Citigroup’s Ronit Ghose recently issued a warning that stablecoin interest payments could potentially trigger a scenario reminiscent of the deposit flight crisis seen in the 1980s. Ghose highlighted the rapid growth of money market funds during that period, which drained deposits from traditional banks that were subject to strict regulations on deposit rates.
The concerns raised by Ghose come at a time when major U.S. banking groups are actively lobbying Congress to address what they perceive as a regulatory “loophole” in the GENIUS Act. This loophole allows crypto exchanges and related businesses to offer yields on stablecoins issued by third parties such as Circle and Tether, creating a competitive advantage for these platforms.
Banking trade groups like the American Bankers Association and Bank Policy Institute argue that while the GENIUS Act prohibits direct interest payments by stablecoin issuers, exchanges can still provide rewards to holders through affiliate programs and marketing arrangements. This could lead to an uneven playing field where stablecoin platforms attract depositors with attractive yields while traditional banks face limitations on deposit rates and regulatory burdens.
The potential consequences of this regulatory gap are significant, with industry experts warning that it could result in up to $6.6 trillion in deposit outflows. Such a scenario could impact how banks fund loans and manage liquidity, ultimately leading to higher borrowing costs for households and businesses.
Interestingly, despite the warnings issued by Ghose, Citigroup is actively exploring opportunities in the stablecoin space. The bank is considering the issuance of its own stablecoin and is developing tokenized deposit services for corporate clients. This contradictory position underscores the complex dynamics at play as traditional banks navigate the evolving landscape of digital assets.
In response to the concerns raised by banking groups, crypto industry advocates have pushed back, arguing that restricting stablecoin yields could stifle innovation and consumer choice. Platforms like Coinbase and PayPal continue to offer stablecoin rewards, citing interpretations of the GENIUS Act that allow for such practices.
Looking ahead, the clash between traditional banking and digital assets is likely to intensify as stablecoins reshape the global payment infrastructure. With stablecoins projected to capture a significant share of the money supply and facilitate cheaper and faster payments, the stage is set for a transformative shift in how financial transactions are conducted.
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