Citigroup Walks Tightrope Between Stablecoin Innovation and Deposit Risk

Citigroup is expanding into stablecoin custody and payment services as part of its broader strategy to adapt to the evolving digital finance landscape. A top executive, Biswarup Chatterjee, global head of partnerships and innovation for Citigroup’s services division, confirmed the bank is exploring custody services for assets backing stablecoins. These services include secure storage and administration of high-quality assets such as U.S. Treasuries or cash, which are required by the recently enacted GENIUS Act for stablecoin issuance. The bank is also developing tokenized deposit services for corporate clients seeking 24/7 settlement capabilities. Chatterjee emphasized the importance of compliance with regulations, including anti-money laundering measures and cyber and operational security protocols, to ensure safekeeping and theft prevention in the digital asset space [2].

In addition to custody, Citigroup is evaluating the use of stablecoins to enhance payment efficiency. Currently, the bank offers tokenized U.S. dollar payments through a blockchain network that operates 24 hours a day, connecting accounts in New York, London, and China Hong Kong. Citigroup is exploring services that would allow clients to send stablecoins between accounts or convert them to dollars for instant payments. This expansion aligns with the broader regulatory environment, which has become more accommodating under recent administration policies favoring innovation in the crypto sector. Chatterjee noted that the bank is in discussions with clients about potential use cases for these services and is working to understand the full scope of opportunities and challenges [2].

Citigroup’s strategic shift comes amid growing institutional interest in stablecoins, as highlighted by Dante Disparte, Chief Strategy Officer at Circle. Disparte described the GENIUS Act as a pivotal piece of financial legislation that provides regulatory clarity and fosters innovation in the stablecoin space. The Act creates a federal framework for stablecoin issuance, requiring one-to-one reserves in approved assets and limiting activities to issuance, redemption, and custodial services. It also establishes a 18-month period for federal regulators to finalize implementation rules. Disparte likened the current development in stablecoins to the early days of cloud computing, where initial hesitation gives way to widespread adoption. He emphasized that stablecoins are poised to become a more efficient medium of exchange, particularly in a global financial system that operates beyond traditional banking hours [4].

However, Citigroup’s approach to stablecoins is not without internal contradictions. While the bank is actively expanding its digital asset services, it has also expressed concerns about the potential risks associated with stablecoin interest payments. Ronit Ghose, a Citi executive, warned that such payments could lead to a significant outflow of deposits from traditional banks, similar to the crisis of the 1980s when money market funds attracted deposits away from regulated institutions. Banking trade groups, including the American Bankers Association and Bank Policy Institute, have echoed these concerns, arguing that the current regulatory framework may create an uneven playing field. They cited Treasury Department estimates suggesting that yield-bearing stablecoins could result in up to $6.6 trillion in deposit outflows, which could affect how banks fund loans and manage liquidity [1].

The potential for large-scale deposit flight raises concerns about the broader economic implications. During the 1980s crisis referenced by Ghose, withdrawals from bank accounts exceeded new deposits by $32 billion between 1981 and 1982. This trend could lead to tighter credit availability and higher borrowing costs for households and businesses. Sean Viergutz, banking and capital markets advisory leader at PwC, noted that banks may face increased funding costs by relying more on wholesale markets or raising deposit rates, which could have a ripple effect on credit accessibility and economic growth. The challenge for Citigroup and other traditional banks lies in balancing the opportunities presented by stablecoins with the need to mitigate systemic risks and maintain regulatory compliance [1].

Source:

[1] Citi Executive Warns Stablecoin Interest Payments Could ... (https://finance.yahoo.com/news/citi-executive-warns-stablecoin-interest-202759337.html)

[2] Citigroup considers custody and payment services for ... (https://arizonadigitalfreepress.com/citigroup-considers-custody-and-payment-services-for-stablecoins-crypto-etfs/)

[3] U.S. Congress enacts stablecoin regulatory act, now law (https://www.jdsupra.com/legalnews/u-s-congress-enacts-stablecoin-3726820/)

[4] The Genius Act: A New Era for Stablecoins and Financial ... (https://fintech.tv/the-genius-act-a-new-era-for-stablecoins-and-financial-innovation/)