Worried about the outflow of $6.6 trillion in deposits, the U.S. banking industry lobbies to prevent interest-bearing rules for stablecoins
Last week, banking lobby groups complained to lawmakers that while banks are allowed to issue their own stablecoins, they cannot pay interest to users like traditional deposits. In contrast, cryptocurrency exchanges can indirectly offer interest to users holding stablecoins issued by third parties through reward mechanisms, which puts banks at a competitive disadvantage and could even lead to a massive shift of funds to the crypto market. Banking representatives stated that stablecoins could siphon off approximately $6.6 trillion in deposits from banks
U.S. banks complain that the new stablecoin regulations have "regulatory loopholes" that could lead to trillions of dollars in outflows from the banking system.
On Monday, August 25, media reported that banking lobby groups (such as the American Bankers Association, the Bank Policy Institute, and the Consumer Bankers Association) warned lawmakers last week that the new regulations contain regulatory "loopholes." Banks are restricted from paying interest, but crypto platforms can circumvent the rules to effectively pay interest, which could result in users transferring funds from banks to crypto platforms, triggering massive outflows.
New Rules for Stablecoins Anger Banks
In July of this year, the U.S. Congress passed the "Genius Act," aimed at regulating the $288 billion global stablecoin market. Stablecoins are digital tokens pegged to real-world assets like the U.S. dollar. The act prohibits issuers from paying "returns" or interest to customers.
Under the new rules, banks will be allowed to issue their own stablecoins but are prohibited from paying any interest. However, crypto exchanges will be able to indirectly offer interest and rewards to users holding third-party issued stablecoins (such as those issued by Circle or Tether).
Banks are concerned this will create an unfair competitive environment, as customers may choose to hold stablecoins on crypto exchanges for returns rather than keeping coins or cash dollars in banks, potentially leading to massive deposit outflows. According to a report from the U.S. Treasury in April, banking representatives stated that stablecoins could siphon off about $6.6 trillion in deposits from banks.
Banking representatives warned that if such a "mass migration of deposits" occurs, it would not only weaken banks' lending capacity and impact the entire economy but could also drive up interest rates and increase financing costs for businesses and households. Ronit Ghose, head of Citi's "Future of Finance" research, believes this wave of deposit outflows could resemble the capital-raising phenomenon of money market funds in the 1980s.
Sean Viergutz, a banking and capital markets advisor at PwC, stated that if consumers turn to higher-yielding stablecoins, banks may have to raise deposit rates or rely on more expensive wholesale financing, leading to increased lending costs and making borrowing more expensive for businesses and households.
Crypto Industry Strikes Back: "Banks Fear Competition"
In response to the banks' accusations, crypto firms strongly countered, claiming that banks' attempts to prohibit exchanges from paying interest to stablecoin users are "anti-competitive behavior."
The Crypto Innovation Council and the Blockchain Association sent a letter to senators on Tuesday, accusing banks of trying to create an "unfair payment stablecoin environment" to protect their interests at the expense of industry development, market competition, and consumer choice.
They also stated that if policies are implemented as per the banks' demands, it would only tilt competition toward "large traditional banks," which typically do not offer attractive returns to users and instead deprive consumers of choice.
Coinbase Chief Legal Officer Paul Grewal responded to the banks' claims on X platform: "This is not a loophole at all; you know it. Most members of Congress have already 'rejected your unrestrained efforts to evade competition... The President has also rejected it; it's time to move forward." However, some senior officials in the U.S. government do not dislike cryptocurrencies and even hope for their growth to provide new channels for financing U.S. debt. The Trump administration has been advocating for the inclusion of cryptocurrencies into the traditional financial system. Previously, Treasury Secretary Mnuchin had signaled to Wall Street that he believes stablecoins will become one of the important buyers of U.S. Treasury bonds in the future
