Paragraph 1
When deposits move, lending capacity moves with them, and borrowing costs for consumers and small businesses rise. As Dr. Nigrinis explains, even moderate deposit substitution into stablecoins could reduce aggregate lending capacity by roughly $250 billion. If stablecoins offer yield competitive with the federal funds rate, the contraction could approach $1.5 trillion — with outsized effects on lending to small-businesses, and farm lending, and particularly to community banks’ ability to lend out to the Main Streets they serve across America, as well as to the broader economy as a whole. The lesson is not that stablecoins should be halted.
Paragraph 2
Payments innovation can and should move forward. But interest transforms stablecoins from payments infrastructure into shadow banks. Policymakers should extend that logic to wallets, exchanges, and intermediaries offering yield by another name. Interest doesn’t modify stablecoins — it transforms them.
Paragraph 3
The question isn’t whether stablecoins should exist; but rather, it’s whether they should pay interest. Competition is healthy. A structural contraction in credit is not. And the two are not the same thing.
Paragraph 4
Stablecoins are no longer a crypto curiosity. With dollar-denominated stablecoins already exceeding $250 billion in circulation and projections reaching into the trillions, they are rapidly becoming a mainstream component of the U.S. financial system. Much of the public debate frames concerns about stablecoins as little more than banks “whining” about competition and asking for tight restrictions to be slapped on a fast-growing rival. That framing misses the point. Competition in payments is healthy.
Paragraph 5
The issue is not that stablecoins challenge banks. It is that, once they pay interest, they hollow out bank deposits, the core funding source that supports credit creation in the U.S. economy. When deposits move, lending capacity moves with them, and borrowing costs for consumers and small businesses rise. Banks lend against deposits. Retail checking and savings accounts, so-called “core deposits,” are the lowest-cost and most stable funding source in the financial system.
Paragraph 6
The magic of banking is that those deposits support mortgages, small-business loans, agricultural lending, and consumer credit such as auto loans and credit cards. When deposits shrink, banks must either replace them with more expensive funding or reduce lending outright. A key point often overlooked is that a dollar is a dollar everywhere except in banking.
Paragraph 7
In banking, the location of that dollar matters. Where a dollar sits on the balance sheet determines how much lending it can support. Retail deposits are treated favorably under liquidity rules because they are sticky and slow to run. Wholesale funding and custodial balances backing stablecoins face much higher assumed outflows.
Paragraph 8
So even if funds “stay in the system,” lending capacity can still shrink materially. Last October, I published research examining how stablecoin-induced deposit substitution would translate into reduced lending capacity. The findings are sobering. Even under a relatively moderate scenario, where stablecoins function primarily as a payments medium and do not pay interest, structural estimates imply roughly a 6.2 percent decline in aggregate deposits.
Paragraph 9
Applied to today’s balance sheets, that translates into approximately $250 billion less in lending capacity across consumer, small‑business, and farm credit markets. Small banks alone would see nearly $19 billion less in small‑business lending and more than $10 billion less in agricultural credit. The effects become far more pronounced if stablecoins are permitted to pay interest at or near the federal funds rate. Yield is not a marginal feature, it is the switch that flips the disintermediation regime.
Paragraph 10
Under a yield‑competitive scenario, deposit losses rise to roughly 25.9 percent, erasing approximately $1.5 trillion in lending capacity, including about $110 billion in small‑business loans and $62 billion in farm lending. These are not marginal adjustments. They represent material contractions in credit availability for Main Street borrowers. Some argue that savers benefit when competition forces banks to pay higher deposit rates. But higher deposit costs compress bank margins and reduce the ability to extend credit—especially to relationship‑based borrowers such as small businesses, farms, and rural communities that have the fewest alternatives.
Paragraph 11
The distributional impact matters: community and mid‑sized banks cannot adapt quickly without cutting credit. This is policy impacts Main Street – not Wall Street. Critics claim these concerns are overstated because stablecoin reserves must be held in high‑quality liquid assets, primarily short‑term Treasuries. In theory, funds recycle back into the system.
Paragraph 12
In practice, that recycling is not neutral. There is a critical difference between stable retail deposits and large wholesale balances. If stablecoin reserves are held in Treasuries, deposits leave the banking system; if placed at large custodial banks, they return as more expensive, less stable wholesale funding that carries higher outflow assumptions and is less able to support long-term lending.
Paragraph 13
This shift would also be uneven. Reserve balances are likely to concentrate at a handful of large custodial institutions, meaning deposits leaving community banks would not meaningfully return — giving large banks more balances while small banks face funding erosion. Analysis by the Independent Community Bankers of America reinforces these concerns. ICBA estimates that permitting interest on stablecoins would reduce community‑bank lending by roughly $850 billion, driven by a $1.3 trillion contraction in community‑bank deposits.
Paragraph 14
The real issue isn’t just overall impact, it’s who ends up paying the price. For small businesses, this is not about bank margins, but about who can obtain credit. For communities, it is not about balance sheets, but about whether businesses can be created, expanded, and grow.
Paragraph 15
The history is instructive. When money-market funds pulled deposits from banks in the 1980s and 1990s, the system didn’t collapse, but lending became more market-dependent and less relationship-based, contributing to the S&L crisis. Money-market funds themselves also required government backstops in 2008 and 2020. Allowing stablecoins to pay yield would import that same fragility into the payments system. Surviving disruption is not the same as avoiding harm.
Leave a Reply