Paying interest on stablecoin deposits might trigger a wave of bank outflows reminiscent of the money market fund surge in the 1980s, warned Ronit Ghose, head of Citi’s Future of Finance, in a report released Monday.
As reported by the Financial Times, Ghose compared the anticipated outflows from interest-bearing stablecoins to the rise of money market funds in the late 1970s and early 1980s.
These funds exploded from around $4 billion in 1975 to $235 billion in 1982, outpacing banks that maintained tightly regulated deposit rates, according to Federal Reserve data. Withdrawals from bank accounts surpassed new deposits by $32 billion between 1981 and 1982.
Sean Viergutz, banking and capital markets advisory leader at PwC, indicated that a transition towards higher-yield stablecoins could pose challenges for the banking sector.
“Banks may confront greater funding costs by leaning more on wholesale markets or increasing deposit rates, which might render credit pricier for households and businesses,” he noted.
Related: Banking lobby fights to change GENIUS Act: Is it too late?
US banks argue against stablecoin yield
The GENIUS Act prohibits stablecoin issuers from offering interest to holders, but it does not extend this prohibition to crypto exchanges or affiliated businesses. This regulatory framework has provoked a strong reaction from the banking sector.
Multiple US banking organizations, spearheaded by the Bank Policy Institute, have implored local regulators to address what they perceive as a loophole that may unintentionally permit stablecoin issuers to provide interest or yields on stablecoins.
In a recent communication, the organization contended that this so-called loophole could disrupt the credit flow to American businesses and families, potentially leading to $6.6 trillion in deposit outflows from the traditional banking system.
Related: What does the US GENIUS Act mean for stablecoins?
The crypto industry is not having it
The crypto industry has pushed back against the banks’ concerns, with two industry groups urging lawmakers to dismiss proposals aimed at closing the “loophole.” These organizations cautioned that such changes would favor traditional banks while hindering innovation and limiting consumer choice.
The US government has positioned itself as a strong advocate for the adoption of dollar-pegged stablecoins. Treasury Secretary Scott Bessent stated in March that the US government plans to utilize stablecoins to maintain the US dollar as the world’s global reserve currency. He remarked:
“We are going to put a lot of thought into the stablecoin regime, and as President Trump has directed, we are going to keep the US [dollar] the dominant reserve currency in the world, and we will use stablecoins to do that.”
Magazine: Crypto wanted to overthrow banks, now it’s becoming them in stablecoin fight
