A senior Citi executive has warned that allowing interest payments on stablecoin deposits could trigger massive outflows from traditional banks, potentially draining $6.6 trillion from the banking system in a scenario reminiscent of the money market fund surge that disrupted finance in the 1980s.
What to Know:
- Citi's Future of Finance head Ronit Ghose compared potential stablecoin-driven bank outflows to the money market fund boom that saw withdrawals exceed new deposits by $32 billion between 1981 and 1982
- Banking groups led by the Bank Policy Institute are urging regulators to close what they call a loophole in the GENIUS Act that could allow indirect interest payments on stablecoins
- The crypto industry is fighting back against banking concerns, while Treasury Secretary Scott Bessent has endorsed using stablecoins to maintain the dollar's global reserve currency status
Ronit Ghose, Citi's head of Future of Finance, drew parallels between the potential impact of interest-bearing stablecoins and the money market fund revolution of the late 1970s and early 1980s, according to a Financial Times report published Monday. During that period, money market funds exploded from approximately $4 billion in 1975 to $235 billion in 1982, according to Federal Reserve data.
The funds outpaced traditional banks whose deposit rates faced tight regulatory constraints. Bank withdrawals exceeded new deposits by $32 billion between 1981 and 1982 as customers chased higher yields elsewhere.
Sean Viergutz, banking and capital markets advisory leader at consultancy PwC, echoed concerns about a similar shift toward higher-yielding stablecoins.
"Banks may face higher funding costs by relying more on wholesale markets or raising deposit rates, which could make credit more expensive for households and businesses," he said.
Regulatory Battle Over GENIUS Act Loophole
The GENIUS Act prohibits stablecoin issuers from offering interest to holders directly. However, the legislation does not extend this ban to crypto exchanges or affiliated businesses, creating what banking groups characterize as a regulatory gap.
Several US banking organizations, led by the Bank Policy Institute, have urged local regulators to address this perceived loophole. In a recent letter, the organization argued that the current regulatory framework may allow stablecoin issuers to indirectly pay interest or yields on stablecoins.
The banking groups contend this arrangement could disrupt credit flow to American businesses and families. They project potential deposit outflows of $6.6 trillion from traditional banking institutions if the regulatory gap remains unaddressed.
Crypto Industry Pushes Back Against Banking Concerns
Two major crypto industry organizations have countered banking sector arguments, urging lawmakers to reject proposals aimed at closing the alleged loophole. These groups argue that proposed revisions would unfairly favor traditional banks while hampering innovation and limiting consumer choice.
The dispute highlights broader tensions between traditional finance and the growing cryptocurrency sector over regulatory frameworks and competitive positioning.
Government Support for Dollar-Pegged Stablecoins
The US government has positioned itself as a supporter of dollar-pegged stablecoin adoption. Treasury Secretary Scott Bessent articulated this stance in March, stating that the administration would leverage stablecoins to preserve the US dollar's status as the world's dominant reserve currency.
"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," Bessent said at the time.
Understanding Stablecoins and Money Market Funds
Stablecoins are digital currencies designed to maintain stable value by pegging to traditional assets like the US dollar. Unlike volatile cryptocurrencies such as Bitcoin or Ethereum, stablecoins aim to provide price stability for transactions and store of value functions.
Money market funds, which proved disruptive to banking in the 1980s, are mutual funds that invest in short-term, high-quality debt securities. These funds became attractive alternatives to bank deposits because they offered higher yields during periods of regulated deposit rates.
The parallel drawn by banking executives suggests stablecoins could serve a similar function in the current financial landscape. If allowed to offer competitive yields, they might attract deposits away from traditional banks, potentially affecting the banking sector's funding model.
Closing Thoughts
The debate over stablecoin yield payments reflects broader questions about the future of digital finance and its impact on traditional banking. While government officials see stablecoins as tools to maintain dollar dominance globally, banking executives worry about competitive pressures that could reshape deposit markets and credit availability.