ICYMI: New Research Examines Impact of Interest-Bearing Stablecoins on Banks’ Ability to Lend

"The most effective way to prevent stablecoins from undermining credit availability is to close the loophole that allows intermediaries to pay yield."

WASHINGTON, D.C. – Former Consumer Financial Protection Bureau (CFPB) enforcement economist Andrew Nigrinis, Ph.D., today penned a new op-ed in Open Banker highlighting new research that examines how a deposit flight to interest-bearing stablecoin issuers could impact banks’ ability to meet the lending needs of the millions of consumers, small businesses, and communities they serve.

What They’re Saying

Dr. Nigrinis explains how he applies pre-existing research on the impact of stablecoins – should they begin offering yield through digital wallets or exchanges – on the deposits and lending landscape:

"Relying on pre-existing literature, if stablecoin intermediaries are allowed to offer yield at the Federal funds rate, about $1.5 trillion in lending capacity — about one-fifth of all currently outstanding consumer, small-business, and farm credit nationwide — would be at risk.

"Wallets and exchanges now routinely offer “yield,” “cash-back,” or “rewards” that mirror the Federal funds rate [...] if this back door allowing yield-bearing stablecoins at other intermediaries isn’t closed, it could siphon trillions of dollars from deposits."

Key Findings

Two scenarios are modeled in Dr. Nigrinis’ research:

A. No-Yield Scenario

• Dr. Nigrinis projects that stablecoins that do not offer interest will lead to a six percent drop in deposits, which in turn leads to about $250 billion less in banks’ lending capacity.
• This is equivalent to four percent of all consumer, small-business, and farm loans currently held by banks.

B. Yield Scenario (Loophole Persists)

• In contrast, Dr. Nigrinis finds that if stablecoins are allowed to earn interest or yield, deposit losses could rise to 25 percent or more.
• This results in a reduction of ~$1.5 trillion in lending capacity—over one-fifth of all consumer, small-business, and farm loans currently held by banks.
• This issue results in not just a liquidity issue for banks, but a shock to the entire credit market, consumers, small businesses, and farms.

Dr. Nigrinis ultimately concludes that "the most effective way to prevent stablecoins from undermining credit availability is to close the loophole that allows intermediaries to pay yield."

The Bottom Line

Stablecoins could redefine the U.S. financial system, but they must not undermine credit creation—the core of U.S. economic resilience. Regulating stablecoin yields appropriately results in protecting the distinction between payments and deposits, which is essential to safeguarding bank lending, jobs, and economic growth.

Dive Deeper

To read the full op-ed, click HERE.