Citi Warns: Stablecoin Yields Could Drain $6.6 Trillion
Major voices in the banking world are sounding the alarm over a looming crisis that could shake the foundations of traditional finance. Ronit Ghose, a top executive at Citigroup, along with leading banking trade groups, have reportedly warned that interest-bearing stablecoins — digital currencies pegged to the dollar but offering yields through regulatory loopholes — could trigger a massive flight of deposits from banks. The potential outflow, estimated at a staggering $6.6 trillion, threatens to upend the deposit-based lending system that fuels the U.S. economy.
A Modern-Day Run on Banks?
Imagine millions of Americans, lured by the promise of higher returns, pulling their money out of traditional bank accounts and moving it into stablecoins that pay interest. This scenario is not just hypothetical. According to CryptoNews.com, Citi's Ronit Ghose has draw a direct line from today's stablecoin craze to the money market fund surge of the late 1970s and early 1980s. Back then, investors fled bank deposits for higher-yielding alternatives, causing money market funds to balloon from $4 billion to $235 billion in seven years, draining funds from banks constrained by strict interest rate regulations. The crisis that followed forced banks to scramble for funding, and pushed borrowing costs higher for consumers and businesses alike.
The parallels are striking. Today's stablecoins, backed by blockchain technology and issued by firms like Circle and Tether, increasingly offer yields through affiliate programs and exchange rewards. This exploits a loophole in the recently enacted GENIUS Act, which prohibits stablecoin issuers from directly paying interest, but does not explicitly ban third-party platforms from doing so. Banking groups argue this creates an uneven playing field, allowing stablecoin platforms to attract depositors with competitive yields, while traditional banks remain constrained by regulatory overhead and deposit rate caps.
The Stakes: $6.6 Trillion at Risk
According to Decrypt.co, the Treasury Department estimates that if stablecoins can offer interest or yield, deposit outflows could reach $6.6 trillion. This represents a seismic shift in where Americans hold their money. Since bank deposits primarily fund loans to households and businesses, such an exodus could tighten credit availability, and push borrowing costs higher across the economy.
Banking trade groups, including the American Bankers Association and the Bank Policy Institute, have reportedly united in urging Congress to close the loopholes in the GENIUS Act. They want the law to extend the prohibition on interest payments to cover not just stablecoin issuers, but also exchanges, brokers, dealers, and affiliated entities. Their goal is to prevent stablecoin platforms from circumventing the law, and protect the traditional banking system from destabilizing deposit flight.
What This Means for You and the Economy
If depositors shift en masse to yield-bearing stablecoins, banks may face higher funding costs. They might have to rely more on wholesale markets, or raise deposit rates to compete, which could make credit more expensive for everyday Americans and businesses. Sean Viergutz, a banking and capital markets advisory leader at PwC, warned this could lead to a credit crunch, making it harder for families to get mortgages or small businesses to secure loans as reported by CryptoNews.com.
On the other hand, some experts see the threat as manageable. Musheer Ahmed, founder of Finstep Asia, suggested retail users may be slow to trust stablecoin providers, keeping the risk "relatively low" for now, according to Decrypt.co. He also pointed out that crypto lending could pick up to fill any gaps left by traditional banks, potentially balancing out the impact on interest rates.
The Regulatory Tug of War
The GENIUS Act, signed into law recently, was hailed as a landmark framework for integrating crypto into the U.S. financial system. It reportedly includes a "Libra clause" designed to prevent Big Tech and Wall Street dominance by requiring separate entities for issuance and prohibiting direct yield payments by issuers. However, the law's wording leaves room for exchanges and third parties to offer rewards, creating the very loophole banks now want closed.
Major crypto firms like Coinbase and PayPal have reportedly exploited this gray area, offering stablecoin rewards despite the federal ban on issuer interest payments. Coinbase's Chief Legal Officer Paul Grewal dismissed banking lobby efforts as attempts to avoid competition, noting lawmakers rejected such efforts during the GENIUS Act's passage, according to CryptoNews.com.
Meanwhile, stablecoin issuers like Paxos and Circle are reportedly moving quickly to secure national banking charters, signaling their intent to become major players under the new regulatory framework.
Citi's Contradictory Role
Citigroup is not just sounding the alarm but also positioning to benefit from the stablecoin revolution. CEO Jane Fraser confirmed Citi is exploring issuing its own stablecoin and developing tokenized deposit services for corporate clients, as reported by CryptoNews.com. The bank already uses blockchain for dollar transfers between global offices, and aims to capture the infrastructure layer as stablecoins gain mainstream adoption.
This dual stance highlights the complex relationship between traditional banks and emerging digital assets. While banks fear destabilizing effects of stablecoin yields, they recognize the opportunity to innovate and stay relevant in a rapidly changing landscape.
The Road Ahead
The clash between traditional banking and digital assets is intensifying. Stablecoins are reportedly projected to capture $1 trillion in annual payment volume by 2028, and could make up 10% of the U.S. money supply, fundamentally altering monetary policy and payment infrastructure.
Treasury Secretary Scott Bessent has expressed support for stablecoin adoption, suggesting they could expand dollar access globally and increase demand for U.S. Treasuries, as reported by CryptoNews.com. Yet, the banking sector's urgent calls to close regulatory gaps underscore the existential risk stablecoins pose to deposit-based lending and credit availability.
For policymakers, the challenge is clear: balance innovation with stability. Closing the GENIUS Act loopholes could safeguard the traditional banking system and ensure credit remains accessible. Ignoring these warnings risks repeating history, with a modern-day deposit flight shaking the economy.
If you hold money in a bank, or rely on loans for your home or business, this drama matters. The next moves by Congress and regulators will shape the future of money, credit, and finance.
References: Citi Warns Stablecoin Interest Could Drain Bank Deposits | Bank Groups Urge US Senate to Close Gaps in Country's New Stablecoin Law | Banks lobby to close loophole for stablecoin interest over deposit flight risk
