Stable Coin Growth Poses $500 Billion Risk to Bank Deposits and Net Interest Margins

Standard Chartered warns that stablecoins could remove up to $500 billion from bank deposits in developed markets by 2028.

U.S. banks are increasingly at risk of losing deposits to the digital asset sector as stablecoins continue to gain traction.

This concern comes amid growing adoption of stablecoins, with the total circulating supply increasing by around 40% over the past year to just over $300 billion.

Long-term financing issues

A Bloomberg report citing analysis by Geoff Kendrick, global head of crypto research at Standard Chartered, estimates that stablecoins could cause $500 billion in deposits to flow out of lenders in industrialized countries by the end of 2028. In the United States in particular, the firm predicts that bank deposits could fall by an amount equivalent to a third of the total stablecoin market capitalization.

Kendrick believes the stablecoin’s pace of growth is also likely to accelerate following the passage of the Clarity Act, legislation currently working its way through Congress intended to regulate the digital assets industry.

“US banks also face a threat as payment networks and other core banking businesses shift to stablecoins,” he wrote.

One of the most contentious issues between traditional financial institutions and crypto companies is whether stablecoin holders should be allowed to earn yield-like rewards. Coinbase currently offers 3.5% rewards on balances held in Circle’s USDC, a practice that banking lobby groups say could accelerate losses on deposits if it continues.

“Bank lobbying groups and banking associations are trying to shut out their competitors,” Coinbase CEO Brian Armstrong said at the World Economic Forum in Davos last week. “I have no tolerance for this; I think it’s un-American and it hurts consumers.”

Despite the ongoing dispute, Kendrick expects the broader crypto market structure bill to be approved by the end of the first quarter.

Regional lenders identified as most vulnerable

To assess which banks are most exposed, the analyst used net interest margin income as a percentage of total income, describing it as the clearest indicator of deposit flight risk as it is critical to generating NIM. With this measure, U.S. regional financial institutions appeared to be more vulnerable than diversified lenders and investment banks, which are the least exposed.

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Of the 19 U.S. banks and brokerage firms examined, Huntington Bancshares, M&T Bank, Truist Financial and Citizens Financial Group were identified as facing the highest risk.

Local businesses are particularly sensitive to payment outflows because they rely more on traditional lending activities than their larger counterparts. On the positive side, market performance suggests limited immediate risk.

The regional KBW banking index climbed almost 6% in January, compared with just over 1% for the broader gauge. In the short term, expected interest rate reductions could reduce deposit costs, while government efforts to stimulate economic activity could support loan growth.

Despite this, Kendrick sees long-term change as inevitable.

“An individual bank’s actual exposure to a stablecoin-driven reduction in NIM revenue will largely depend on its own response to the threat,” he said.

He also pointed out that Tether and Circle, the two dominant stablecoin issuers, hold only 0.02% and 14.5% of their reserves in bank deposits, noting that “very few redeposits are taking place.”