Rejecting the Banks’ Deposit Erosion Myth

Banks across America—from Wall Street giants to small-town lenders—are sounding alarms about stablecoins, warning they will drain deposits and cripple lending. This narrative, now echoed in mainstream media, misrepresents both the evidence and the reality of stablecoin use.

Look closer, and it’s clear this isn’t about protecting lending capacity. It’s about protecting banks’ payment processing profits and their grip on an outdated, expensive financial system.

The Myth of Deposit Erosion

The central claim—that stablecoins will cause a mass outflow of bank deposits—simply doesn’t hold up. Recent analysis shows no meaningful link between stablecoin adoption and deposit flight for community banks, and there’s no reason to believe big banks would fare any worse. Instead, what we’re really seeing is a coordinated campaign by the largest financial institutions to slow innovation and preserve the rents they earn from a payment system that hasn’t fundamentally changed in decades.

This is a familiar playbook: banks fought ATMs, electronic check clearing, and online banking, always warning of harm to consumers or financial stability, when in reality they were just trying to build regulatory moats to defend their profit streams from competition.

Banks have touted a Treasury Borrowing Advisory Committee report that asserts - without any evidence - that there will be $6 trillion in potential deposit outflows. That same report, however, forecasts a $2 trillion stablecoin market by 2028. The math doesn’t add up. Most forecasts put global stablecoin markets between $500 billion and $4 trillion over the next few years, but these reports don’t suggest that  $1 entering stablecoins means $1 leaving bank deposits. Stablecoins are not savings accounts. They are payment tools used to buy digital assets, settle trades, and increasingly, move money across borders. Someone buying stablecoins to pay an overseas supplier isn’t reallocating their savings—they’re choosing a faster, cheaper payment method over a slow, expensive wire transfer.

What’s Really at Stake

Stablecoins don’t threaten lending—they offer a competitive alternative to banks’ $187 billion annual swipe-fee windfall. The institutions now warning of “systemic risk” are the same ones pocketing tens of billions from card processing fees, which stablecoins could bypass entirely. Card rewards programs—often cited by the banks as a key consumer benefit—are simply rebates funded by these inflated fees, effectively forcing cash-paying customers (often lower-income) to subsidize perks for wealthier credit card users. 

The lending-capacity argument falls apart under scrutiny. If banks were truly starved for deposits, they would be competing aggressively for funds with higher interest rates. Instead, currently, they park $3.3T as reserves at the Federal Reserve, accounting for almost 20% of all bank deposits, rather than extending more loans. These reserves earned risk-free interest of $176B last year, or 55% of all bank earnings before taxes. The reserve requirement is zero, and while holding reserves isn’t a bad idea, banks are clearly holding more than they need to with the Fed. This isn’t about economics; it’s about narrative control and protecting profit margins from competition.

Compete, Don’t Block Innovation

Rather than lobbying to restrict stablecoins or ban rewards, banks should seize the opportunity to innovate. Stablecoin rails can enable instant settlement, slash correspondent banking costs, and deliver 24/7 payments. Forward-looking institutions are already experimenting with stablecoin offerings or partnering with issuers to better serve customers. Those who embrace this technology will thrive; those who resist will be left behind.

Stablecoins are a payment innovation, not a threat to lending. What we’re witnessing is classic incumbent resistance: the largest banks are using fear to protect a lucrative, outdated payments monopoly. Surveys consistently find the public disaffected by the banking system—Congress taking action to entrench a system that so many Americans feel alienated from would be a mistake.

Congress made the right call with the GENIUS Act, which established a clear, pro-consumer regulatory framework for stablecoins. Lawmakers should reject efforts to roll back these protections and double down on fostering competition and innovation.

The choice is clear: protect bank monopolies, or protect consumers. Embrace innovation, or cling to the past. The future of payments—and U.S. leadership in financial technology—depends on getting this right.