Banks Awakening to the Tech Threat in Stablecoins: Why Lobbying Won't Cut It

Bottom line: In a battle for margin, between banks and tech, tech will win. And bank lobbying to change the rules won’t work. Tech will innovate around any tweaking of the rules. The real solution is to change the GENIUS Act to enable stablecoins to act like deposits to fuel bank lending.

The stablecoin market is in a major landgrab with everyone trying to capture the interest on the projected $2 trillion by 2028 and potential $3.7 trillion by 2030. If interest rates stay around 4% we’re talking about $80 - $148 billion in interest, almost all of which goes to stablecoin issuer profits. This is a gold rush like no other. On a level playing field, tech will win. The banking industry projects a deposit drain of $6.6 trillion; deposits that fuel lending. And lending is the foundation of our entire economy. I’ve written about this, but my projections were more conservative, in the $3-5 trillion range.

The lawmakers may put up roadblocks, at the speed of government, but tech companies will avoid them at Internet speed. Right now, the stablecoin issuers (currently tech, not really banks yet) are working with affiliates like crypto exchanges to offer backdoor or indirect interest to make their stablecoins more attractive. They are buying market share by leveraging network effects that will lock out future competition. Good luck stopping this in a world of staking, DEXs and more. It will be the ultimate game of whack-a-mole. Jeff Bezos nailed it when he said, "Your margin is my opportunity," and with tech's lower costs, they'll come out on top in any price war.

The reality is that our entire economy is built on debt, or if you prefer: “credit”. Banks uniquely lend money into existence. This is their superpower. Unfortunately, under the GENIUS Act, stablecoins are their kryptonite. They will drain deposits from banks, which will hit liquidity ratios, resulting in reduced lending and higher interest rates, AKA credit contraction. This will crush the real economy that relies on credit to operate.

The Wake-Up Call for Bankers: Deposits Slipping Away

Lately, groups like the Bank Policy Institute, the American Bankers Association, and others have been firing off letters to Congress. They're begging to close a gap in the GENIUS Act, which became law on July 18 to boost dollar-backed stablecoins and keep the U.S. dollar on top globally. The problem, they say, is that affiliates of stablecoin issuers, like crypto exchanges, can still offer yields or interest on these assets, even though the issuers themselves can't.

What keeps them up at night? A huge outflow of deposits from banks. They point to a U.S. Treasury report warning of up to $6.6 trillion draining out. This isn't just talk. Stablecoins like Tether and USDC already top $230 billion combined, and folks at Citibank think they could reach $3.7 trillion by 2030. If people chase better returns with yield-paying stablecoins, banks lose the low-cost money they use for loans. That could drive up rates, cut back on credit, and hit everyday businesses and families hard.

Lobbying Won't Fix This Problem

Banks are defaulting to what they know: lobbing for tweaks to the GENIUS Act to kill yields from those affiliates. In theory this should solve the problem; in practice it won’t. My favorite line: Do you know the difference between theory and practice? In theory there is no difference, in practice, there is. As I explained above, tech will evade any regulatory tweak. The real solution is obvious to a banking nerd like me: make stablecoins work just like fiat money. Change the law so that banks can lend against them, like deposits. This would not only inoculate the banks against their stablecoin kryptonite, it will turn stablecoins into the banks’ superpower. They’ll earn huge profits on them, better than mortgage backed securities (MBS). 

The lawmakers prioritized “safety” over “growth” when they demanded that stablecoins be segregated from deposits; unable to be borrowed against. Maybe they were concerned about an FTX-style blow-up, breaking the $1 peg, or maybe they wanted cheap funding for government debt. Who knows. But in the process that crippled the banks, stripping them of their superpower to lend money into existence to fuel our economy. If they try to apply a bandaid, like restricting backdoor interest payments to stablecoin holders, they won’t solve the real problem. I assumed that this sort of fix to the GENIUS Act would take 3-5 years. But maybe the awareness will build sufficiently to move this along faster.

You might find it odd that a tech guy like me is pulling for the banks. My natural affiliation is with tech companies. I like creative destruction through margin collapse and disintermediation. However, our entire economy is built on credit that is issued by banks. If we dramatically reduce the banks’ ability to issue that credit, lending money into existence, then we could have a credit collapse that would make the 2008 global financial crisis (GFC) look like a walk in the park.