Federal Reserve Council cautions that stablecoins could threaten bank deposits and lending capabilities.

Members of the Federal Reserve’s Community Depository Institutions Advisory Council (CDIAC) voiced concerns regarding the impact that nonbank-issued stablecoins may have on deposit withdrawals from conventional banks, potentially leading to reduced credit access for local communities.

During their meeting on April 10, council members articulated their worries about looming legislation in Congress that pertains to payment stablecoins and the regulatory framework governing them.

They likened the potential shift of deposits from banks to stablecoin platforms to the historical trend where funds moved to money market mutual funds in the late 20th century, which significantly altered the financial ecosystem.

Furthermore, the council indicated that stablecoins could serve as a digital counterpart to that earlier trend of disintermediation, which might jeopardize the deposit pools that community banks depend on to provide loans to individuals and businesses.

In their discussions, the council connected the issues surrounding stablecoins to prior concerns raised about central bank digital currencies (CBDCs). In earlier meetings, CDIAC members had cautioned that CBDCs might siphon deposits away from the banking industry.

The conversation on April 10 extended this reasoning to privately issued stablecoins, pointing out that they share the same potential risk of diverting funds from insured banks.

The council highlighted that CBDCs and payment stablecoins introduce competitive pressure on traditional bank deposits, often without being subjected to similar regulatory scrutiny or liquidity standards.

Members expressed the view that this imbalance in risk could lead banks to curtail their lending capabilities, especially affecting small businesses and local borrowers who rely on community banking relationships.

Council members called on regulators to include stablecoins within broader supervisory frameworks focused on financial stability, consumer protection, and systemic risk management.

They stressed that unchecked stablecoin issuance, particularly from nonbank sources, could undermine the funding streams of regulated institutions and destabilize credit access for everyday businesses.

The council also underscored the need for uniform oversight between bank and nonbank entities, reiterating concerns about the risks of regulatory arbitrage.

Additionally, they encouraged policymakers to consider the implications that stablecoin usage might have on essential banking operations, particularly concerning insured deposits and liquidity management.

Fed Chair Jerome Powell has recently remarked that stablecoins represent a digital product with considerable potential appeal, expressing support for their regulation and affirming that the Fed intends to maintain a collaborative relationship between the banking sector and the crypto industry.