Stablecoins could reshape banking, but not without disruptions

The growing push to regulate stablecoins — digital assets tied to fiat currencies like the U.S. dollar — has sparked new questions about how they might reshape traditional banking, according to The Wall Street Journal’s “Heard on the Street” column.

With the Senate preparing to vote on the so-called Genius Act, which would establish a regulatory framework for stablecoin issuers, analysts are increasingly focused on how a mainstream shift toward these digital instruments could impact bank deposits.

While stablecoins don’t technically remove money from the banking ecosystem (since the cash they’re backed by generally ends up back in banks), they could still alter the structure and stability of that money. In particular, they may shift funds from smaller, insured retail accounts into large, uninsured institutional deposits that are more volatile and expensive for banks to manage, according to the financial column.

Under the proposed legislation, stablecoin issuers would be required to hold reserves, which could include bank deposits, U.S. Treasury securities, or funds placed in short-term lending markets such as repurchase agreements. In practice, this would mirror the behavior of money-market funds, according to a recent note from JPMorgan (NYSE:JPM) strategists cited by the Journal. These shifts wouldn’t eliminate bank deposits but would reallocate them within the financial system.

Even if the total pool of bank deposits remains steady, the composition of those deposits could change significantly. For example, a consumer moving funds from a federally insured savings account into stablecoins could unintentionally contribute to a rise in large, uninsured deposits, posing a risk similar to what was seen during the regional banking crisis of 2023.

The European Central Bank recently flagged this issue, warning that when banks gather deposits from stablecoin issuers, they’re effectively converting stable retail funding into more flight-prone institutional money.

This kind of shift was at the heart of the panic surrounding Silicon Valley Bank (SVB) in March 2023. At the time, Circle Internet Financial, the issuer of USD Coin (USDC), had billions in deposits at SVB that were in the process of being transferred when the bank collapsed. USDC briefly fell below its $1 peg until federal regulators guaranteed all SVB deposits, restoring market confidence.

Should stablecoins continue to grow in use, large financial institutions are expected to benefit most. These globally important banks are already required to maintain high levels of liquid assets, making them more resilient to large, fast-moving flows of money. Circle has since restructured its reserves, stating that most of its cash is now held with major global banks such as JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC).

There’s also speculation that these large banks could eventually issue their own stablecoins. Reports have surfaced of preliminary talks among major U.S. lenders about creating a jointly issued digital dollar token.

As stablecoins offer more ways for consumers and institutions to earn returns (such as through tokenized Treasury bills), traditional banks may feel pressured to raise deposit rates in order to remain competitive.

For now, the largest banks appear well-positioned to absorb these changes. However, smaller and regional banks could face more significant challenges if stablecoins gain widespread adoption as an alternative for holding everyday cash and savings, according to the Journal.