Banks Battle Stablecoins: Where Will Deposits Ultimately Flow?
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Banks Battle Stablecoins: Where Will Deposits Ultimately Flow?
Bank deposits will not vanish entirely; they will only be deconstructed and reconstructed.
Navigating Web3 tides with focused insightsBy Prathik Desai
Translated by Chopper, Foresight News
Throughout the long history of banking, depositors have always held a subordinate position. People entrust funds to banks, which then lend those funds out and earn returns several times higher than the interest paid to depositors. Depositors accept this model because—until recently—they had no better alternative: holding cash directly only leads to its gradual erosion in value over time.
Today, the average interest rate on standard U.S. savings accounts stands at just 0.6%, while investing in U.S. Treasury securities or money market funds yields at least 4%. This traditional model has persisted for decades primarily because depositors lacked convenient alternatives. Yet every few decades, new options inevitably emerge.
Stablecoins operate on blockchains, enabling round-the-clock transferability, settlement within seconds, and transaction costs under one cent. Although relevant regulations prohibit stablecoin issuers from paying interest directly to holders, DeFi’s composability allows users to deposit stablecoins into lending protocols and earn annualized yields of 5%–8%. This offers depositors a compelling new destination for their funds—without sacrificing usability.
In this article, we analyze the measures banks are taking to stem deposit outflows—and how this transformation will reshape global banking and capital flows.
Depositor Behavior
In 1977, Merrill Lynch—the wealth management and investment firm—launched its Cash Management Account (CMA). At that time, Regulation Q capped bank deposit interest rates at 5.25%, while U.S. Treasury yields had already surged past 7%. Merrill Lynch identified a regulatory loophole: its CMA automatically swept idle funds from clients’ brokerage accounts into money market funds each day. It also offered checking accounts and debit cards.
This combination enabled customers to earn market-rate returns while retaining the liquidity and convenience of a checking account. As a result, money market fund assets exploded—from roughly $4 billion in 1977 to $220 billion in 1982, a 55-fold increase—driven largely by massive bank deposit outflows.
The banking industry responded with collective protest. Ultimately, Congress repealed Regulation Q’s interest-rate caps, and major banks launched money market deposit accounts (MMDAs), recapturing deposits with higher yields. From the CMA’s introduction to the removal of deposit rate restrictions, the entire process took nine years.
Today, technological advances have shortened fund transfers to minutes—or even seconds—making depositors increasingly unwilling to wait.
During Silicon Valley Bank’s (SVB) collapse on March 8, 2023, depositors submitted withdrawal requests totaling $42 billion in under eight hours—averaging approximately $1.5 million per second. Over 85% of SVB’s deposits were uninsured, a key driver behind the concentrated run on the bank.
Prudent depositors consistently move funds to safer locations where capital is at least preserved—and potentially grows.
Two Digital Dollars
To address this challenge, two competing forms of digital dollar have emerged—each charting a radically different course: one pulls funds out of the banking system entirely; the other retains them within the banking system but transforms their form.
First: Stablecoins
Take Circle’s USDC as an example. When users exchange dollars for USDC, the corresponding fiat is used to purchase U.S. Treasuries—removing those funds from the bank’s balance sheet. This reduces the principal banks can lend out and profit from via net interest margins. Moreover, such funds no longer qualify for Federal Deposit Insurance Corporation (FDIC) coverage. Should the stablecoin issuer cease operations, holders may struggle to recover their principal.
The GENIUS Act, set to take effect in July 2025, introduces specific regulatory rules governing stablecoin issuance and usage—including an explicit ban on stablecoin issuers paying interest to users. This regulatory logic mirrors Regulation Q’s historical interest-rate caps. Yet, just as Merrill Lynch circumvented Regulation Q by channeling funds into high-yield money market funds, stablecoin issuers today offer yield-like incentives through reward programs—a point now under legislative debate in the CLARITY Act. Alternatively, users can independently deploy stablecoins into various lending protocols to generate returns.
For banks, this represents an existential threat. In the hours following SVB’s failure, enormous sums rapidly exited the banking system. Standard Chartered forecasts that up to $500 billion in bank deposits could gradually shift toward stablecoins by 2028—with regional U.S. banks facing the greatest impact, given their heavy reliance on net interest income.
Even if this forecast proves overly pessimistic, the trend of deposit outflows is unmistakable. That’s why—for the first time in decades—the four largest U.S. banks have joined forces to explore new countermeasures.
Second: Tokenized Deposits
Stablecoins’ core advantages lie in low transfer costs and sub-second settlement. To tackle precisely these pain points, banks have introduced tokenized deposits.
Banks convert customer deposits into on-chain tokens, enabling low-cost, high-efficiency movement across blockchain networks. Crucially, the underlying USD deposits remain on the bank’s balance sheet—preserving its ability to lend and earn interest—and retain full FDIC insurance coverage.
Two major banking consortia have already formed to advance tokenized deposits.
The first is the Clearing House Network—a coalition including JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and over a dozen other institutions—building a unified tokenized deposit platform scheduled to launch in the first half of 2027. Targeting institutional clients, it aims to deliver 24/7 settlement, programmable payments, and cross-border functionality—directly challenging stablecoins.
