Originally published at Forbes
There’s a certain inevitability about recent arguments between the crypto industry and the banking sector. Like the seven stages of grief—shock, denial, anger, bargaining, depression and the upward turn before final acceptance—we are seeing a very traditional finance industry coming to terms with seismic changes. And it’s fair to say, we’re currently in the anger stage.
The current row is over a not-so-innocuous “loophole” the banking lobby has flagged that would allow crypto exchanges to pay interest to their customers for stablecoins. Banking lobbies have been blunt about the risks, noting this is not about competition, but the potential of “greater deposit flight risk … that will undermine credit creation throughout the economy.”
To underscore the risk, they state that “the Treasury Department issued a report in April estimating that stablecoins could lead to as much as $6.6 trillion in deposit outflows, depending on whether stablecoins can offer interest or yield.”
The reaction? It may be best summed up by Paul Grewal, chief legal officer at Coinbase: “This was no loophole and you know it. 376 Democrats and Republicans in the House and Senate rejected your unrestrained effort to avoid competition. So did one President.”
The Concern
I’m the founder of both a European bank (EMBank) and a global banking-as-a-service provider (OpenPayd) that avails international payment rails in fiat currencies and stablecoins to some of the largest fintechs and exchanges worldwide. EMBank gives me a close view of the regulatory hurdles and systemic risk banks are required to handle, while OpenPayd has recently integrated stablecoin payments into its infrastructure, giving me firsthand experience in how stablecoins renovate payment rails.
The concern lies in fractional reserve banking. In plain English, it means that banks are authorized to lend based on a fraction held in deposits. Reduce the deposits by $6.6 trillion moving to stablecoins, and a credit crisis could ensue. Just because the reputation of the banking industry is less than stellar doesn’t mean we shouldn’t heed the warnings.
The $6.6 trillion figure is enormous. Given that the U.S. debt is circa $37 trillion, and $6.4 trillion of that is in Treasury bills, the banking lobby has said a sum greater than the entire Treasury bills market is at risk from flight, reported everywhere from the Financial Times (paywall) to crypto news outlets worldwide.
They cite it’s from the U.S. Treasury Report in April, so it’s worth cross-checking. However, a closer look suggests the figure is incorrect.
The Numbers
The press release doesn’t cite the Treasury report directly—instead, they cite the Wall Street Journal (paywall) in an article that makes no reference to such figures. The Treasury report is more telling.
So where’s the $6.6 trillion figure? That relates to the current total amount of liquid cash—known as M1—money supply in the U.S. economy. It’s the total amount of money readily available, instantly, for payments. Not stablecoins. Nothing to do with yields.
The Treasury report indicates some of that could shift into less liquid (i.e., not instantly accessible categories of money), known as M2 and M3. They don’t project how much, nor do they say all M1 money will shift into stablecoins or that yields have anything to do with it. Instead, the report suggests stablecoins could grow to $2 trillion by 2030.
So $2 trillion in outflows? Still a sizeable figure, but it’s actually nowhere near that.
Stablecoin reserves would still largely be held in Treasurys and cash equivalents, and actual usage would be fragmented across payments, DeFi, wallets and custodial services. A reasonable estimate would be a quarter on exchanges, maybe arguably a third. But 100%? No chance.
So the real figure is maybe $400 billion to $700 billion—not quite as earth-shattering.
The Real Issue
The deposit outflows then may be a concern, but they’re grossly overstated. The interest rates consumers receive across the entire industry can be best described as negligible. Right now, the baseline U.S. interest rate is 4.5%, and the typical bank interest rate for a savings account is just 0.6%.
Stablecoins buy U.S. Treasurys on a 1-to-1 basis for every dollar they hold. The interest from these yields can then be shared back with the holders. Not directly—the GENIUS Act prohibits this—but via the exchanges. Yes, it’s a loophole—they’re called “rewards.” But is it potentially better for consumers? Yes. Does it threaten the banking industry? Absolutely.
Where We Go From Here
The biggest issue that I think deserves attention is the creation of a level playing field. Why should exchanges be able to effectively act as banks without being subject to the same regulatory burdens as banks?
This is the next level of complication. It may seem logical to say entities acting as banks should be regulated like one, but current banking legislation is not designed for blockchain’s speed and immutability. The requirements of anti-money laundering for FX are built on processes with natural breaks, like correspondent banks and KYC checks, that don’t exist in blockchain. Applying the same levels of regulation requires an entirely new framework.
That will take time, but in the meantime, there is one solution that has not been mentioned.
In the seven stages of grief, the final stage is acceptance, which often leads to forming partnerships. The crypto and banking industries need one another. There’s no reason why legislation can’t be amended to allow banks to carry the regulatory burden of accepting stablecoins on exchanges as deposits for collateral for lending, thus negating the credit risks while improving customer and business outcomes.
The scale and speed of the new technology would be married with the regulatory expertise of the other.
Bank-crypto partnerships are still in their infancy, such as that of JPMorgan and Coinbase in July of this year. But I believe they will gather pace.
There are no shortcuts to experience, and when change is inevitable, you find partners that fill the gaps in your own. Watch this space.
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