TLDR
- Citi’s Ronit Ghose warns stablecoin yields may drain bank deposits.
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Stablecoins offering yields could mimic the 1980s’ money market fund boom.
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U.S. banking groups warn of $6.6 trillion in deposit outflows due to stablecoins.
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Crypto industry pushes back against regulations limiting stablecoin yields.
Ronit Ghose, head of Citi’s Future of Finance, has warned that paying interest on stablecoin holdings could spark large-scale bank outflows. He compared this potential shift to the rise of money market funds in the 1980s, where the funds grew rapidly, taking away significant deposits from traditional banks. The concern is that stablecoins, by offering higher yields, may draw customers away from traditional banking products, creating liquidity challenges for banks.
Ghose’s warning highlights the growing concern over the implications of new digital financial products, such as stablecoins. These digital assets are often backed by traditional currencies like the U.S. dollar but are more flexible and offer higher interest rates. If this trend continues, it could reshape how money is stored and moved within the economy.
Historical Parallel to the 1980s Money Market Fund Boom
Citi’s Ronit Ghose pointed to the money market fund explosion from the late 1970s and early 1980s, a period during which the funds grew from $4 billion in 1975 to $235 billion by 1982. As consumers sought higher returns, this shift led to a net outflow of $32 billion from banks, according to Federal Reserve data.
Ghose’s comparison suggests that, just as in the 1980s, the rise of stablecoins offering interest could divert funds from traditional banking systems, especially if such assets offer better returns than conventional savings accounts.
This historical example underscores the potential disruption stablecoins could have on the banking sector. Banks may find themselves needing to raise deposit rates or turn to more costly wholesale markets to maintain their liquidity.
Banking Industry Warns of $6.6 Trillion Outflow Risk
The Bank Policy Institute, along with other U.S. banking groups, has warned that the increasing adoption of stablecoins could trigger up to $6.6 trillion in deposit outflows from the traditional banking sector. These figures highlight the scale of the challenge banks might face if customers start moving their funds into stablecoins offering higher yields.
As a result, banks would likely need to raise deposit rates or look for alternative funding sources, potentially leading to higher borrowing costs for businesses and households.
The banking sector has been vocal in urging regulators to curb the use of stablecoin yields, which they argue would create unfair competition. While the U.S. Securities and Exchange Commission (SEC) and other regulators have been active in establishing clear frameworks for crypto assets, banks fear the current regulatory landscape could allow stablecoin platforms to offer attractive yields without facing the same scrutiny as traditional financial products.
Crypto Industry Pushes Back Against Yield Restrictions
Despite the growing concerns within the banking sector, the crypto industry has actively pushed back against calls for restrictions on stablecoin yields. Organizations like the Blockchain Association and the Crypto Council for Innovation argue that these measures would tilt the playing field in favor of traditional banks, stifling innovation and limiting consumer choices.
They contend that existing regulatory frameworks are already providing consumer protection while still allowing for innovation in digital financial products.
Coinbase and other crypto platforms also argue that stablecoin yields help drive the broader adoption of digital assets, providing more opportunities for people to access new financial products. As a result, many in the crypto industry believe that stablecoins should be allowed to operate without the same restrictions applied to traditional banks.
