Interest-Bearing Stablecoins

Depositors that don't require liquidity management services will seek crypto-related and higher deposit rate services of interest-bearing stablecoins. Bank franchise would get eroded by limiting the ability to diversify shocks across depositors, and by greater deposit competition

The direction of the effect is clear, but the magnitude is not. Money market funds already compete with banks, so interest-bearing stablecoins are not the first threat to the deposit franchise.

And that is the point. Interest bearing stable coins implement money market funds with payments, narrow banks, segregated accounts, all good innovations quashed by the Fed.

Stablecoins are most useful for on blockchain and cross border transactions. Other than those, they are similar to existing money market funds.

It's highly uncertain whether stablecoins will come into common use by households and businesses in developed market economies. If they do, I would agree.

A lot depends on how it is done.

The average regular savings deposit rate is only 42bps. TBTF banks run at 5bps. Stablecoins offer competition with higher rates. As the SC market grows, so will the SC lending markets. Banks and private credit will have additional competition - which is good for the economy.

Depends on whether things outside the regulatory perimeter come to dominate stable coins. You can get interest on Tether, yet USDC competes. The Genius act bans interest. So interest may move some wholesale deposits, but the impact on the deposit franchise is less obvious

Alternative deposit products exist currently and yet banks retain substantial value from their deposit franchises. That indicates to me that the central friction is not limited choices. Surely there will some switching, but at the edges.

Will depend on competitive response from banks.

Depends on at least two important unknowns: (i) How is the perception of safety of such stablecoins? This may in turn depend on the regulatory framework.(ii) How do they compare in terms of transaction convenience?

Deposits are incredibly. stubbornly sticky.

Stablecoin market cap (~$170B) is a rounding error vs $17T in US deposits. Actual users are crypto-native traders and EM dollar-seekers, not retail bank depositors. Stablecoins lack payroll direct deposit, mortgage servicing, credit card linkages, and FDIC insurance.​​​​​​​​​​​​​

Deposit franchise erosion isn’t all bad if depositors were paid below-market rates:competition can be healthy. But stablecoins, especially their off-chain governance, raise real concerns. Blocking narrow banks may have backfired; innovation has returned, this time wrapped in tech

currently, there are a lot of firm that offer easy-to-use cash accounts that can be quickly move into and out of deposit accounts. yet, aggregate deposits remain very big and do not respond a lot to interest rates, further, it may be hard to draw many people into stablecoins.

Would offer higher yields and liquidity than bank deposits and fewer regulations but don't benefit from deposit insurance. Banks may have to respond by offering higher rates, eroding franchise value.

Many unresolved problems including; uncertain regulatory classifications; uneven reserve assurance (audits); fragmentation left to markets; issuer custodian risks; asset/liquidity risk; sanctions related to violation of KYC/AML; rehypothecation risks; economic