The Coming Stablecoin Shock to America’s Credit Markets

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Dr. Andrew Rodrigo Nigrinis is a Stanford-trained economist specializing in consumer finance, antitrust, and regulatory policy, who was the first Enforcement Economist at the Consumer Financial Protection Bureau. He is now in private practice, where he provides expert economic analysis for litigation and public policy matters at Legal Economics LLC with a focus on credit markets, medical debt, and the intersection of financial regulation and competition.

A major change is coming to the structure of U.S. financial markets. With the passage of the GENIUS Act, stablecoins — digital tokens designed to maintain a one-to-one value with the U.S. dollar–are moving to a much more prominent position within the financial system. When Congress passed the GENIUS Act, it prohibited stablecoin issuers from paying interest, drawing a bright line between stablecoins and traditional deposits. The prohibition was an attempt to allow payments innovation while preserving the deposit base that underwrites credit in the real economy.

Yet while that may have been Congress’s intent, that line is already blurring. Wallets and exchanges now routinely offer “yield,” “cash-back,” or “rewards” that mirror the federal funds rate. The difference is semantic, not economic, and it has profound implications for credit creation. That’s because deposits are not the end of the story; they are the raw material that fuels loans to households, small businesses, and farms, and those loans are what power economic growth. 

As policymakers consider whether intermediaries, wallet providers, exchanges, and other platforms are permitted to offer yield or “rewards” on stablecoin balances, they should consider two straightforward questions I examine in a recent paper:

• If deposits move into stablecoins, how much lending capacity disappears?
• Where will the real-world impact be felt?

The Short Answer

Congress’s prohibition on yield could be a safeguard meant to protect the flow of credit that sustains America’s small businesses, households, and farms. But if this back door allowing yield-bearing stablecoins at other intermediaries isn’t closed, it could siphon trillions of dollars from deposits. Banks typically transform deposits into longer-term loans — loans that small-businesses use to meet payrolls, keep family finances steady in hard times, and finance the next agricultural season. But when those “core” deposits shrink, capital and liquidity rules prevent perfect substitution by wholesale funding sources. Each lost dollar of core deposit funding therefore forces a smaller loan book or higher borrowing costs.

Said another way, when 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.

With over $250 billion in circulation, stablecoins are a significant part of America’s money landscape. That growth reflects genuine innovation: instant, programmable, global payments. But if yield allows stablecoin balances to compete directly with deposits, the consequences will extend beyond financial institutions and ripple through the credit system, sabotaging the quiet machinery behind America’s job creation, economic resilience, and long-term growth.

A Research-Based Look at the Risks

Existing studies frame the range of plausible stablecoin impacts on lending:

• The U.S. Treasury’s April 2025 report, which provides an upper-bound “thought experiment” assuming one-for-one displacement of deposits by stablecoins.
• Charles River Associates (2025), commissioned by the crypto industry, which concluded that stablecoin adoption had “no material impact” on community-bank deposits.
• Whited et al. (2023) is a rigorous, structural analysis of how introducing a central-bank digital currency could affect deposits and lending. It provides a helpful middle ground, empirical estimates that can be applied to today’s deposit base to gauge the impact on credit.

Historical examples also demonstrate this. For instance, the U.S. shale-boom experience of the 2000s showed that when deposits flow in, lending expands. If inflows spur credit creation, outflows contract it. That symmetry anchors the analysis.

The “No-Yield” Scenario: A Manageable but Meaningful Drain

It was Congress’ intent that stablecoins not pay interest. In this case, their role is primarily as a payment medium, not a savings vehicle.

Using Whited et al.’s (2023) estimated 81.5 percent substitution rate — meaning that for every $1 shifted into stablecoins, roughly $0.81 leaves bank deposits under a “no-yield” setting — the corresponding decline in total deposits is about 6.1 percent. In other words, even when stablecoins function purely as payment instruments without paying interest, their modeled substitution effect implies mid-single-digit losses in aggregate deposits.

On paper, that sounds small. In practice, it is significant. Applied to today’s deposit base, that shift would mean about a $250 billion reduction in lending capacity, or roughly 4 percent of all consumer, small-business, and farm credit outstanding. Translates into nearly $19 billion less small-business credit, $91 billion less consumer lending, and $10 billion less in farm loans.

