- Key insight: The Council of Economic Advisers said its model shows a stablecoin yield ban would increase bank lending by $2.1 billion — a mere 0.02% of total loans — pushing back on industry warnings that allowing yield would drain the banking system of deposits.
- What’s at stake: People familiar with the banking industry’s concerns about stablecoin yield say the analysis doesn’t account for deposit outflows under the current regulatory regime or the consequences of deposits returning to banks in different forms.
- Forward look: The White House’s willingness to publicly challenge the banking industry’s position could complicate the ongoing negotiations between banks and crypto as part of an effort to draft a crypto market structure bill, a major legislative priority for the administration.
WASHINGTON — The White House Council of Economic Advisors downplayed the banking industry’s fears that stablecoin yield would lead to an outflow of deposits in a new report published Wednesday.
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The CEA report found that a provision in the Senate’s stablecoin bill banning issuers from paying yield to holders is unlikely to meaningfully reduce bank deposits or restrict banks’ ability to lend. Banks have
“The yield prohibition in the GENIUS Act — and its proposed reinforcement through the CLARITY Act — may be motivated by the concern that competitive stablecoin returns will draw deposits out of the banking system and contract lending,” the report said. “Our model shows that this concern is quantitatively small.”
The unnamed authors of the report said that stablecoin reserves will recirculate through the banking system just the same way ordinary deposits would. In total, getting rid of stablecoin yield increases bank lending by $2.1 billion, leading to a net increase of 0.02% of total loans, the report said.
The CEA did say their model did envision a scenario where a strict stablecoin yield ban results in considerably more bank lending — to the tune of $531 billion, or a 4.4% increase in bank loans — but the CEA said that outcome is unlikely.
“Producing lending effects in the hundreds of billions requires simultaneously assuming the stablecoin share sextuples, all reserves shift into segregated deposits, and the Federal Reserve abandons its ample-reserves framework,” the report said. “In short, a yield prohibition would do very little to protect bank lending, while forgoing the consumer benefits of competitive returns on stablecoin holdings.”
The CEA report also concluded that banning stablecoin yield would bring its own costs. Prohibiting yield, the report says, is effectively a tax on people who want to hold stablecoins, and pushes them toward conventional bank deposits in a way that distorts their choices.
“The central question is [whether the] benefits of prohibition exceed the costs,” the authors said.
Several people familiar with the industry’s thinking said that the White House paper doesn’t address bankers’ concerns. It doesn’t focus on deposit outflows under the current regulatory regime, particularly from the smallest institutions, one person said.
The CEA report also makes faulty assumptions in concluding that stablecoin funds will recirculate as easily as bank deposits, experts said. While dollars used to buy stablecoins would remain in the banking system, as the CEA report says, one source familiar with the banking industry’s position said those funds will have to be held as reserves rather than being lent out, thus limiting the stablecoins’ benefit relative to traditional deposits, and will generally change the way credit funding moves and behaves.