Banks are facing an existential crisis.
Not because of a looming recession or rising credit losses… although those risks could still be ahead.
They’re up against something more structural today.
Because for the first time in decades, something new is starting to compete for their most important asset.
Your deposits.
This battle is already underway in Washington and across the rapidly expanding stablecoin market.
And it could determine who controls trillions of dollars in deposits in the years ahead.
A New Competitor for Deposits
Deposits are the foundation of the banking system.
They’re the raw material banks use to make loans, buy securities and generate interest income.
That’s why banks guard them so closely. Lose deposits, and you don’t just lose customers — you lose the ability to fund lending.
Your deposits are why the reaction to stablecoins has been so strong from the banking community, and why lawmakers in Washington are now actively working to restrict stablecoins from offering yield.
Under new proposals tied to the GENIUS Act and related frameworks, stablecoin issuers will be prohibited from paying interest directly to holders. Regulators are also looking at ways to prevent companies from offering yield through affiliates or other structures.
The issue with stablecoins comes down to a simple question: Should a digital dollar be allowed to pay yield at all?
Because once it does, it starts to compete directly with bank deposits.
And banks have already witnessed what happens when a better option for holding cash comes along.
In the 1970s and 1980s, money market funds emerged as an alternative to bank deposits. They offered higher yields with similar liquidity.
Naturally, many investors moved their deposits to these new financial instruments. That caused funding costs to change, and regulators were forced to adapt.
Stablecoins threaten to do the same thing. But they operate on a very different kind of infrastructure.
Because money market funds still sit inside the traditional banking system.
But stablecoins can move outside of it. They run on networks that are always on, globally accessible and built into software.
That changes both the speed and scope of their adoption.
And it puts pressure on the core of the banking model.
Why Your Deposits Matter
You see, the business of banks is to take in deposits at low rates and deploy that money at higher ones.
Image: Wikipedia Commons
As of mid-March, short-term Treasury yields were up around 3.64%. But the average U.S. savings account only paid about 0.39%, and money market deposit accounts weren’t much higher at 0.56%.
That difference between what banks pay you and what they earn on your money is how banks make money.
A stablecoin blows away your meager interest on deposits. It holds higher-yielding, safe assets like U.S. Treasuries and passes some of that yield back to users. It’s still a dollar in every sense of the word, but it can be sent around the globe as easily as sending an email.
And it pays more.
Coinbase’s USDC rewards program, for example, has been offering around 3.5%.
That’s a lot more attractive than a regular bank account. And it means some deposits will move out of banks and into stablecoins.
That gives banks two choices.
They can raise the rates they pay to keep your money, or they can lose your business.
Either way, their costs go up. And when costs go up, lending slows.
That’s potentially bad news for everyone. Because deposits don’t just sit in accounts — they fund mortgages, business loans and credit across the economy.
That’s why this is more than just a crypto story. It’s also a capital allocation story.
And it’s already big enough that it can’t be ignored.
Stablecoin supply has more than doubled since early 2023. It now sits in the $300 billion to $315 billion range.
Image: panewslab.com
Visa estimates adjusted stablecoin transaction volume exceeded $10 trillion over the past year, with total volume exceeding $50 trillion.
Even if some of that activity is trading, stablecoins are already moving huge amounts of money. They’ve become core settlement infrastructure in digital markets, with growing use in payments and cross-border transfers.
What’s more, it represents a different kind of payment system. It’s faster and more flexible, and it isn’t dependent on traditional banking rails in the same way.
So you can see why banks and regulators are working quickly to regulate stablecoins today.
But stablecoins aren’t without their drawbacks. They don’t have deposit insurance. They also carry regulatory uncertainty. And banks still have structural advantages in trust, scale and access to central bank liquidity.
Those are important advantages.
But they don’t change the fact that stablecoins are starting to compete for one of the most important funding sources in finance — your deposits.
That’s why this push to regulate stablecoins is happening now.
Because banks and regulators know exactly what’s at stake.
Here’s My Take
Stablecoins are starting to compete directly with bank deposits.
That’s why lawmakers are trying to limit whether stablecoins can offer yield. If they’re successful, the threat is seemingly contained.
But I don’t believe this issue is going to go away with a simple ruling.
Because even if regulators block yield at the issuer level, the underlying economics haven’t changed. As long as stablecoins can hold higher-yielding assets, there will be pressure to pass that return back to users in some form.
That means the competition for your deposits won’t go away.
It’ll just move outside the traditional banking system.
Regards,
Ian King
Chief Strategist, Banyan Hill Publishing
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