Could Proposed Stablecoin Laws Cause Credit Collapse & Depression?

By 2028, the U.S. Treasury estimates that stablecoins—digital currencies pegged to the dollar—could hold $2 trillion worldwide. If we assume that half of this ($1 trillion) comes from U.S. bank deposits, with the rest coming from outside of the US, that would be $1 trillion drained from the $18 trillion in U.S. bank deposits. Proposed laws like GENIUS and STABLE would “sterilize” these assets, meaning banks can’t use them for lending, and they explicitly prohibit borrowing against stablecoins themselves. This could choke the economy, spike borrowing costs, and risk a recession worse than the 2008 Global Financial Crisis (GFC). Worse yet, Citibank projects stablecoins could balloon to $3.7 trillion by 2030, amplifying the threat. Let’s break it down in simple terms.

How Banks Keep the Economy Moving

Your bank account is part of $18 trillion in U.S. deposits, the fuel for $13 trillion in loans—car loans, mortgages, business financing, you name it. Banks don’t just hold your money; they lend it out through fractional reserve banking. Since 2020, the Federal Reserve has set reserve requirements to 0%, but banks still keep some cash for safety and lend the rest, creating a chain reaction called the money multiplier.

Here’s how it works: You deposit $1,000. The bank lends $900 to someone buying a truck. The truck dealer deposits that $900, and their bank lends $810 to a business, which deposits it, and so on. This “daisy-chained” debt cycle amplifies your deposit, turning $1,000 into several thousand dollars of economic activity. Historically, the money multiplier in the U.S. has been 3 to 5 times, meaning $1 in deposits could support $3-$5 in loans, powering businesses, jobs, and growth.

What Happens if $1 Trillion Leaves Banks?

If $1 trillion of U.S. deposits (half of the $2 trillion stablecoin estimate) moves to stablecoins by 2028, it’s like pulling the plug on the economy’s engine. Stablecoins backed by Treasuries sound safe, but GENIUS and STABLE require those Treasuries to be “sterilized”—locked away so banks can’t borrow against them like they do against all other deposits. These laws also prohibit banks from borrowing against stablecoins themselves, so they can’t replace the lost deposits with stablecoins held by the bank. This breaks the debt cycle and starves the economy.

Near-Term Pain (By 2028)

• Less Credit: Losing $1 trillion in deposits over three years means banks can’t lend as much. They might reduce the number of new loans or let old ones expire. Short-term, this would reduce lending by $1-$2 trillion—that’s 8-15% of the $13 trillion in loans outstanding. This means fewer loans for cars, homes, or businesses. Long-term loans, such as mortgages, remain unchanged, new loans bear the full impact.
• Spiking Interest Rates: Loans are priced “on the margin,” meaning banks set rates based on the cost of their last dollar of funding. With $1 trillion less to lend, banks will charge more to cover the shortage. Loan rates (like mortgages or car loans) could jump by 1-2% or more, making borrowing much more expensive for everyone.
• Economic Slowdown: Less credit means less spending. Businesses scale back, factories produce less, and you might delay big purchases. This could shave 0.5-1% off GDP growth yearly, risking a recession if other pressures (like inflation) hit.

Long-Term Trouble (Beyond 2028)

• Massive Credit Crunch: The money multiplier amplifies the damage. A $1 trillion deposit loss could shrink lending capacity by $3-$5 trillion over 5-10 years, cutting loans from $13 trillion to $8-$10 trillion—a 20-40% drop. This would starve industries like real estate, manufacturing, and small businesses.
• Sustained High Rates: Interest rates could stay high as banks compete for scarcer funds. Loans are priced on the margin, so a tighter supply of deposits could push rates up significantly, squeezing borrowers. Meanwhile, stablecoins’ demand for Treasuries might lower Treasury yields, shifting debt from private banks to the public sector (like Federal Reserve loans or quantitative easing, where the Fed prints money to buy bonds).
• Public Debt Burden: To avoid a banking collapse, the Fed might pump cash into the system, as it did in 2008. This increases public debt, risking inflation or higher taxes down the road.

