US banks are stepping up their push on legislators to amend approved stablecoin rules after expressing concerns about deposit flight and competitive disadvantages. Banking groups such as the American Bankers Association, the Bank Policy Institute, and the Consumer Bankers Association say the rules place the financial sector at a competitive disadvantage relative to the cryptocurrency sector.
The Genesis Act, passed last July to govern the $288 billion global stablecoin industry, prohibits the granting of interest or yield to customers. Although banks would be able to distribute their stablecoins now after the passage of the said legislation, they cannot distribute them to owners by themselves. Crypto exchanges will still provide indirect yield, however, through stablecoins from others like Tether and Circle.
The banks worry that this framework encourages depositors to move funds out of ordinary accounts into higher-paying stablecoin alternatives. Market insiders say trillions of dollars may depart the banks, breaking the credit creation process and damaging the overall economy.
Concerns over outflows and credit pressure stablecoin
The US Treasury report last April outlined the risk, approximating stablecoins would pull down to $6.6 trillion from banks if there were opportunities to earn yields. Lobbies noted that large withdrawals would increase deposit flight risk most significantly when the economy is under strain, spreading the effect to the lending market.
The action could result in fewer loans, expensive borrowing, and limited credit access by households and small businesses. The situation is drawn parallel by analysts to the rise of money market funds in the 1980s when the funds drew deposits from banks since the funds were paying higher interest than the typical current accounts.
Analysts indicate banks should revise their funding approach to remain competitive by turning increasingly to wholesale markets or increasing deposit prices. Those steps would, though, push the cost of credit even higher and stretch already struggling Main Street borrowers with higher interest levels.
Crypto industry rejects banks’ demands
The crypto industry resolutely opposed the banks’ lobbying campaign, describing it as anti-competitive and protectionist. Organizations such as the Blockchain Association and the Crypto Council for Innovation contend that the effort aims to protect the banks at the expense of industry development and consumer choice.
They argue that it would bring greater competition and innovation if exchanges reward coin holders. Industry leaders such as Coinbase bosses have responded dismissively to the banks’ belated warnings, cautioning policymakers against depriving decentralised finance of further growth.
The discussion reflects the intensifying tension between conventional financial systems and cryptocurrencies. As the White House hints that it is favorable towards the inclusion of crypto into the financial system, stablecoins will increasingly take prominence within the capital market scenario, especially as demand for US government bonds increases.
