Stable currency growth poses a $500 billion risk to bank deposits and net interest margins

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

US banks are increasingly at risk of losing their deposits to the digital asset space as stablecoins continue to gain traction.

The concern stems from the growing adoption of stablecoins, with the total supply in circulation increasing by about 40% over the past year to just over $300 billion.

Long-term financing problems

A Bloomberg report citing analysis by Geoff Kendrick, global head of crypto research at Standard Chartered, estimates that stablecoins could drive up to $500 billion in deposits from lenders in industrialized countries by the end of 2028. In the US, the company predicts that bank deposits could fall by an amount equivalent to a third of the total stablecoin market capitalization.

Kendrick believes that the pace of stablecoin growth is also likely to accelerate following the passage of the Clarity Act, legislation currently moving through Congress that is intended to regulate the digital asset industry.

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

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

“The banking lobby groups and banking associations are trying to ban their competition,” Coinbase CEO Brian Armstrong said at the World Economic Forum in Davos last week. “I have zero tolerance for that; I think it’s un-American and it hurts consumers.”

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

Regional lenders identified as most vulnerable

To assess which banks face the greatest exposure, the analyst used net interest margin revenue as a percentage of total revenue. He described this as the clearest indicator of deposit flight risk as it is critical to generating NIM. Using this measure, regional U.S. financial institutions emerged as more vulnerable than diversified lenders and investment banks, which are the least vulnerable.

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Of the 19 U.S. banks and brokers surveyed, Huntington Bancshares, M&T Bank, Truist Financial and Citizens Financial Group were identified as those most at risk.

Local companies are particularly sensitive to outward payment flows because they rely more heavily on traditional lending activities than their larger peers. On the positive side, market performance indicates limited direct risk.

The KBW Regional Banking Index rose almost 6% in January, compared with just over 1% for the broader measure. In the short term, expected interest rate cuts could lower deposit costs, while government efforts to stimulate economic activity could support credit growth.

Still, Kendrick sees the longer-term shift as inevitable.

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

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