Yielding a Structural Credit Shock

Now imagine the rule changes, or, more precisely, the GENIUS Act’s loophole persists — and stablecoin wallets or exchanges begin offering yield near the federal funds rate. That single shift transforms stablecoins from a payments tool into a deposit alternative.

Estimated deposit losses would climb from roughly 6 percent to over 25 percent, depending on adoption speed.

Community Lenders–and Their Borrowers–Bear the Brunt

The effects are not uniform. The analysis distinguishes between the top 1 percent of banks by deposit size and everyone else. Four structural features explain why smaller institutions, and the communities they serve, are most exposed:

(a) Less cushion from excess deposits. The largest banks have substantial deposits and, accordingly, could weather deposit outflows in ways that smaller banks with thinner deposit cushions could not.

(b) Greater exposure to relationship-based lending. Community banks’ business models rely more on small-business, consumer, and agricultural lending — markets that depend on local knowledge and cannot easily be securitized or automated.

(c) Limited access to alternative funding. Large banks can draw on diversified funding bases, like wholesale markets or bond issuance. Smaller lenders rely on core household and business deposits that are harder to replace.

(d) Concentration of stablecoin reserves. Stablecoin issuers are likely to park reserves at a handful of large custodial banks or directly in Treasuries. Those funds bypass smaller lenders entirely. The liquidity, once recycled into local loans, becomes static collateral.

The net result: even if deposit losses appear proportional, credit losses are magnified in the sectors that most drive local jobs and investment.

Why the “No Impact” Narrative Doesn’t Hold Up

A recent paper by the crypto industry, produced with Charles River Associates, claims that stablecoins have had “no material impact” on community bank deposits because deposits come back into the banking system as stablecoin deposits. But that logic depends on all deposits being the same — and that is absolutely not the case.

A thousand households each holding $1,000 in insured checking accounts pose far less run risk than one stablecoin issuer holding a single $1 million uninsured account. Even if deposits return to the banking system through stablecoin custodians, they must be held as high-quality liquid assets — as the GENIUS Act recognizes — because they can vanish instantly. The collapse of Silicon Valley Bank illustrated how concentrated, confidence-sensitive deposits can flee faster than regulators can react. Stablecoin-linked deposits may net to zero in accounting terms, but their volatility and limited capacity to support lending make them fundamentally different from the stable, credit-supporting deposits that finance Main Street.

Lessons from the Shale Boom and Money-Market Funds

Economic history helps clarify what’s new here.

During the shale boom, sudden inflows of mineral royalties into community banks lowered their funding costs and expanded local credit. Every dollar of new deposits produced roughly fifty cents of additional mortgage lending. Reverse that flow, and lending shrinks just as predictably.

Critics sometimes argue that the U.S. financial system has already adapted to deposit substitutes like money-market funds (MMFs). But this ignores how consequential MMFs actually were. The MMF shift was gradual, unfolding over decades, giving banks time to adjust through pricing and regulation. Their existence reshaped thrift institutions and contributed to the savings-and-loan crisis. While it is understandable that the lessons from this faded as the system stabilized, it is reckless to assume that, because we survived that adjustment, we can absorb another today.

Policy Considerations: Protect Credit, Not Banks

The evidence presented here points clearly in one direction: the most effective way to prevent stablecoins from undermining credit availability is to close the loophole that allows intermediaries to pay yield.

If stablecoins remain limited to their payments function — moving money more quickly and cheaply while coexisting alongside traditional deposits — their impact on lending will likely be modest. But if wallets and exchanges are permitted to offer yield, even indirectly, deposits will migrate in far greater volumes, and with them goes the funding that underwrites loans to households, small businesses, and farms. The result is not a simple shift in market share between banks and fintechs; it is a contraction in the credit that sustains economic growth.

Congress has already taken an essential first step by prohibiting stablecoin issuers themselves from paying interest. Closing the loophole at the intermediary level would build on and reinforce those initial guardrails, ensuring they remain effective as the market evolves. Regulators could clarify that yield, rewards, and other compensation offered on stablecoin balances by wallets and exchanges should be treated as what they functionally are: interest.

Locking down that definition would help ensure that digital money continues to support, rather than starve, the flow of credit that drives jobs, resilience, and long-term growth across the U.S. economy.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

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