indirect means, such as rewards and affiliate programs. This regulatory distinction, banks contend, could undermine traditional deposit systems and lead to significant outflows from conventional banking channels [1].

The American Bankers Association and other major banking lobbies have highlighted the potential for a $6.6 trillion shift in deposit liabilities, citing a Treasury Department report from April 2025 [3]. They warn that if consumers and businesses move funds into stablecoin platforms that offer yield, the banking system could face liquidity constraints, reduced lending capacity, and higher credit costs for borrowers. The concern is heightened by historical parallels to the 1980s money market fund boom, which saw over $30 billion in deposit outflows as customers shifted toward higher-yielding alternatives [1].

Citigroup’s Ronit Ghose, head of Future of Finance, has drawn direct comparisons between the potential impact of stablecoin interest payments and the deposit outflows of the 1980s. According to Ghose, this scenario could repeat if stablecoins continue to attract liquidity without facing the same regulatory constraints as traditional banks [4]. The Federal Reserve data reinforces these concerns, showing that even a modest $1 trillion deposit outflow during recent interest rate hikes had significant ripple effects across the financial system [2].

Critics within the crypto industry argue that the banks’ push for stricter stablecoin regulation is anti-competitive. The Blockchain Association and the Crypto Council for Innovation have pointed out that the GENIUS Act already includes balanced provisions and that banning yield on stablecoins would unfairly favor legacy institutions. Coinbase’s legal team and other crypto advocates have dismissed the banks’ concerns as exaggerated, noting that the regulatory framework allows for innovation while ensuring consumer protection [3].

The debate also underscores broader tensions around the future of digital finance. As stablecoins gain traction, some analysts suggest that the banking sector may see a shift toward "narrow banking," where banks increasingly rely on wholesale capital markets rather than customer deposits to fund loans. This shift, if it occurs, could lead to more transparent and liquid financial systems, though it would also reduce the traditional role of banks in intermediating credit [2].

While banks continue to press for regulatory revisions, crypto platforms are exploring ways to address the yield gap. Decentralized finance (DeFi) and tokenization of real-world assets are being viewed as potential solutions. These technologies enable stablecoin holders to earn yields through lending or staking without returning to traditional fiat systems. Such developments may offer an alternative funding model that challenges conventional banking structures while preserving access to credit and liquidity [2].

Source:

[1] U.S. Banks Warn Stablecoins Could Trigger Massive Deposit Outflows (https://coincentral.com/u-s-banks-warn-stablecoins-could-trigger-massive-deposit-outflows/)

[2] Stablecoin regulation will drive a return to 'narrow banking' (https://www.americanbanker.com/opinion/stablecoin-regulation-will-drive-a-return-to-narrow-banking)

[3] US Banks Demand Stablecoin Yield Ban While Paying Depositors Nearly Nothing (https://cryptopotato.com/us-banks-demand-stablecoin-yield-ban-while-paying-depositors-nearly-nothing/)

[4] Citi Executive Warns Stablecoin Interest Payments Could Drain Bank Deposits Like 1980s Crisis as Banking Groups Lobby to Close GENIUS Act Loophole (https://finance.yahoo.com/news/citi-executive-warns-stablecoin-interest-202759337.html)