Banks warn stablecoins could drain $6 trillion in deposits. Reuters analysis shows the math doesn’t work that way. Money stays in the system regardless.
Banks are sounding alarms. Brian Moynihan at Bank of America claims stablecoins could pull $6 trillion from traditional lenders. The threat is real, the CEO insists. But Reuters Breakingviews dug into the numbers and found something different.
The deposit flight argument has a hole. Cash moving to stablecoins doesn’t vanish from banking. It transforms instead.
The Loophole Banks Fear
Stablecoins like Circle’s $70 billion USDC found a workaround. Direct interest payments are banned under 2025’s Genius Act. Third parties changed everything, though. Coinbase pays holders about 3.5% yearly. Users just need balances on the platform.
Circle doesn’t pay holders directly. The company pays Coinbase fees for custody work. That subsidizes the interest effectively.
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Banks call this a loophole. They say it breaks the Genius Act’s spirit. Aaron Klein wrote in September that interest-paying stablecoins could “cause massive problems resulting in losses by retail crypto holders.” A bill to close it died in January. Coinbase CEO Brian Armstrong opposed the legislation.
Math That Doesn’t Add Up
Paul Grewal, Chief Legal Officer at Coinbase, challenged the $6 trillion claim on X. He called the Treasury study “a bank industry push piece” and compared it to an “ESPN report” saying the Browns would make the Super Bowl.
The study came out in April. The Treasury Department funded it. Other estimates went lower fast. Fed economist Jessie Wang used $1 trillion as a high-end figure in December. Standard Chartered predicted $500 billion by the end of 2028. Circle’s stock dropped 64% over six months.
Where Money Actually Goes
Here’s the trick banks missed. Deposits can’t leave the system on aggregate. A customer pulls cash from Bank A to buy tokens. The stablecoin issuer buys Treasury bills with that money. Whoever sold those bills now has extra cash at Bank B.
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Money shifts from retail deposits at Bank A to wholesale deposits at Bank B. It stays in banking, though.
Individual banks might pay more to keep customers. That’s different from system collapse. Breakingviews studied call reports from 4,088 profitable U.S. banks last year. Only 174 would lose money if consumer deposit costs rose 1 percentage point.
Small Banks Face Pressure
Those 174 banks hold $79 billion in deposits combined. That’s under 0.5% of America’s $19 trillion deposit base, according to KBRA Financial Intelligence. About 2,600 banks currently earn 10% return on equity. That number drops to 1,600 with higher deposit costs.
One thousand smaller lenders would need new models or buyers. The U.S. would still have more banks than most developed countries. Total deposits wouldn’t change on aggregate.
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History Repeats With New Tech
Money market funds changed everything in the 1970s. Before them, consumers had two options for cash savings. Banks or mattresses basically. MMFs parked money in low-risk government debt. They paid decent yields while offering access.
Banks survived that shift. Many smaller regional lenders didn’t make it. Savers benefited massively, though. Stablecoins could follow the same path, according to Reuters analysis.
Banks passed on just 40% of rate increases to retail depositors during March 2022 to March 2024. Business customers got 60% to 80%, depending on deposit type, per Fed figures. Competition from yield-bearing tokens would change that math.
What Comes Next
The White House gave banks and crypto firms until the end of February to find common ground. Both sides want tight restrictions, but for different reasons. Safety concerns are separate from the interest payment debate, though.
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If tokens are unsafe and prone to runs, better prudential regulation makes sense. Rules designed to make them less appealing arbitrarily don’t. Retailers like Walmart or Amazon could enter the space. They’d save on card fees if stablecoin payments grow. That creates an incentive to pay good yields.
Public market investors grew weary of giant forecasts. Circle’s stock performance shows that. The deposit flight argument relies on flawed math about where money actually goes. Banks faced new competition before and adapted. The system held together even as individual lenders failed.
