4 Minutes
Citi report: stablecoin yields may prompt bank deposit flight
Citi’s head of the Future of Finance, Ronit Ghose, warned in a recent report that paying interest on stablecoin holdings could prompt significant outflows from traditional banks. Ghose drew parallels to the money market fund surge of the late 1970s and early 1980s, suggesting that attractive yields on dollar-pegged stablecoins might pull deposits away from retail banks and reshape the funding landscape for lenders.
Historical precedent — money market funds vs. bank deposits
The Financial Times highlighted Ghose’s analogy to the era when money market funds ballooned from roughly $4 billion in 1975 to about $235 billion by 1982. At that time, regulated caps on bank deposit rates limited banks’ ability to compete, and withdrawals exceeded new deposits by $32 billion between 1981 and 1982, Federal Reserve data show. Citi warns that a similar dynamic could unfold if stablecoin issuers or crypto platforms start offering yield on stablecoin balances, accelerating deposit outflows and pressuring traditional deposit franchise models.
Impact on bank funding costs and credit pricing
Industry advisers agree this scenario could raise costs for banks. Sean Viergutz, PwC’s banking and capital markets advisory leader, noted that banks may be forced to turn to wholesale funding or hike deposit rates to retain clients — moves that would increase funding costs and could translate into pricier loans for businesses and households. In short, higher stablecoin yields could tighten credit conditions if banks’ net interest margins compress.
Regulatory debate: GENIUS Act and the so-called loophole
The regulatory backdrop is central to the dispute. The GENIUS Act currently bars stablecoin issuers from directly offering interest on tokens, but it does not explicitly prohibit crypto exchanges or affiliated entities from providing yields. Banking groups, spearheaded by the Bank Policy Institute, have urged regulators to close what they call a loophole that could indirectly enable stablecoin yields. In a recent letter, the organization warned that unchecked stablecoin yield offerings might divert as much as $6.6 trillion from the traditional banking system, potentially disrupting credit flows.
Industry pushback and political stakes
The crypto industry has pushed back against efforts to tighten rules, arguing that closing the perceived loophole would unduly favor traditional banks and stifle innovation and consumer choice. Industry trade groups have asked lawmakers to resist changes that would prohibit exchanges or non-bank firms from competing on yield, asserting that a balanced regulatory approach can protect consumers without halting digital asset development.
Government stance and what to watch next
At the same time, the U.S. government has signaled support for stablecoin adoption. Treasury Secretary Scott Bessent stated in March that stablecoins could be used to reinforce the dollar’s role as the world’s primary reserve currency — a sign that policymakers recognize both the strategic and economic implications of dollar-pegged tokens.
What this means for crypto investors and banks
For crypto users, increased stablecoin yields could offer more attractive short-term returns, but may invite sharper regulatory scrutiny. For banks, the risk of deposit migration underscores the need to adapt funding strategies and product offerings. Market participants should watch proposed legislative changes, regulatory guidance on exchanges and issuers, and any signs of platforms advertising yield on stablecoins — developments that would determine whether stablecoins become a systemic competitor to traditional deposits.
Comments