Fed Sounds Alarm: Stablecoins Could Drain Bank Deposits, Choke Credit Markets

Stablecoins aren’t just disrupting payments—they’re coming for the banks’ lunch. The Federal Reserve’s latest warning paints a stark picture: dollar-pegged crypto could lure deposits away from traditional institutions, shrinking their capacity to lend.

The run risk regulators won’t say out loud

When depositors can earn 5% in a crypto wallet versus 0.5% at Chase, the flight path writes itself. The Fed’s real fear? A digital-age bank run where exits move at blockchain speed.

Credit crunch by algorithm

Smaller deposit bases mean tighter loan books. Mortgage approvals could hinge on how fast Tether moves its reserves—because nothing says ’financial stability’ like volatility-pegged stablecoins backed by who-knows-what.

The irony? Banks spent decades fighting for deregulation, only to get outmaneuvered by code. Maybe next they’ll lobby to ban math.

Stablecoins mirror risks posed by CBDCs

During the session, the council linked concerns about stablecoins to earlier discussions on central bank digital currencies (CBDCs). In previous meetings, CDIAC members had warned that CBDCs could draw deposits away from the banking sector. 

The April 10 dialogue extended that logic to privately issued stablecoins, describing them as equally capable of diverting funds from insured depository institutions.

The council noted that CBDCs and payment stablecoins introduce competition for traditional bank deposits without necessarily being subject to equivalent regulatory oversight or liquidity requirements. 

Members suggested that this asymmetric risk profile could prompt banks to reduce their lending capacity, particularly for small businesses and community borrowers who depend on localized banking relationships.

Calls for stablecoin supervision to address risks

Council members urged regulators to incorporate stablecoins into broader supervisory frameworks that address financial stability, consumer protection, and systemic risk. 

They reiterated that unchecked stablecoin issuance, especially by nonbanks, could weaken the funding base of regulated institutions and destabilize the credit channel that serves “Main Street” borrowers.

The council further emphasized the importance of consistent oversight between bank and nonbank issuers and reiterated concerns about the potential for regulatory arbitrage. 

It encouraged policymakers to ensure that emerging rulemaking efforts consider the implications of stablecoin adoption for Core banking functions, particularly regarding insured deposit bases and liquidity provisioning.

Fed Chair Jerome Powell recently said that stablecoins are a digital product that could have fairly wide appeal during an April 16 event.

He also encouraged the regulation of stablecoins and guaranteed that the Fed has no intention of preventing banking sectors from interacting with the crypto industry.