A senior executive at Citi has raised alarms about stablecoin yields disrupting the traditional banking sector.
Ronit Ghose, Citi’s Head of Future of Finance, warned that offering interest on stablecoin holdings could lead to significant deposit outflows from banks.
He said this could even potentially reshape the financial landscape.
Ghose also drew parallels to the financial upheaval caused by money market funds in the late 1970s and early 1980s.
Stablecoin Yields: Would they make history repeat?
According to a Financial Times report, Ghose likened the rise of interest-bearing stablecoins to the rapid growth of money market funds.
These funds surged from $4 billion in assets in 1975 to $235 billion by 1982. Then outspaced the tightly regulated bank deposit rates.
Federal Reserve data indicates that between 1981 and 1982, bank account withdrawals exceeded new deposits by $32 billion.
Ghose fears a similar trend could repeat if stablecoins gain traction as a high-yield alternative.
Meanwhile, Sean Viergutz, Banking and Capital Markets Advisory Leader at PwC, echoed similar sentiments.
He was of the opinion that a consumer shift toward higher-yielding stablecoins could force banks to drastic measures. For instance, either relying more heavily on wholesale markets or raise deposit rates to remain competitive.
“This could drive up funding costs for banks, ultimately making credit more expensive for households and businesses,” Viergutz said.
Banking Sector Sounds Alarm Over Regulatory Loophole
The debate over stablecoin yields has intensified with the introduction of the GENIUS Act.
This is a U.S. legislative proposal that prohibits stablecoin issuers from directly offering interest to holders. However, it does not extend this ban to crypto exchanges or affiliated businesses.
The Bank Policy Institute (BPI), representing major U.S. banks, has urged regulators to close what it calls a “loophole” that could indirectly allow stablecoin issuers to pay yields.
In a letter to regulators, the BPI warned that this regulatory gap could lead to deposit outflows estimated at $6.6 trillion, severely disrupting the flow of credit to American businesses and families.
The organization argues that unchecked stablecoin yields could destabilize the traditional banking system, which relies heavily on consumer deposits to fund lending activities.
Crypto Industry Pushes Back
However, the cryptocurrency industry has strongly opposed efforts to tighten regulations on stablecoin yields.
Two prominent crypto advocacy groups have called on lawmakers to reject proposals to close the perceived loophole, arguing that such measures would favor traditional banks at the expense of innovation and consumer choice.
They contend that restricting stablecoin yields could stifle the growth of digital assets and limit opportunities for investors seeking alternatives to traditional banking products.
As stablecoins gain popularity, regulators face the challenge of balancing financial innovation with the stability of the traditional banking system.
