The Clash Over Stablecoins: How Collaboration Can Strengthen Finance

Dr. Ozan Ozerk is the architect behind OpenPayd. As a serial entrepreneur, he has a strong commitment to numerous digital initiatives.

The ongoing tensions between the cryptocurrency sector and the traditional banking industry have reached a tipping point. Much like the well-known stages of grief—shock, denial, anger, bargaining, depression, and eventual acceptance—we are witnessing the banking world grappling with monumental changes that it has historically resisted. Presently, we seem to be stuck in the anger phase.

The latest disagreement involves a controversial “loophole” raised by banking lobbyists, which they argue would enable crypto exchanges to pay interest on stablecoins to their clients. These banking advocates have made their position clear, arguing that the real concern is not competition but rather the potential of “increased deposit flight risk… that could negatively affect credit creation in the broader economy.”

To illustrate the stakes involved, they refer to a report from the Treasury Department released in April, which estimated that stablecoins could cause up to $6.6 trillion in deposit outflows, contingent upon whether they are permitted to provide interest or yields.

The industry response? Perhaps best captured by Paul Grewal, the chief legal officer at Coinbase: “This was no loophole, and you know it. 376 Democrats and Republicans in the House and Senate rejected your unrestrained effort to sidestep competition. So did one President.”

The Electric Concern

As the founder of both a European banking entity (EMBank) and a global banking-as-a-service provider (OpenPayd), I have a front-row seat to the regulatory challenges and systemic risks that banks must navigate. EMBank allows me to observe these regulatory hurdles up close, while OpenPayd’s integration of stablecoin payments offers insights into how these cryptocurrencies can revolutionize traditional payment infrastructure.

The fundamental worry lies in the concept of fractional reserve banking. In simple terms, this practice enables banks to issue loans based on a percentage of their deposits. A sudden $6.6 trillion shift to stablecoins could trigger a credit crisis. Despite the questionable reputations of banks, we cannot ignore the associated risks.

Considering that the U.S. national debt approaches $37 trillion, with roughly $6.4 trillion tied up in Treasury bills, the banking lobby claims that a sum larger than the entire Treasury bill market is jeopardized by potential outflows, as the Financial Times and various crypto news outlets have pointed out.

While that figure is frequently cited as stemming from the U.S. Treasury Report, examining the source reveals inconsistencies.

The Numbers Dissected

The press release fails to quote the Treasury report directly—instead, it references the Wall Street Journal, which does not mention such staggering statistics. The Treasury report itself presents more nuanced insights.

So where does the $6.6 trillion figure originate? It pertains to the total quantity of liquid cash known as M1—the immediate money supply available within the U.S. economy. This amount does not pertain to stablecoins and bears no relation to interest yields.

The Treasury report forecasts some of that liquid money might transition into less accessible forms—referred to as M2 and M3. However, it does not provide specific predictions on the scale of this shift nor imply that all M1 money will migrate to stablecoins or that yields are a significant factor in this transition. In fact, the report anticipates stablecoin growth to reach up to $2 trillion by 2030.

So, when contemplating potential outflows of $2 trillion, while it remains a substantial number, the reality is that it is significantly lower.

Stablecoin reserves would primarily remain invested in Treasuries and cash equivalents, with their actual application dispersed among payments, DeFi, wallets, and custodial services. A plausible estimate would be about one-quarter on exchanges, possibly up to a third at best. But 100%? Unlikely.

Thus, the actual figure is likely between $400 billion and $700 billion—not nearly as catastrophic.

The Core Concern

Therefore, while the prospect of deposit outflows is legitimate, the figures have been greatly exaggerated. Currently, consumer interest rates across the board are, at best, minimal. The baseline interest rate in the U.S. stands at 4.5%, while the average savings account interest rate is a mere 0.6%.

Stablecoins acquire U.S. Treasuries on a one-to-one basis for every dollar they possess. The interest generated from these yields can then be redistributed to the holders. While not directly—due to the GENIUS Act prohibiting this—it can occur through exchanges. Yes, this constitutes a loophole, referred to as “rewards.” But is it potentially more advantageous for consumers? Certainly. Does it pose a threat to traditional banking? Undoubtedly.

The Path Ahead

The most pressing issue that needs addressing is the establishment of a fair playing field. Why should exchanges operate similarly to banks without overlapping regulatory responsibilities?

This introduces further complexities. Although it may seem rational to regulate entities performing banking functions as banks, existing banking regulations are not tailored to accommodate the rapid pace and inherent transparency of blockchain technology. The anti-money laundering requirements for foreign exchanges are predicated on processes that include natural pause points, such as correspondent banks and KYC checks, which are absent in blockchain systems. Enforcing identical regulatory standards necessitates a comprehensive overhaul.

That said, one seldom-discussed solution has emerged.

As outlined in the seven stages of grief, the final phase is acceptance, which can often lead to collaborative ventures. The cryptocurrency and banking sectors depend on each other. There’s no reason legislative measures couldn’t be adjusted to allow banks to bear the regulatory responsibility of accepting stablecoins from exchanges as collateral for lending purposes. This would mitigate credit risks while enhancing outcomes for consumers and businesses alike.

The agility and innovation of the new technologies would align well with the regulatory knowledge of traditional institutions.

Banking-crypto partnerships may still be in their infancy, as witnessed by the recent collaboration between JPMorgan and Coinbase in July of this year. However, I firmly believe their momentum will accelerate.

Experience has no shortcuts, and when transformation is unavoidable, successful parties find collaborators to complement their capabilities. Stay tuned.

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