The Stablecoin Interest Fight

Banks call stablecoin rewards a stability risk—do they really fear competition?

President Trump holding up the signed GENIUS Act. Source.

Crypto exchanges such as Coinbase currently offer “rewards” on customers’ stablecoin balances, but the banking industry would like to put an end to that. When the loudest voices calling for new restrictions are the incumbents facing competition, skepticism is usually warranted. Still, the question of stablecoin yield is more complicated than a simple fight between banks and crypto. Competitive markets generally benefit consumers, but the implicit guarantees built into our financial system create a moral hazard of privatized profits and socialized losses in the form of bailouts.

So when crypto firms led by Coinbase launched a lobbying campaign with the catchy URL NoMoreBailouts.org, urging customers to “protect their rights” and “stop big banks from coming after you crypto rewards,” I was intrigued. And while it’s true the big banks may be coming for your crypto rewards, what’s harder to parse are the relative risks stablecoins impose on the financial system as outlined in the GENIUS Act—the law that set the regulatory framework for dollar-backed payment stablecoins in the United States.

As part of the compromise to get GENIUS across the finish line, Congress prohibited stablecoin issuers from paying interest or yield to holders, while remaining silent on distributors such as exchanges and wallets. The “rewards” some platforms advertise typically come not from the issuers themselves but from distributors—by passing through a portion of the income earned on stablecoin reserves, by funding promotions from their own revenue, or through lending and other incentive programs.

At first, it looked like the crypto lobby had outfoxed the banks with this “loophole.” Now, the bank lobby is pressing Congress to close it as debates over the next major piece of crypto legislation, the CLARITY Act, drag on. But the banks’ resistance to stablecoin rewards is just one facet of a much broader question: How do stablecoins fit into the larger monetary system?

The Banking Industry Pushes Back

Banks warn of deposit flight and financial instability if stablecoins start competing with banks on offering yield. They argue that allowing the practice to continue would drain deposits from traditional banks and make credit more expensive. Do banks’ warnings reflect legitimate risks to the financial system or simply their effort to preserve a comfortable status quo? After all, banks benefit from cheap customer deposits, for which they pay little or nothing in interest. Anyone who has checked the rate on their savings account will be sorely aware of this fact.

After digging into the issue, I’m not persuaded by the banks’ case. The banking industry has focused its arguments on the underlying risk that stablecoins present to financial stability as justification for a blanket ban to prevent stablecoins from competing with banks on yield. In a recent article warning about the dangers of allowing stablecoins to compete on yield, the Bank Policy Institute (BPI) begins its analysis with a simple premise: If stablecoins were allowed to pay interest, demand for them would rise—an outcome it treats as inherently risky. Based on a theoretical model, BPI estimates that paying interest could double the projected size of the stablecoin market. That, by itself, is not a policy problem, and policymakers shouldn’t pursue measures to keep growth artificially small. BPI concedes stablecoins may grow large even without yield, but its “macroprudential” push for a blanket ban risks stifling innovation without evidence of harm.

But that’s just the beginning of BPI’s argument. It warns that paying interest on stablecoins would draw funds out of bank deposits, reducing the pool of money banks use to make loans and, in turn, driving up borrowing costs. In other words, consumers choosing Treasury-backed stablecoins over checking accounts could make credit more expensive. That’s certainly possible in theory but hard to project and not obviously a policy failure. The goal of public policy shouldn’t be to shield one industry from competition to keep credit artificially cheap. Banks earn the privilege of holding people’s money by offering the best product in a competitive market, not by entitlement.

Are Stablecoins a Financial Stability Risk?

Perhaps the most formidable objection to allowing stablecoin interest is that stablecoins are a threat to financial stability. Stablecoins share features with their closest traditional-finance cousins—money market funds (MMFs)—that can make balances vulnerable to stress-period redemptions. After Lehman Brothers failed during the Great Financial Crisis (GFC) in 2008, the Reserve Primary Fund—then one of the largest U.S. MMFs—saw its share price fall below one dollar after disclosing exposure to Lehman’s commercial paper, sparking industry-wide withdrawals and prompting Treasury and the Federal Reserve to intervene.

Since then, regulators have overhauled MMF rules to reduce the risk of future runs. During the COVID-19 market panic in March 2020, prime MMFs experienced substantial outflows, prompting the Federal Reserve to once again provide a liquidity backstop. However, government MMFs, which are more analogous to stablecoins under GENIUS, saw no significant outflows and in fact experienced significant inflows as investors fled to safety.

The GENIUS Act’s guardrails for stablecoin reserves go even further than MMF reforms in limiting credit and maturity risk by prohibiting commercial paper and restricting reserves to cash, very short-dated Treasuries with maturities of 93 days or less, Treasury-secured overnight repos, and government-only MMFs. Additionally, reserves must be legally segregated and not rehypothecated by the issuer, with special protections in the event of failure—so holders are better insulated than MMF investors were in 2008. Because a portion of the backing assets can be held as bank deposits, stablecoins aren’t run proof, but they are meaningfully less exposed to credit and maturity risk than pre-GFC MMFs.

Still, the larger, more familiar source of systemic risk remains the traditional, fractional-reserve banking system. Payment stablecoins are designed as a narrower, fully reserved alternative, but issuers still depend on banks to hold money, which leads to another facet of the concerns around financial stability: the run-prone nature and flightiness of the uninsured deposits that stablecoin issuers hold at banks.

Learning from USDC and Silicon Valley Bank

Bank Policy Institute, in response to the “No More Bailouts” campaign, was quick to point out that crypto also benefited from a rescue when Circle, the issuer of USDC stablecoin, had $3.3 billion in uninsured deposits trapped in Silicon Valley Bank when it collapsed in 2023. This caused USDC to briefly de-peg below $1 before regulators stepped in and invoked a systemic risk exception to protect Silicon Valley Bank’s depositors.

