Citigroup Warns Stablecoin Yields Could Drain $6.6 Trillion From Banks

A senior executive at Citigroup has raised concerns that interest-bearing stablecoin deposits could lead to a massive exodus of funds from traditional banks, potentially draining $6.6 trillion from the banking system [1]. Ronit Ghose, Citi’s head of Future of Finance, warned that such a shift would mirror the disruptive impact of money market funds in the 1980s, which saw deposits surge to $235 billion by 1982 from just $4 billion in 1975 [1]. During that period, customers moved their money out of banks that were constrained by deposit rate regulations, leading to a $32 billion net outflow between 1981 and 1982 [1].

The comparison highlights the potential of stablecoins to offer higher yields than traditional bank deposits, which could entice customers to shift their money toward these digital alternatives. Sean Viergutz of PwC has echoed these concerns, noting that increased reliance on wholesale funding or higher deposit rates could raise banks’ funding costs and, in turn, make credit more expensive for households and businesses [1].

The issue has sparked a regulatory debate, particularly over the GENIUS Act. While the act prohibits stablecoin issuers from directly offering interest, it does not extend this restriction to affiliated entities such as crypto exchanges. This perceived loophole has drawn criticism from the Bank Policy Institute and other banking groups, which argue that it could enable indirect interest payments on stablecoins and threaten the stability of the traditional banking system [1]. These groups have called for regulatory action to close this gap and prevent a $6.6 trillion deposit outflow from American banks [1].

Meanwhile, the crypto industry has pushed back against these concerns. Major crypto organizations have argued that regulatory efforts to restrict stablecoin yields could unfairly favor traditional banks and hinder financial innovation. They advocate for a level playing field that allows consumers to choose between different types of savings and investment products [1]. The debate reflects deeper tensions between traditional finance and the crypto sector over market access and regulatory oversight [1].

In contrast, the U.S. government has shown support for dollar-pegged stablecoins, with Treasury Secretary Scott Bessent stating in March that the administration would use stablecoins to maintain the dollar’s global dominance as a reserve currency [1]. This stance underscores the strategic importance of stablecoins in international finance and highlights the government’s interest in leveraging digital assets for broader economic objectives [1].

Stablecoins, which are designed to maintain a stable value by being pegged to traditional assets like the U.S. dollar, differ from volatile cryptocurrencies like Bitcoin or Ethereum. Their appeal lies in their ability to offer yield-bearing features without the price instability associated with other crypto assets [1]. However, the emergence of interest-bearing stablecoins introduces new risks, including counterparty risk, liquidity mismatches, and potential systemic instability [1].

As the financial landscape continues to evolve, the debate over stablecoin yields raises important questions about the future of banking and monetary policy. Central banks may find it increasingly difficult to control liquidity and interest rates if a significant portion of bank deposits shifts to alternative financial instruments. This scenario could complicate efforts to manage inflation and economic growth, as traditional monetary tools become less effective [1].

The situation underscores the need for a balanced approach to regulation that encourages innovation while preserving financial stability. Ghose’s warning serves as a cautionary note that, while stablecoins and DeFi protocols offer new opportunities for investors, they also pose significant risks to the traditional banking system if left unaddressed [1]. The potential outflow of $6.6 trillion highlights the urgency for both regulators and financial institutions to adapt to a rapidly changing financial ecosystem [1].

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[1] Citi Warns Stablecoin Yields Could Drain $6.6 Trillion From ... (https://www.ainvest.com/news/citi-warns-stablecoin-yields-drain-6-6-trillion-banks-2508/)