Who Moved My Cheese? Debunking the Five Big Lies of Stablecoins "Sucking" the Banking Industry

*Original: * 《Dispelling the Biggest Myths on How Stablecoins Could Impact Banking and Credit》

Compiled by: Ken, Chaincatcher

The progress of Washington's legislative efforts on crypto market structure currently seems to partly hinge on the question of whether stablecoin issuers should be allowed to share their economic benefits with third parties.

The banking industry refers to this as the "stablecoin loophole," but Congress's intent regarding yield in the "Genius Act" is very clear. Moreover, labeling a practice that could benefit ordinary Americans and provide them with tangible returns as a "loophole" seems quite strange.

That said, this debate has largely been derailed by some unfounded fears, primarily concerning what broader stablecoin applications might mean for the banking and credit sectors. Here are the five biggest myths and their fallacies.

Myth 1: The growth of stablecoins will only lead to a shrinkage of bank deposits

False. The two are not always substitutes; the growth of stablecoins could actually increase bank deposits in the U.S.

So far, stablecoins have actually increased domestic bank deposits. We know this because:

1. Most of the demand comes from overseas, likely from those who cannot access dollars through other means.

2. All major issuers use a combination of government bonds and bank deposits as reserve assets for their tokens (the "Genius Act" will further enforce this).

Combining these two factors creates a scenario where every additional dollar of stablecoin issuance drives an increase in bank deposits.

Even the portion of the issuer's reserves made up of government bonds will increase bank deposits. Trading government securities requires substantial banking support, including buying and selling, repos, foreign exchange transactions, and so on. The more stablecoins there are, the more securities trading related to stablecoins, leading to more bank deposits.

This should not surprise anyone. Stablecoins will promote broader adoption of the dollar, which is precisely why the "Genius Act" initially garnered bipartisan support. An increase in dollars held overseas means an increase in deposits at U.S. banks. If stablecoin holders can earn yield rewards, demand will be higher, leading to more deposits.

Skeptics might argue that this logic only holds if stablecoins are not widely adopted in the domestic market. But this view is shortsighted, as stablecoins are global. Increased domestic demand means enhanced liquidity, greater awareness, accelerated innovation, and broader applications overseas.

In summary: Stablecoins increase global demand for the dollar, especially those that earn interest. In the foreseeable future, this could lead to an increase in bank deposits.

Myth 2: The widespread adoption of domestic stablecoins will harm banks' ability to provide credit

False. Competition for deposits does not harm banks' lending; it harms their profitability. These are two distinct issues.

The U.S. banking industry is a highly profitable sector—current profits are richer than at any time in recent memory. Bank stocks were among the best-performing sectors last year. Net interest margins (the difference between the interest banks pay to depositors and the interest they charge borrowers) are at historical highs and still rising.

To cope with deposit competition—coming not just from stablecoins but from any source—banks only need to pay depositors slightly higher interest. This is something every other industry routinely does. While this may affect bank profits, it does not necessarily impact the availability of credit or the cost of borrowing.

According to an analysis by the Financial Times, the banking industry has captured an additional $1 trillion in net interest profits during the recent two-year interest rate hike cycle. Just JPMorgan alone could have earned $100 billion last year. This is enough to create a strong "firepower" to compete with any third-party rewards stablecoins offer to consumers.

Moreover, U.S. banks currently hold nearly $3 trillion in reserves at the Federal Reserve, close to historical highs and well above capital adequacy requirements. These idle funds are sitting there, earning banks substantial risk-free returns. If stablecoins lead to deposit outflows, banks can easily tap into these funds to offset that, maintaining equivalent levels of credit supply. With ongoing regulatory easing in the banking sector, demand for these reserves will likely decrease further in the coming years.

I don't know what you think, but I believe Congress should not legislate to protect the interests of bank shareholders and executives, especially when their stock prices are at historical highs.

In summary: Banks can compete with stablecoins by paying customers higher interest. They can also offset deposit outflows by reducing reserves at the Federal Reserve. Both actions may lower their profitability but do not necessarily affect lending operations.

Myth 3: Banks are the most important source of credit in the U.S. and must be protected from competition

False: Credit provided by banks accounts for only about 20% of total credit to U.S. businesses and households. A decrease in bank deposits is unlikely to lead to a proportional decrease in credit.

There are many nuances to this point, but one thing is clear in the data: U.S. banks do not provide most of the critical credit to the general public, such as mortgages. About half of small business loans also come from non-bank institutions.

Why is this important? Because even if stablecoins do harm bank deposits—which is not a given—even if banks cannot simply raise savings interest—which they clearly can—this does not mean that the adoption of stablecoins will lead to higher borrowing costs.

