• Citigroup’s Ronit Ghose warns stablecoin interest payments could trigger a massive deposit flight, destabilizing banks.
• U.S. banking groups push for stricter stablecoin regulations, citing loopholes that give high-yield advantages over traditional banks.
• Stablecoins are poised to disrupt the financial system, with predictions that they could represent 10% of U.S. money supply by 2028.

Citigroup analyst Ronit Ghose issued a warning that interest on stablecoins would pose a potential threat of a huge flight of deposits out of banking. Ghose warned that, like money market funds in the late 1970s and early 1980s, these assets may cause investors to initiate a run on the deposits.

This warning is issued by Ghose as other significant banking groups in the U.S. express concerns about a loophole in the GENIUS Act. The Act prevents paying interest to an issuer of stablecoin explicitly, though the rewards can be provided by an exchange through affiliate programs. These rewards can bring high-yield depositors compared to traditional banks, as they are heavily regulated.

Also Read: Japan’s SBI Group Picks Chainlink for Tokenization & Stablecoin Growth

Regulatory Gaps Favor Stablecoins Over Banks

The American Bankers Association (ABA) and the Bank Policy Institute (BPI) complain that such a regulatory gap results in an uneven playing field. The advantages of stablecoin platforms are that they can provide high yields compared to traditional banks, which have skill limitations imposed on them by their regulations. This would make more depositors shift to networks at the expense of banks.

It is estimated by the U.S. Treasury Department that yield-bearing stablecoins have the potential to drive out $6.6 trillion of deposits from the banks. This would increase liquidity management and loan funding difficulties of the banks. In the event of this, banks will have to depend more on wholesale markets, which may increase the costs of credit to consumers and businesses in terms of loans.

Stablecoins Spark 1980s-Like Bank Risks

Ghose likened the present scenario to the period in the 1980s when money market funds parked huge amounts of money park it in the banks. The cash flow consists of $32 billion between 1981 and 1982, of cash going out rather than coming in. 

This created extreme pressure on banks, and increased the interest rates as well as tightened credit. Ghose cautioned that banks would face comparable issues when it comes to the payment of interest on these assets.

Nevertheless, Citigroup, which issued the warning, is also considering its own coin services. In July, CEO Jane Fraser indicated that Citi is looking at issuing a Citi stablecoin. The bank is also coming up with tokenized deposit services for its corporate clients.

Conversely, members of the crypto industry also note that any restrictive regulation on stablecoin yields will reduce consumer choice. The Crypto Council Innovation argues that the move by the banking industry to control the payments of interest on these assets aims at curbing competition. Paul Grewal, Chief Legal Officer of Coinbase, said that the industry is trying to relitigate the reasons why lawmakers rejected such proposals when they passed the GENIUS Act.

The more stable coins gain acceptance, the more they are likely to revolutionize payments. It has been estimated that coins will be used to capture 1 trillion of the payment volume per year by 2028. They may also comprise 10% of the American money supply. The change of the course would reshape the monetary policy and affect the conventional financial institutions.

Treasury Secretary Scott Bessent has expressed his support for stablecoins, arguing that they can increase global access to the U.S. dollar. He also stressed the capability of coins to attract demand toward the securities of the U.S., integrating digital assets into the international financial system.

Also Read: Bullish IPO Raises $1.15 Billion Using Stablecoins, a First for U.S. Markets