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The American Bankers Association is signaling that the White House’s recent stablecoin analysis asks the incorrect question and underestimates the jeopardy faced by community banks.
On April 8, the Council of Economic Advisers published a 21-page document modeling the consequences if payment stablecoin issuers were prohibited from offering yield. The analysis, linked to the 2025 GENIUS Act’s restriction on interest for payment stablecoins, concludes that disallowing yield would boost bank lending by a mere $2.1 billion, or approximately 0.02% of a $12 trillion loan portfolio.
The report further estimates that individuals would forfeit about $800 million in returns, resulting in a cost-benefit ratio of 6.6, where the lost yield exceeds the benefits of marginally reduced borrowing expenses.
In essence, White House economists deduced that stablecoin yield, under prevailing conditions, is unlikely to precipitate the extensive deposit outflow some academic research had predicted.
ABA: The genuine risk stems from yield-paying coins at scale
The American Bankers Association responded today, asserting that the CEA posed “the wrong question” by concentrating on the implications of a prohibition rather than the effects of permitting yield as the market expands.
ABA chief economist Sayee Srinivasan and banking research VP Yikai Wang cautioned that yield-generating payment stablecoins could hasten the migration of deposits away from insured accounts, particularly impacting community banks.
Their research indicates a potential future market for payment stablecoins ranging from $1 to $2 trillion, where competitive yields on tokens backed by Treasuries and other secure assets would directly challenge local deposits. In such a scenario, they contend, even individual states might experience multi-billion-dollar reductions in bank lending as cost-effective funding diminishes.
Deposit stablecoin reshuffling versus community bank pressure
The White House paper emphasizes that when consumers transfer funds into stablecoins, issuers reinvest these reserves into Treasury bills, repos, and money-market funds, thereby returning the majority of the capital to the banking system.
This “reshuffling” implies that total deposits remain largely stable, and with banks currently holding over $1.1 trillion in excess liquidity, the model suggests minimal system-wide constraints on lending.
The ABA’s counterargument is that this overlooks the repercussions for individual institutions when deposits are withdrawn, compelling community banks to substitute funding through more expensive wholesale borrowing or by increasing deposit rates.
These heightened funding expenses, they argue, translate into reduced local credit availability and increased loan rates for individuals, farmers, and small businesses dependent on relationship-based lenders.
The discussion arises alongside the GENIUS Act, the 2025 legislation that established the initial federal framework for payment stablecoins and mandated a ban on issuers paying yield to holders.
However, this prohibition does not encompass third-party platforms, leaving avenues open for arrangements like Coinbase’s USDC rewards, which distribute reserve income to users at rates comparable to high-yield savings accounts.
Certain versions of the proposed CLARITY Act aim to close this loophole by preventing intermediaries from passing through yield, a point the CEA acknowledges but does not thoroughly assess. The ABA’s authors advocate for treating a yield prohibition as a “prudent safeguard” that maintains stablecoins in a payment capacity rather than allowing them to morph into a high-yield alternative to insured deposits.
Both sides touch upon a more fundamental issue: whether stablecoins that bear yield effectively create a form of narrow banking that diverts funds from traditional credit intermediation. The CEA characterizes narrow-bank-like structures as potentially more secure for payments, assuming reserves are held in Treasuries and other extremely safe assets, while minimizing immediate lending losses.
The ABA warns that promoting activity in such models without a strategy to preserve community bank lending disregards Congress’s apprehension towards endorsing central bank digital currencies for analogous reasons.
With over 80% of stablecoin activity already occurring offshore and issuers managing Treasury portfolios that exceed the size of some sovereign nations, the White House also highlights global demand and U.S. borrowing costs as an underdeveloped aspect of the yield debate.
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Micah ZimmermanMicah first discovered Bitcoin in 2018 but remained a skeptic on the sidelines for too long. Since 2021, he has covered crypto and business and now works as a news reporter for Bitcoin Magazine, based in North Carolina.RELATED ARTICLES CULTURE
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