Growth of Stablecoins Represents a $500 Billion Challenge for Bank Deposits and Net Interest Margins

U.S. banks are facing increased risks of deposit losses to the burgeoning digital asset sector as stablecoins surge in popularity. The worry stems from the rapid adoption of stablecoins, with their circulating supply expanding approximately 40% in the past year to over $300 billion. Concerns about long-term funding are highlighted in a Bloomberg report, which cites insights from Geoff Kendrick, global head of crypto research at Standard Chartered. He estimates that stablecoins could lead to the exit of around $500 billion in deposits from banks in developed countries by 2028. In the U.S., Kendrick predicts that bank deposits could decrease by an amount roughly equivalent to one-third of the total stablecoin market capitalization. He also anticipates that the growth of stablecoins may accelerate following the anticipated passage of the Clarity Act, legislation currently under review in Congress designed to regulate the digital asset sector. “U.S. banks are under threat as payment systems and essential banking functions transition to stablecoins,” he stated. A contentious debate continues between traditional financial institutions and crypto firms regarding whether holders of stablecoins should be permitted to earn yield-like rewards. Currently, Coinbase offers a 3.5% reward on balances in Circle’s USDC, which banking lobbyists argue could lead to further deposit losses if not curtailed. “Bank lobbying groups are trying to eliminate their competition,” remarked Coinbase CEO Brian Armstrong at the World Economic Forum in Davos last week. “I have no tolerance for that; it's un-American and detrimental to consumers.” Despite these tensions, Kendrick is optimistic about the approval of the broader crypto market structure bill by the end of the first quarter. In terms of vulnerability, Kendrick used net interest margin income as a proportion of total revenue to identify which banks are most at risk; this metric serves as a strong indicator of the potential for deposit flight. His analysis revealed that regional American banks are more susceptible than diversified lending institutions and investment banks, which show the least exposure. Among the 19 U.S. banks and brokerages surveyed, Huntington Bancshares, M&T Bank, Truist Financial, and Citizens Financial Group rank as the highest-risk entities. Regional banks are particularly exposed to payment outflows since they rely more on traditional lending compared to their larger counterparts. On a positive note, market performance indicates limited short-term risk, with the KBW Regional Banking Index rising nearly 6% in January, while the broader market only increased just above 1%. Short-term anticipated interest rate cuts could lessen deposit costs, and government initiatives to bolster economic activity might enhance loan growth. Nevertheless, Kendrick maintains that the long-term shift toward stablecoins is inevitable. “An individual bank's actual risk from a stablecoin-induced decline in net interest margin income will predominantly depend on its response to this threat,” he observed. Furthermore, he pointed out that Tether and Circle, the leading stablecoin providers, hold only 0.02% and 14.5% of their reserves in bank deposits, respectively, indicating that “very little re-depositing is occurring.”