The Stablecoin Surge: A $3.7 Trillion Threat by 2030

If the shift to stablecoins grows, the damage could be catastrophic. Citibank projects stablecoins could reach $3.7 trillion by 2030. If half of that ($1.85 trillion) comes from U.S. deposits, the lending reduction could hit $2-$4 trillion by 2030 and $6-$9 trillion long-term, slashing loans to $4-$7 trillion—a 50-70% collapse. This would cripple credit-dependent sectors, almost certainly triggering a severe recession or depression. Tech companies pushing to “debank” the system don’t realize that, unlike banks, stablecoin issuers can’t create credit through fractional reserve banking. As more money flows into stablecoins, it’s locked away, draining the real economy.

GENIUS and STABLE: A Policy Misstep

The GENIUS and STABLE laws aim to make stablecoins safe by requiring 100% Treasury backing and sterilizing those assets so banks can’t use them. They also ban banks from borrowing against stablecoins, ensuring no workaround for the liquidity drain. While this protects stablecoin holders, it breaks the daisy-chained debt cycle, shrinks credit, and slows growth. Lawmakers may not grasp how deeply this could hurt, but the consequences are massive.

How Does This Compare to 2008?

The 2008 GFC saw a $1.2 trillion drop in bank lending (10% of loans then) as mortgage securities collapsed, freezing credit. The stablecoin scenario could be worse:

• Short-Term (By 2028): A $1-$2 trillion loan reduction (8-15% of $13 trillion) matches 2008’s scale but happens gradually, avoiding instant panic but still hurting growth.
• Long-Term (Beyond 2028): A $3-$5 trillion loan drop (20-40%) is far worse than 2008, driven by a permanent deposit loss. If stablecoins hit $3.7 trillion by 2030, a 50-70% loan collapse could dwarf 2008, causing a deeper, longer downturn.

In 2008, the Fed and government bailed out banks with trillions in loans and stimulus. A stablecoin-driven crisis might need even bigger rescues, piling up public debt and risking inflation.

Additional Reading and Insights

I believe that the constraints on stablecoin reserves and seniority in bankruptcy are an overreaction to the FTX failure. Ironically, as a result of the run in crypto prices and an investment in Anthropic, the FTX bankruptcy trustee is sitting on $16.1 billion in assets to satisfy $11 billion in debts. Our elected representatives are overly concerned about consumer protection and maintaining the peg, when the banking system has all the tools to manage term mismatch (borrowing short, lending long) liquidity demands. In addition, Tether has maintained the peg extremely well after they moved away from riskier investments (select “All” view) even though they are not transparent in their holdings. The GENIUS Act, as written now, makes all claims of stablecoin holders senior to FDIC insurance and bank account holders. That’s right crypto gets paid before anyone else. Bank Associations are not asleep at the wheel, they are pointing out that stablecoins will drain deposits and make lending less available and more expensive. It will be exciting to see how this all plays out.

The Bottom Line

Stablecoins unlock significant efficiencies, but draining $1 trillion from U.S. bank deposits by 2028 could choke the economy. The daisy-chained debt cycle and money multiplier (historically 3-5x) keep America moving, and banks are its heart. GENIUS and STABLE’s sterilization rules and ban on borrowing against stablecoins could starve that heart, slashing loans by 8-15% short-term and 20-40% long-term, with rates spiking due to marginal pricing. If stablecoins hit $3.7 trillion by 2030, the damage could be catastrophic, risking a depression. Compared to 2008, the long-term impact could be far worse, with less room to recover.

What can you do? Learn about stablecoin laws, urge your representatives to rethink GENIUS and STABLE, and watch how digital currencies might affect your loans and livelihood. Frankly, I’m shocked that banks aren’t lobbying hard against these Acts. Your bank account isn’t just money—it’s the fuel for our economy’s future.

Subscribe and follow me on X (@Hoganator), LinkedIn, and my blog for more insights on the intersection of stablecoins and banking. Future articles will talk about the impending battle royale between banks and tech (DeFi), possible mitigation factors, and more.