The second is the Cari Network—an alliance of five regional banks: Huntington Bancshares, M&T Bank, KeyCorp, First Horizon, and Old National—with combined assets under management of approximately $780 billion. Leveraging ZKsync’s Prividium zero-knowledge proof stack, the network is building a retail-focused tokenized deposit platform slated for Q4 2026. The fact that regional banks spearheaded this effort underscores how acutely they feel stablecoin-driven deposit flight—a risk amplified by their disproportionate dependence on net interest income.
So which product will depositors ultimately favor?
Historical precedent suggests depositors rarely choose based solely on inherent product superiority. Instead, they gravitate toward whichever option most effortlessly resolves their immediate pain points.
In the late 1970s, depositors’ primary need was higher yield. Though bank deposits were safe, Regulation Q rendered them uncompetitive once market rates rose. Merrill Lynch’s innovation was to decompose the bank account into two core needs: market-matching returns and daily liquidity. Once regulation lifted rate caps, banks responded with money market deposit accounts—reintegrating both functions.
Today’s stablecoins mirror that earlier innovation: operating outside traditional deposit infrastructure, enabling global circulation, interoperability with crypto platforms, and programmable use of idle capital. But like money market funds back then, they share a critical weakness: they are not FDIC-insured bank liabilities—their safety depends entirely on the issuer, reserve asset composition, redemption channels, and the broader regulatory environment.
Tokenized deposits, by contrast, replicate the strengths of 1980s-era banks: funds remain within the regulated banking system, preserving banks’ lending-profit model and the familiar FDIC safety net. Yet precisely because they comply with banking regulations, tokenized deposits fall short of stablecoins in openness, interoperability, and composability. Bank deposits can be accelerated and made programmable—but if they fully adopt stablecoins’ open attributes, banks lose control over those deposits.
Thus, competition is evolving into a contest over who controls the right to convert funds between forms.
Against this backdrop, a third path has emerged—one offering a glimpse into the future shape of banking and money itself.
The Bridge of Integration
On May 27 this year, SoFi Bank officially launched SoFiUSD—the first stablecoin issued by a U.S. national bank. Already deployed on Ethereum and Solana, the token is accessible to SoFi’s 15 million app users for seamless conversion and use. SoFiUSD delivers all classic stablecoin benefits: 24/7 availability, cross-border settlement in seconds, and per-transaction fees of just a few cents.
Simultaneously, users can—in the same app—convert SoFiUSD into tokenized deposits that earn interest and remain FDIC-insured. This enables fluid switching: use stablecoins for speed and flexibility; convert to tokenized deposits for yield and security. If bank-offered yields prove insufficient, users can revert to stablecoins and deploy them into lending protocols for higher returns.
SoFi may never match Circle’s decentralization, nor rival JPMorgan’s scale—but it has carved out a unique advantage: integrating bank accounts, stablecoin wallets, and tokenized deposits into a single application interface.
This approach echoes Merrill Lynch’s original innovation—distinct from pure stablecoin issuers or traditional banking consortia. SoFi seeks to eliminate the binary choice, freeing users from trade-offs between blockchain efficiency and bank deposit yields.
The evolution of these products confirms a fundamental truth: in storing and moving capital, the specific form matters less than the ability to freely switch between forms.
Faced with stablecoin disruption, banks’ initial response was lobbying regulators to ban interest and rewards. But regulatory pressure alone cannot win this race. The only viable path forward is proactive evolution—matching or surpassing crypto-native capabilities: adding yield and FDIC insurance atop instant settlement and programmability. Ironically, the technology enabling this upgrade is blockchain itself.
That’s the beauty of markets: they compel legacy industries to evolve until the entire ecosystem optimally serves participants. Merrill Lynch’s CMA forced the U.S. to abolish Regulation Q and spurred banks to launch MMDAs; today’s stablecoins are driving banks to develop tokenized deposits and 24/7 settlement systems. In both cases, incumbents weren’t displaced—they absorbed innovations, upgraded themselves, and retained their positions.
Regional banks face the sharpest pressure from this shift. Their heavier reliance on net interest income leaves far less buffer against deposit flight than larger banks possess. Optimizing only traditional accounts risks losing users demanding high liquidity; chasing crypto-like speed risks forfeiting FDIC protection and lending profitability. The Cari Network represents regional banks’ self-rescue attempt; the Clearing House Alliance reflects large banks’ defensive posture; SoFi has chosen a bolder path—building an integrated service bridge to avoid ceding ground to external players.
Reviewing financial history reveals a pattern: emerging models gain traction by exposing inefficiencies in legacy systems; once those pain points become undeniable, incumbents absorb new features to upgrade and stabilize their market standing. Merrill Lynch highlighted the disconnect between regulated deposit rates and market yields—banks responded with MMDAs; stablecoins exposed traditional banks’ weekday-only settlements and constrained capital mobility—banks are now countering with tokenized deposits and 24/7 settlement.
Industry leadership is shifting—from the innovators who first spot problems, to the institutions best able to integrate features, operate compliantly, and scale solutions.
We’ve recently argued that crypto—or more precisely, blockchain technology—is becoming the foundational infrastructure of fintech.
This holds true in the current transformation. Blockchain isn’t replacing bank deposits—it’s forcing the industry to disaggregate service dimensions: yield is one layer; settlement speed another; FDIC insurance yet another. And perhaps the highest-value layer is frictionless conversion between forms.
Regardless of where the industry heads, bank deposits won’t vanish—they’ll be deconstructed and rebuilt. The ultimate winners will be institutions enabling seamless, frictionless movement of capital among safety, yield, and liquidity.
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