The Regulatory and Financial Implications of Interest-Bearing Stablecoins on Traditional Banking

The rise of interest-bearing stablecoins has ignited a seismic shift in the financial landscape, challenging the long-standing dominance of traditional banking systems. By 2025, the market for these digital assets has grown by 300% year-over-year, driven by regulatory clarity and technological innovation. At the heart of this disruption lies a critical question: Can traditional banks adapt to a world where deposits are no longer their exclusive domain?

The Genesis of Growth: Regulation and Infrastructure

The passage of the GENIUS Act in the United States in 2023 marked a turning point. By establishing a federal framework for stablecoin issuance, the law not only legitimized the sector but also spurred rapid innovation in yield-bearing products. According to a report by Reuters, this regulatory clarity has led to 86% of firms declaring infrastructure readiness for stablecoin adoption in 2025. Advancements in regtech and compliance tools have further reduced barriers, enabling institutions to navigate the complex regulatory environment with confidence.

However, the market's explosive growth has not been without its challenges. Despite the $4 trillion in annual on-chain transaction volume attributed to stablecoins in 2025, only 8% to 11% of crypto assets generate yield- far below the 55% to 65% seen in traditional finance. This gap highlights the unmet demand for products that combine the stability of fiat with the yield potential of crypto, a niche that interest-bearing stablecoins are uniquely positioned to fill.

Disintermediation Risks: The Deposit Competition Dilemma

The most immediate threat posed by interest-bearing stablecoins is their potential to disintermediate traditional banks. As these digital assets gain traction, particularly among digitally native demographics, they are increasingly substituting for transaction accounts and savings products. The Federal Reserve has noted that the impact of this substitution depends heavily on where stablecoin demand originates:

• Domestic Demand: If users convert traditional deposits into stablecoins, and issuers allocate reserves outside the banking system (e.g., into Treasury bills or repurchase agreements), bank deposits could shrink. This scenario risks reducing the overall size of the banking system and increasing liquidity vulnerabilities.
• Foreign Demand: Conversely, if foreign entities adopt USD stablecoins and issuers hold reserves domestically, U.S. bank deposits may actually rise. This dynamic could create a paradoxical situation where stablecoins both erode and bolster traditional banking, depending on the flow of capital.

The structure of stablecoin reserves is equally critical. If issuers gain access to central-bank accounts-such as Federal Reserve master accounts that pay the Interest on Reserve Balances (IORB) rate- the risk of disintermediation escalates dramatically. In such a case, stablecoins could bypass banks entirely, offering users perceived safety and liquidity without relying on traditional intermediaries.

Regulatory Guardrails and Systemic Implications

The GENIUS Act's restrictions on stablecoin reserves-limiting them to low-risk assets like cash and short-term government debt- have tempered their disruptive potential. By preventing stablecoins from directly funding consumer or business credit, the law preserves banks' role in credit creation. Yet, this regulatory framework also creates a new competitive arena: banks that tokenize their deposits (so-called "deposit tokens") can integrate blockchain technology while retaining their intermediary role.

The broader implications extend beyond deposits. Stablecoins are already challenging traditional payment systems. By enabling faster, cheaper cross-border transactions, they threaten to erode interchange fees and revenue from ACH and SWIFT systems. For banks, this represents a dual challenge: not only must they compete for deposits, but they must also defend their core revenue streams.

The Uneven Playing Field: Large vs. Small Banks

The competitive pressures are not evenly distributed. Large banks, with their diversified funding bases and access to wholesale markets, are better positioned to weather deposit shifts and maintain credit availability. Mid-sized and community banks, however, face existential risks. These institutions often rely on relationship-based lending and have limited access to alternative funding sources, particularly in sectors like commercial real estate. If stablecoin adoption accelerates, their lending capacity-and by extension, their profitability-could be severely constrained.

Conclusion: Navigating the Future of Finance

Interest-bearing stablecoins are not a passing trend but a fundamental reimagining of how value is stored and transferred. For investors, the key question is not whether traditional banks will survive, but how they will adapt. Those that embrace blockchain technology-whether through deposit tokens or strategic partnerships with stablecoin issuers-may thrive in this new era. Conversely, institutions that cling to legacy models risk being left behind.

As the financial system evolves, one thing is clear: the age of disintermediation is here. The winners will be those who recognize that the future of banking is not about resisting change, but about harnessing it.