Paying interest on deposits in stablecoins could trigger a wave of bank fund outflows similar to the boom of money market funds in the 1980s, warned Citigroup's future finance chief Ronit Ghose in a report released on Monday.
According to the Financial Times, Ghose compared the potential outflows from paying interest on stablecoins to the rise of money market funds in the late 1970s and early 1980s.
Federal Reserve data shows that these funds surged from about $4 billion in 1975 to $235 billion in 1982, surpassing banks where deposit rates were heavily regulated. Between 1981 and 1982, bank account withdrawals exceeded new deposits by $32 billion.
Sean Viergutz, head of banking and capital markets consulting at PwC, also stated that consumers turning to higher-yielding stablecoins could pose challenges for the banking industry.
"Banks may face higher funding costs as they need to rely more on wholesale markets or raise deposit rates, which could make credit more expensive for households and businesses," he said.
The GENIUS Act does not allow stablecoin issuers to pay interest to holders, but it does not extend the ban to cryptocurrency exchanges or affiliated entities. This regulatory setup has sparked a strong reaction from the banking industry.
Several U.S. banking groups, led by the Bank Policy Institute, have urged local regulators to close what they describe as a loophole that could indirectly allow stablecoin issuers to pay interest or yields on stablecoins.
In a recent letter, the organization argued that the so-called loophole could disrupt the flow of credit to U.S. businesses and households, potentially triggering a $6.6 trillion outflow of deposits from the traditional banking system.
The crypto industry has pushed back against the banks' concerns, with two industry organizations urging lawmakers to reject proposals to close the "loophole." These organizations warned that revisions would tilt the competitive landscape in favor of traditional banks while stifling innovation and consumer choice.
The U.S. government has become a major proponent of dollar-pegged stablecoins. Treasury Secretary Scott Bessent stated in March that the U.S. government would use stablecoins to ensure the dollar maintains its status as the world's global reserve currency. He said at the time:
Related: Banking lobby seeks to amend the GENIUS Act: Is it too late?
Original article: “Citi executive warns stablecoin yields could drain bank deposits”
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