The USDC event is both an example of what can go wrong with concentrated deposit risk and a lesson to stablecoin issuers and regulators. Stablecoins can create this type of risk by pooling many small, FDIC-insured deposits into a few large, uninsured deposits at select banks—a problem not unique to stablecoins—but this risk can be mitigated. GENIUS does not directly resolve this risk but does include language instructing the FDIC and NCUA to establish limitations on reserves kept as demand deposits or insured shares at banks and credit unions, to address safety and soundness risks’ at those institutions.

Also, the 2023 banking crisis that ensnared Circle, was during the height of “Operation Chokepoint 2.0,” when policymakers discouraged banks from doing business with the crypto industry. So it’s no surprise that a large share of Circle’s deposits was concentrated in a few regional banks catering to the high-risk tech sector, which was hit particularly hard by the Fed’s 2022 rate hikes. Circle learned its lesson, and today it holds its reserves at one of the Globally Systemically Important Banks, which, for better or worse, would be unlikely to fail during a crisis. The second Trump administration has moved to end debanking based on reputational risk and has signaled that banks are free to serve crypto firms like any other lawful business.

Stablecoins Are Still Small, for Now

Fears that crypto firms will siphon retail deposits from banks remain theoretical—at least until the data say otherwise. As of October 2025, the stablecoin market totals roughly $300 billion—a fraction of the $7.4 trillion held in U.S. money market funds. It’s not obvious consumers will ditch banks en masse anytime soon. According to a CNBC Select and Dynata Banking Behaviors survey, about 57% of American still keep their money in traditional savings accounts over higher-yielding options such as high-yield savings accounts, MMFs, and certificates of deposits.

As a payments technology, stablecoins offer real promise, but given the crypto industry’s reputation as the “world’s largest casino,” exchanges and wallets will likely face an uphill battle for market share—even if they continue to offer rewards. Banks also retain a major competitive advantage: FDIC insurance. If risks from stablecoins getting “too big” materialize, they’re likely years away, not months. Citigroup forecasts stablecoins could reach $1.9 trillion by 2030 in a base case or up to $4 trillion in a bull scenario, through steady adoption in remittances and DeFi. Policymakers still have time to observe real-world data rather than regulate based on hypotheticals.

Managing Stablecoin Demand for Safe Assets

Another systemic concern is that stablecoins would create excess demand for Treasury bills and other short-term government debt. In Without Warning, financial stability scholar Steven Kelly considers that if stablecoin demand for T-bills grows sharply, it could tighten supply and encourage hedge funds and other market participants to “manufacture” synthetic T-bills through basis trades or other short-term funding structures. That pattern—private markets creating near-money substitutes when official safe assets are scarce—has contributed to financial-stability problems in the past.

It’s a legitimate concern, but Treasury is not a passive observer. The supply of T-bills is designed to be elastic, acting as a shock absorber for funding volatility—including surges in private safe-asset demand, as noted by the Treasury Borrowing Advisory Committee. If a spike in stablecoin demand were ever to meaningfully tighten the market for short-term government debt, Treasury could expand bill issuance as part of its normal debt-management process to accommodate stablecoin-related demand—a development the Treasury market is well-equipped to absorb.

And this wouldn’t be the first time a policy change spurred demand for short-term Treasuries. Post-GFC, capital and liquidity rules mandated banks hold more High-Quality Liquid Assets (HQLA), including T-bills, creating sustained policy-driven demand—over the medium to long term—the Treasury successfully met without disrupting markets.

Additionally, the tokenization technology that underpins stablecoins could also alleviate the potential issue of stablecoins absorbing too many HQLAs. Efforts to tokenize collateral—turning Treasuries and repo agreements into real-time, transferable digital instruments—could help liquidity flow more efficiently through the financial system’s pipes. The Commodity Futures Trading Commission recently announced a digital-asset pilot program to test these kinds of experiments, allowing firms to test tokenized Treasury, repo and margin-collateral structures under regulatory supervision. If it works, tokenized collateral could ease the liquidity stresses critics highlight, helping markets clear faster and reducing the need for emergency intervention when volatility hits.

A Better Question: Who Gets Access to the Fed?

The fight over the so-called interest rate loophole distracts from a far more consequential question: Who should get access to the Federal Reserve’s balance sheet and on what terms? While the GENIUS Act establishes tight guardrails to limit risks from stablecoin reliance on the traditional banking system, it leaves the existing framework for Federal Reserve access unchanged.

As IMF economist Manmohan Singh points out, this policy keeps stablecoins on the fiscal side of the system (funded by Treasury bills) rather than the monetary side (funded by reserves), leaving them dependent on commercial banks and other intermediaries. If stablecoins are truly a form of digital money, shouldn’t they eventually have access to the Fed’s balance sheet and be able to hold reserves directly? For now, the Fed has signaled that the answer is no.

The political compromise behind GENIUS carved out a narrow space where stablecoin issuers can function with greater regulatory clarity and demonstrate real-world benefits without promising any broader integration with the monetary system. The law’s passage is a milestone for those who see the potential in blockchain- enabled payments and for privatized forms of money. But if stablecoin technology delivers on its promises, more policy battles are inevitable. The debate ahead will likely center on how digital payment systems fit within the broader monetary framework.

Let the Best Money Win

The fight over the “interest loophole” misses the plot. If banks were genuinely concerned about financial stability, they would urge policymakers to address the harder question: Who should be allowed to access the Fed’s balance sheet, and on what terms? That answer—not another skirmish over yield—is of greater consequence to the the financial system and the dollar. Until policymakers take it up, the least they can do is let people keep earning their stablecoin rewards.