Are Stablecoins Really a Threat to Banks or Just a Myth?

Coinbase has strongly refuted claims that stablecoins pose a threat to the banking system, labelling the notion of “deposit erosion” as unfounded. The crypto exchange argues that stablecoins are not draining banks of deposits but rather providing alternative payment methods that could enhance the financial ecosystem.

Last updated: 01 November 2023 (BST)

Key Takeaways

• Coinbase challenges the idea that stablecoins threaten traditional banking by highlighting their role as payment tools.
• The exchange argues that stablecoins do not significantly impact community bank deposits.
• Most stablecoin transactions occur outside the US, reinforcing the dollar's global dominance.
• Coinbase cites positive correlations between bank stock performance and crypto firms post-stablecoin legislation.
• Criticism of banks for their low-interest offerings has intensified as stablecoins become more popular.

Understanding Stablecoins and Their Impact

Stablecoins, cryptocurrencies pegged to a stable asset such as the US dollar, have been at the forefront of discussions regarding their impact on the banking sector. Coinbase's recent blog post seeks to clarify misconceptions surrounding these digital currencies, particularly the idea that they could lead to significant deposit outflows from traditional banks.

What Are Stablecoins?

Stablecoins are designed to maintain a stable value, allowing users to transact with minimal volatility compared to other cryptocurrencies. They are commonly used for remittances and international payments, providing a faster and often cheaper alternative to traditional banking methods. This functionality has raised concerns among traditional banks about potential deposit erosion.

Coinbase's Arguments Against Deposit Erosion

In its analysis, Coinbase asserts that fears of deposit erosion due to stablecoin adoption are overstated. The exchange points to its analysis, which indicates no substantive correlation between the rise of stablecoins and the decline of bank deposits, particularly within community banks.

The Role of Stablecoins in Payments

According to Coinbase, stablecoins are primarily payment tools rather than savings accounts, meaning that transactions involving stablecoins do not necessarily signify a withdrawal of savings from banks. For instance, if a business buys stablecoins to pay a supplier overseas, it is not moving funds to a different account but rather opting for a more efficient payment solution.

Challenging Treasury Department Projections

Coinbase has also taken issue with recent projections from the US Treasury Borrowing Advisory Committee, which estimated a potential $6 trillion in deposit flight. This figure is particularly striking given that the Treasury's own forecast places the stablecoin market at only $2 trillion by 2028. Coinbase argues that such a disparity indicates flawed reasoning, stating, “The math doesn’t add up.”

Global Context of Stablecoin Activity

Another critical point raised by Coinbase is that a significant portion of stablecoin transactions occurs outside the United States. According to the International Monetary Fund (IMF), over $1 trillion of the projected $2 trillion in stablecoin transactions for 2024 will be conducted internationally. Regions such as Asia, Latin America, and Africa are seeing heightened stablecoin activity, often due to weaker financial infrastructures.

The Dollar's Global Dominance

Since most stablecoins are pegged to the US dollar, their usage abroad serves to bolster the dollar's status as the world's reserve currency. Coinbase argues that instead of undermining US bank deposits, stablecoins are expanding the dollar's influence across global markets, without significantly affecting domestic credit availability.

Positive Correlations with Bank Performance

Coinbase further highlights that the performance of bank stocks appears to benefit from the growth of stablecoins. Following the introduction of the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act), there has been a noted positive correlation in stock performance between banks and crypto firms such as Coinbase and Circle, suggesting that both sectors can coexist and potentially thrive together.

Criticism of Traditional Banking Practices

The narrative around stablecoins has also prompted criticism of traditional banks, particularly regarding their treatment of depositors. Matt Hougan, investment chief at Bitwise, has been vocal about the need for banks to enhance their offerings rather than lament stablecoin competition. He argues that banks have long benefited from low yields on deposits and are now facing challenges as stablecoins provide attractive alternatives.

Legislative Challenges and Industry Responses

In light of these developments, banking groups have urged Congress to address perceived loopholes in the GENIUS Act. They seek to prevent stablecoin issuers from offering indirect yields through crypto exchanges, fearing that this could further undermine traditional banking practices. Conversely, the Crypto Council for Innovation and the Blockchain Association have pushed back against these proposals, arguing that such measures could stifle innovation and favour traditional banks at the expense of competition.

What Happens Next?

As the landscape of digital finance evolves, it remains crucial for regulators and industry stakeholders to navigate the complexities of stablecoins and their impact on traditional banking. The ongoing dialogue highlights the necessity for banks to innovate and adapt to the changing financial environment. It also raises important questions about how best to regulate these emerging technologies without hindering progress.

Conclusion

Coinbase’s assertions present a compelling argument for the coexistence of stablecoins and traditional banking, as they highlight the importance of adapting to new financial tools rather than resisting change. As stablecoins continue to gain traction globally, it will be interesting to observe how traditional banks respond and evolve in this rapidly shifting landscape. Will they adapt their offerings to compete with these digital currencies, or will they continue to face challenges as consumers seek better alternatives?

FAQs

What are stablecoins?

Stablecoins are cryptocurrencies designed to maintain a stable value by being pegged to a reserve asset, typically a currency like the US dollar. They are commonly used for transactions to mitigate volatility found in other cryptocurrencies.

Do stablecoins threaten traditional banks?

Coinbase argues that stablecoins do not threaten traditional banks, asserting that they serve as payment tools rather than mechanisms for withdrawing deposits. The impact on banks may depend more on their ability to innovate and improve offerings.

Where is most stablecoin activity occurring?

A significant portion of stablecoin transactions, estimated at over $1 trillion, occurs outside the US, particularly in regions with weaker financial infrastructure, such as Asia, Latin America, and Africa.

How do stablecoins benefit the US economy?

Stablecoins can enhance the global dominance of the US dollar, as most are dollar-pegged, thereby expanding its influence in international markets without necessarily threatening domestic deposits.

What are the concerns regarding stablecoins and banking regulation?

Concerns centre around the potential for stablecoins to offer yields indirectly, which some banks fear could undermine their deposit base. Ongoing legislative discussions aim to address these issues and establish a regulatory framework for stablecoins.