Your columnist’s first job after graduating from university was working in the team at the Bank of England that compiled and analysed the UK’s monetary aggregates. This was, sadly for him, in the days before the Global Financial Crisis and the subsequent birth of quantitative easing as a major tool of policy revived – at least for a while – interest in the monetary aggregates. It was not the kind of thing that many members of the rate-setting Monetary Policy Committee paid a great deal of attention to. That time working on the monetary data, though, did leave your columnist with both a lasting understanding of some rather arcane definitional debates around how to calculate broad money measures* and with an almost philosophical interest in questions such as what is money?
Developments in crypto markets and issues such as the debate around central bank digital currencies have made such questions rather topical again in the last few years.
This week, the Clark Center’s Finance Experts Panel turned their attention towards the vexed issues of stablecoin issuers paying interest.
The GENIUS Act of 2025 put stablecoins on a firmer legal footing in the United States and was described by this column at the time as “a generally reasonable-looking regulatory framework for stablecoins in the United States and could, potentially, lead to an increase in their use.”
The supposed advantage of Stablecoins, effectively a token pegged to the value of the dollar (or, in theory, a different currency) with enough safe assets – such as Treasury bills – on hand to meet redemptions, is the fact that they embed superior technology. Because transactions involving them are recorded near instantaneously on central digital registers, they allow for low-cost transfers without the wait times often associated with traditional finance.
Last year’s column noted three major uses of such tokens.
They are widely used as part of the wider cryptocurrency ecosystem to purchase cryptocurrencies, although over the last 18 or so months, the growth of stablecoins does seem to have decoupled from the growth of cryptocurrency transactions. In states marked by low trust in the government and traditional banking, together with high inflation – such as Nigeria and Turkey – they have begun to carve out a role as a substitute for fiat currencies. And then there are cross-border transactions. Sending a remittance via a stablecoin can often cost just a third (or sometimes even less) as much as using a wire transfer.
Some observers – and certainly some retail bankers – have worried that stablecoins could provide an alternative to traditional banking retail deposits and draw funds away from the banking system.
One factor – possibly not the only one – standing in the way has been the fact that, under the GENIUS Act framework, stablecoins are not permitted to pay interest.
In reality, there is something of a loophole in the legislation. As Bloomberg’s Matt Levine explained last month:
- The stablecoin issuer can’t pay interest, but it can pay fees to crypto exchanges (for encouraging their customers to hold the stablecoin), and the exchanges can pass those fees along to the customers. To the customers, this looks pretty much exactly like “interest on a stablecoin.”
- If you’re a customer who holds a stablecoin, you can lend it out to crypto traders for their crypto trades, and get a second layer of interest.
How much would the situation change if stablecoin issuers could, without having to go through the workarounds explained above, simply pay interest to their holders?
This is the question that the expert panel considered. They were asked whether “interest-bearing stablecoins, either via direct issuer payments or exchange-provided rewards, would measurably erode the deposit franchise of banks in developed-market economies”?
The results suggested broad, although far from unanimous, agreement. Weighted by confidence, 3% of respondents strongly agreed and 47% agreed, 29% expressed uncertainty while 19% disagreed, and 2% strongly disagreed.
Given that uncertainty tends to be high in questions asking about future trends, 50% of the panel agreeing is a reasonably strong finding.
Of course, much remains unknowable. As John Campbell of Harvard noted, “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 as Loretta Mester of the Wharton School put it, much “will depend on competitive response from banks”.
In the face of more competition from stablecoins, one would expect banks to adapt and innovate. Which, of course, would be no bad thing for consumers.
Arvind Krishnamurthy of Stanford GSB pointed out that banks already face such competition from vehicles such as money market mutual funds, 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”.
Then there is the question of scale. Paola Sapienza of the Hoover Institution, Stanford, noted that “stablecoin market cap (~$170B) is a rounding error vs $17T in US deposits”, while “stablecoins lack payroll direct deposit, mortgage servicing, credit card linkages, and FDIC insurance.” Although of course, just as bank deposits may adapt in the face of competition, there is every chance that stablecoin issuers could begin to offer such services eventually too. John Cochrane, also of the Hoover Institution, argued that “Interest bearing stable coins implement money market funds with payments, narrow banks, segregated accounts, all good innovations quashed by the Fed”.
The panel then broadly agreed that interest-bearing stablecoins would measurably erode the deposit franchise of retail banks, but much of it depends on how one defines ‘measurably’.
*I can still talk for hours if needed about how the clearing of inter-bank repos through central clearing counterparties rather than bilaterally between banks inflates broad money. I struggle, though, to find anyone to talk to about it.
