What Stablecoin Yield Costs Main Street

When lawmakers return to Washington later this month, Congress has an opportunity to finish a strong market-structure bill. But one issue still needs to be fixed: stablecoin yield.

A yield loophole invites deposit flight

As written, the bill could allow crypto platforms to effectively offer interest-bearing accounts on stablecoin holdings without the safeguards that apply to traditional deposit products. If money that would typically be deposited is pulled towards digital assets, there is less funding for the institutions that support Main Street lending.

Institutions like banks turn deposits into loans, whether that be for a mortgage, a line of credit for a small business, or a farmer's spring planting. When deposits shift into stablecoins, less of that funding is available to support traditional bank lending.

What deposit flight means for lending

• The math: The Federal Reserve Bank of Kansas City modeled what could happen if the stablecoin market ballooned from $250 billion to $900 billion, siphoning reserves from bank deposits. The shift would translate into a "$325 billion reduction in bank loans to the economy."
• The mechanism: "[W]hen a consumer deposits $1,000 in their checking account, a community bank uses those deposits to fund a local loan. If the consumer instead chooses to buy $1,000 in stablecoins, the exchange parks the reserve money in a giant custodial bank or in U.S. Treasuries, bypassing local credit creation," as Dr. Andrew Nigrinis, a former CFPB economist, explains.
• On the ground: Sen. Josh Hawley (R-MO) put it plainly: "Farmers and ranchers, in particular, are very, very concerned that deposit flight in small towns could absolutely kill their ability to get ag[riculture] loans. So that needs to be fixed.”

The Clarity Act can deliver the market structure framework digital assets need

Congress does not have to choose between innovation and protecting today's infrastructure for everyday lending. It can do both by fixing stablecoin yield and moving a stronger bill forward.

Congress has the chance to close this loophole in September. We think it should.

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