Bank loans, especially those financed through deposits, are not as critical as one might think. The U.S. is fortunate to have robust capital markets and large non-bank lending institutions. For example: money market funds, mortgage-backed securities, private credit funds, and insurance companies.

All these lending institutions—worth reiterating, they occupy a large share of the lending market—could benefit from the broader adoption of stablecoins, including those that offer rewards. This is because:

1. They all stand to benefit from cutting-edge innovations in payments. By using stablecoins instead of slow and costly wire transfers, the cost savings could make their credit supply more efficient and cheaper.

2. Their loan rates are primarily benchmarked against Treasury rates. The greater the demand stablecoins create for U.S. government debt, the lower the cost of non-bank credit may become.

The widespread adoption of stablecoins is likely to lower the borrowing costs for the U.S. government. This alone is reason enough to embrace them: stablecoins save taxpayers money. Furthermore, most of the credit created in the U.S. is actually tied to Treasury rates. This could lead to a scenario where stablecoins reduce bank deposits but simultaneously lower average borrowing costs.

In summary: Banks do not need special protection because their importance has changed significantly. In certain scenarios, funds flowing from banks to stablecoins could actually make mortgages and small business loans cheaper.

Myth 4: Community banks and regional banks are particularly vulnerable to the impact of stablecoins

False. The truly vulnerable ones are the large "money center" banks.

A digital dollar invented to improve the payment system is more likely to compete with large global payment banks serving ultra-large clients than with small community banks that lend to farmers.

The belief that the opposite is true does not withstand basic common sense.

First, small banks typically pay higher interest to depositors. Academic literature consistently explains this as a natural result of large banks providing certain specific services (like agency business) with less competition. The less competition there is, the lower the yields offered.

Stablecoins are primarily payment tools, so they are more likely to compete with wire transfer services rather than with basic savings accounts.

Second, survey data shows that the customer base of community banks tends to be older. This is intuitively reasonable: younger depositors are more likely to use fintech applications or are more interested in the latest tech products typically supported by large banks.

Do we really think a middle-aged farmer in the Midwest who got his first mortgage from a local bank would abandon that bank for a cryptocurrency offered by a startup?

The persistence of this fallacy is solely due to an unholy alliance between large banks trying to protect their profits and crypto startups trying to sell services to small banks.

In summary: It is currently unclear which type of financial institution is most affected by the adoption of stablecoins, but common sense tells us that those "too big to fail" large banks are more likely to have to compete with this new payment tool.

Myth 5: Borrowers are important, depositors are not

False: Both groups are essential for a viable banking system and a strong economy.

Prohibiting stablecoin issuers from sharing their economic benefits is, in effect, a covert policy of "subsidizing borrowers at the expense of American depositors." This is a strange policy choice. Saving and borrowing are two sides of the same coin. It is also something that benefits everyone. Savings can lead to economic prosperity and help families weather economic downturns.

The so-called "loophole" that banking lobbyists continuously protest actually just provides an additional income opportunity for retirees like my mother, who live off their savings. She is unlikely to switch to stablecoins, but why take that option away from her?

Innovation and competition drive businesses to strive to offer better products and services to consumers, which is the cornerstone of the vitality of the American economy. Why should the highly profitable banking industry be any different?

When you consider that most of the interest stablecoin issuers could theoretically pay actually comes from taxpayers (through the government bonds held by the issuers), their claim that "depositors are irrelevant in this debate" becomes even more infuriating.

Why would Congress consider enacting a rule that insists taxpayer funds can only flow to bank shareholders and not to depositors? I am sure this is not the intent of our officials, but the panic spread by banking lobby groups has muddied the waters on this issue.

In summary: The issue of stablecoin yields affects many people. Factors that may be unfavorable to borrowers could be beneficial to depositors, and borrowing is fundamentally a bilateral market.

Conclusion

It would be very strange if Apple lobbied Congress to ban the production of better smartphones instead of working to improve existing models. It would also be odd if Ford and General Motors lobbied Congress to ban Tesla instead of making popular electric vehicles. If I lobbied the department chair to prevent the offering of any new courses so I wouldn't have to improve my own, that would also be wrong.

Digital currency is no exception. Most of the concerns raised by the banking industry in this regard are unsubstantiated and lack basis. So far, Congress has done an excellent job of placing American progress above corporate interests; it should not stop now.

The crypto industry urgently needs more robust regulation to move into the mainstream, and the "Genius Act" has addressed the issue of stablecoins. It is time to focus on more important matters. Regardless of the outcome, the U.S. banking industry will be just fine.