Concerns grow over US bank deposit outflows as stablecoins spread… warning of weakened traditional finance funding base

As the use of stablecoins increases rapidly, US banks could face the risk of large-scale deposit outflows, according to a new analysis. The warning is that if stablecoins proliferate as a means of payment and custody for digital assets, the deposit base of traditional finance could be structurally weakened.

According to Bloomberg on the 28th, Standard Chartered said the spread of stablecoins could lead to as much as $500 billion in deposits flowing out of banks across advanced economies by the end of 2028. Geoff Kendrick, head of digital assets research at Standard Chartered, said roughly one-third of stablecoins’ market capitalization could translate into a decline in US bank deposits.

The amount of stablecoins currently in circulation is about $300 billion, up about 40% from a year ago. Standard Chartered said growth could accelerate further if the “Clarity Act,” a crypto-asset regulatory bill under discussion in the US Congress, is passed. Kendrick also said that in the process, crypto firms such as Coinbase would come into full-fledged competition with traditional financial institutions.

The report noted in particular that US regional banks are more exposed to deposit outflow risk than large banks or investment banks. Kendrick explained that “the share of net interest margin (NIM) in bank earnings is the best indicator of deposit outflow risk, and by that metric the vulnerability of regional banks stands out.”

Among 19 US banks and securities firms reviewed, the biggest deposit-outflow risks were flagged for Huntington Bancshares, M&T Bank, Truist Financial, and Citizens Financial Group. The assessment is that these banks rely more heavily on lending than large banks, meaning a decline in deposits would have a larger impact on profitability.

Tensions between the banking sector and the crypto industry are also continuing over whether to offer compensation on stablecoin holdings. Coinbase is providing compensation of around 3.5% to customers holding Circle’s US dollar stablecoin, USDC. Bank lobbying groups warn that allowing crypto companies to offer such compensation could accelerate deposit outflows.

Brian Armstrong, CEO of Coinbase, criticized the bank lobby groups at the World Economic Forum in Davos, Switzerland, saying they are trying to block competition and that it is “un-American” and harmful to consumers. Still, Kendrick said that “despite the confrontation between banks and the crypto industry, there is a high likelihood that legislation related to digital asset market structure will pass by the end of the first quarter.”

Meanwhile, bank stocks have been relatively stable in the short term. The KBW Regional Banking Index has risen about 6% in January, outperforming the 1% gain in the KBW Bank Index, which is centered on large banks. Kendrick said that while rate cuts could lower deposit costs and stimulus measures could support loan growth, it will be difficult to avoid the structural risks posed by stablecoins.