Fed research reinforces ICBA call to mitigate stablecoin risks 

A newly released Federal Reserve research paper warns that stablecoins could reduce bank deposits and lending—in line with a recent ICBA analysis on crypto exchanges paying interest or rewards on payment stablecoin holdings. 

Details: The paper from Fed Principal Economist Jessie Wang says: 

• As retail deposits substitute into stablecoins, banks face more concentrated, uninsured, wholesale deposits, increasing both liquidity risk and funding costs. 

• The most significant reduction in bank deposits would occur if stablecoin issuers gain access to Fed master accounts, allowing them to bypass the banking system entirely. 

• Smaller institutions may face more serious headwinds, particularly in markets where relationship banking has been central to local credit provision. 

• Stablecoin growth may also redistribute credit availability, which would be particularly felt by small businesses that rely on relationship banking as well as commercial real estate lending due to its shifts in funding stability. 

• The uneven capacity of banks to adapt may accelerate banking industry consolidation.

ICBA Analysis: With Congress crafting legislation to establish a regulatory framework for digital assets markets, ICBA this week released a new analysis that says: 

• Allowing crypto exchanges, affiliates, and other intermediaries to continue paying interest, yield, or rewards on payment stablecoin holdings would reduce community bank lending by $850 billion due to a $1.3 trillion reduction in the industry’s deposits.   

• Congress must explicitly extend the GENIUS Act’s prohibition for payment stablecoin issuers to crypto exchanges, affiliates, and other intermediaries. 

Master Accounts: Meanwhile, nonbank entities and crypto institutions are trying to obtain access to Fed master accounts—industry settlement accounts that are traditionally limited to depository institutions that can demonstrate through an applications process that they pose limited risk to the banking system. ICBA has long advocated for limiting access to master accounts to avoid introducing unnecessary risks and volatility into the banking system. 

Community Banker Action Needed: With the Senate crafting proposed crypto market structure legislation and a markup coming as soon as January, ICBA continues calling on community bankers to use its Be Heard grassroots action center to urge lawmakers to ensure the measure bars all digital assets market participants from offering yield, interest, or rewards on payment stablecoins. 

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