Citi Warns of Stablecoin Threat to Banks

Interest on stablecoins could cause bank deposit outflows, Citi warns.

The payment of interest on deposits in stablecoins could trigger a mass exodus of deposits from the banking system, warned Ronit Ghose, head of financial services at Citi, according to FT.

The expert likened the situation to the boom in money market funds in the United States during the 1980s. At that time, their volume grew from $4 billion to $235 billion over seven years, and the outflow of funds from financial institutions exceeded the inflow by $32 billion, according to data from the Federal Reserve.

This view is shared by PwC consultant Sean Virkuts. He suggests that a shift by clients to higher-yielding stablecoins will force banks to raise deposit rates. Consequently, loans for individuals and businesses will become more expensive.

Banking Demands

Banking groups led by the Bank Policy Institute have called on legislators to reconsider the new law regulating stablecoins. They fear that the rules will provoke a deposit outflow of trillions of dollars into the crypto industry.

The conflict centers around the GENIUS Act. The document prohibits stablecoin issuers from paying interest to coin holders. This means that banks, when issuing their own assets, will not be able to offer returns on them.

However, the law does not prevent crypto exchanges from accruing rewards and interest on stablecoins from third-party issuers like Circle or Tether.

Bankers consider this a “loophole” that creates unequal conditions. They warn of the risk of a massive withdrawal of deposits. Clients might prefer high-yield stablecoins on exchanges instead of holding dollars in financial institutions.

According to the US Treasury, this could lead to an outflow of up to $6.6 trillion from the banking system. Associations have warned that this will undermine lending, lead to higher interest rates, and reduce the availability of loans for businesses and individuals.

Crypto Industry’s Response

In a letter to senators, the Crypto Council for Innovation and Blockchain Association stated that financial institutions are trying to protect themselves from competition at the expense of industry growth and consumer choice.

“This was no loophole, and you know it. Most lawmakers rejected your attempt to avoid competition,” wrote Coinbase’s chief legal officer Paul Grewal on X, commenting on the banks’ statement.

This was no loophole and you know it. 376 Democrats and Republicans in the House and Senate rejected your unrestrained effort to avoid competition. So did one President. It’s time to move on. https://t.co/CGCGxDqKNa

— paulgrewal.eth (@iampaulgrewal) August 13, 2025

Benefits of Stablecoins for the US Economy

US Treasury Secretary Scott Bessent hopes that stablecoin issuers will help manage the country’s growing national debt, writes FT.

Companies like Tether and Circle are major buyers of US government bonds, investing their reserves in them. Bessent expects this demand to increase following the adoption of the GENIUS Act.

According to Citigroup’s forecast, the market capitalization of stablecoins could grow to $3.7 trillion over the next five years. 

Experts doubt this will be sufficient.

“It won’t hurt. But an additional 10% demand for bonds won’t solve the long-term fiscal problems of the US,” said Bluechip rating agency economist Garrett Jones.

The US national debt stands at $35 trillion and is projected to grow by another $2.8 trillion by 2034.

“While it’s beneficial and creates predictable demand, it’s not enough to offset the structural deficit,” explained Borderless.xyz CEO Kevin Lehtiniitty.

Analysts also pointed to risks. If several large issuers become holders of trillions of dollars of national debt, they could gain undue political influence.

According to BitGo managing director Ben Reynolds, private companies are less stable than governments. Their potential collapse would lead to a forced and rapid sale of a huge volume of government bonds, destabilizing the market.

Jones added that the largest stablecoin projects will become “too big to fail.” This will limit the government’s ability to manage debt in the future.

Meanwhile, M0 Foundation co-founder Luca Prosperi believes that the trend towards the growth of stablecoins is independent of politicians. In his view, it is a macroeconomic and technological trend that even a hostile administration cannot stop.

Earlier, Wyoming became the first US state to launch a stablecoin. The Frontier Stable Token, ticker FRNT, is available on seven blockchains.