GENIUS Act Prompts Shift from Traditional Banks to Stablecoins

The recently enacted GENIUS Act is anticipated to lead to a significant migration of deposits from traditional bank accounts to stablecoins offering higher yields. Tushar Jain, co-founder and managing partner of Multicoin Capital, stated that the legislation marks the beginning of the end for banks' ability to offer minimal interest rates to retail depositors. He further suggested that major technology companies such as Meta, Google, and Apple might enter the financial sector by providing stablecoin yields coupled with enhanced user experiences, including instant settlement and 24/7 payment capabilities.

Banking groups have expressed concerns over potential deposit outflows. In August, they urged regulators to address a perceived loophole that could allow stablecoin issuers to offer interest through affiliated entities. The GENIUS Act prohibits stablecoin issuers from directly offering interest to token holders but does not explicitly extend this ban to crypto exchanges or affiliated businesses, potentially enabling issuers to circumvent the restriction via partnerships. The U.S. Department of the Treasury estimated in April that widespread adoption of yield-bearing stablecoins could result in approximately $6.6 trillion in deposit outflows from the traditional banking system. The Bank Policy Institute warned that such a shift could increase deposit flight risk, particularly during periods of financial stress, potentially undermining credit creation and leading to higher interest rates and increased costs for businesses and households.

To remain competitive, banks may need to offer higher interest rates to depositors, which could adversely affect their earnings. Currently, the average interest rate for U.S. savings accounts is 0.40%, while in Europe, it stands at 0.25%. In contrast, stablecoins like Tether (USDT) and Circle's USDC offer rates of 4.02% and 3.69%, respectively, on platforms such as Aave. Reports indicate that major technology companies are exploring the issuance of stablecoins to reduce fees and enhance cross-border payment processes. The stablecoin market currently has a capitalization of $308.3 billion, led by USDT and USDC, with the Treasury Department projecting a 566% increase to reach $2 trillion by 2028.