Stablecoins: A Rising Threat to US Banks as $500 Billion Departs

TLDR

• Standard Chartered predicts that $500 billion in bank deposits will move to stablecoins by 2028.
• The shift in deposits poses a growing risk to traditional banks’ earnings and net interest margins.
• Regional banks are more vulnerable to the potential deposit outflow caused by stablecoin adoption.
• Lawmakers are debating the Digital Asset Market Clarity Act, which could regulate stablecoins and their ability to offer yield.
• Stablecoin issuers may reduce deposit flight if they hold a significant portion of reserves in bank deposits.

Standard Chartered’s Geoff Kendrick has warned that $500 billion in bank deposits could shift into stablecoins by 2028. This forecast is significantly lower than his previous $1 trillion estimate from October. Despite this, Kendrick’s assessment highlights a growing risk for traditional banks as stablecoins continue to gain traction.

As lawmakers in Washington debate the Digital Asset Market Clarity Act (CLARITY Act), the future of stablecoins remains uncertain. The proposed bill would create a federal regulatory framework for digital assets, possibly limiting the ability of stablecoin issuers to offer yield. If stablecoins are allowed to offer yield, this could draw a large portion of deposits away from the banking system.

The Impact of Stablecoins on Net Interest Margin (NIM)

Stablecoins could affect U.S. banks by draining deposits that are crucial to net interest margin (NIM) income. NIM represents the difference between what banks earn from loans and what they pay on deposits. As Kendrick explains, a decrease in deposits would directly result in reduced NIM, a key driver of bank earnings.

Regional banks may be particularly vulnerable to this shift. Kendrick’s analysis reveals that regional banks like Huntington Bancshares, M&T Bank, and Truist Financial rely on NIM for over 60% of their revenue. In contrast, investment banks such as Goldman Sachs and Morgan Stanley depend less on NIM, with this revenue stream contributing to less than 20% of their total income.

Kendrick Optimistic About Stablecoin Regulation Progress

The potential for stablecoins to offer yield could exacerbate the shift in deposits from traditional banks. Kendrick noted that if stablecoins begin to offer attractive returns, the transfer of funds away from banks could increase. However, he also pointed out that the impact might not be as severe if stablecoin issuers keep their reserves in bank deposits.

In such a scenario, stablecoins would still rely on banks to hold a large portion of their reserves. This would reduce the overall flight of deposits, as stablecoin issuers would essentially be circulating the funds back into the banking system. This could mitigate some of the pressure on banks, particularly in terms of deposit loss.

Despite concerns over the future of stablecoins and their potential impact on the banking system, Kendrick remains optimistic that progress will continue. He believes that a regulatory framework for digital assets will be finalized by the end of Q1, with the CLARITY Act potentially making its way to President Donald Trump for approval.