According to the Independent Community Bankers of America (ICBA), stablecoin wallets could suck $1.3 trillion, with a "T", out of the insured deposit system. Predominantly from banks. I'm thinking the ICBA would care less about deposits leaving credit unions.
The concern and the headline number is that if stablecoin becomes a widely adopted payment rail, like ACH, wires, and Visa/MC, and stablecoin issuers can offer rewards, then businesses and perhaps individuals will park more of their cash holdings in a stablecoin wallet. The other payments rails flow through banks, so the "wallets" are essentially the customer operating accounts.
Do I think the great vacuum sucking machine of deposits leaving banks for stablecoin wallets will come to fruition? Probably not, at least not at the levels projected. And the Clarity Act recently failed to pass the Senate, due in part to not closing the rewards loophole, more like a tunnel a freight train could pass through, left in the Genius Act that forbids the paying of interest to stablecoin providers but does not forbid rewards.
And bankers are beginning to adapt. The Clearing House is developing a shared, bank‑led platform for clearing and settling tokenized deposits. It is designed to keep customer funds inside regulated bank accounts while adding on‑chain speed, programmability, and 24/7 settlement. A cadre of bank trade associations are doing the same in an initiative called Bank Chain.
Even if the $1.3T is a huge miss, I think we're missing where there is titanic risk. The alternatives to bank deposits. Before I elaborate, let's look at past behaviors during different rate and pricing transparency in the recent past.
The above chart is a macro look at the spreads delivered by asset products, namely loans and investment securities, and liability products, primarily deposits, during different rate scenarios. The dotted line represents the Fed Funds Rate. The orange line, asset spreads. And the green line, liability/deposit spreads. Many of my readers know that my firm measures product profitability for community financial institutions on an outsourced basis and that is where I am getting these statistics from. Our outsourcing client averages.
In 2006, when the Fed Funds Rate was 5%-5.25%, as it was in 2023, deposit spreads actually exceeded asset spreads although deposits have negligible credit risk. At that time, there were nearly 100,000 bank branches nationwide.
Then came the Great Recession and the Fed Funds Rate fell to zero. Deposit spreads plummeted and lingered around 1% for the remainder of the zero-rate environment until the Fed started tightening in 2017. The number of bank branches plummeted to around 70,000. Why? Deposits were less profitable. Therefore branches were less profitable. And the declining number of customer visits to branches made them easy targets for consolidation. And as it turned out, there was little deposit attrition from consolidated branches.
Because customers did most of their transactions online or on mobile. No branch. No problem.
At peak Fed Funds Rate in 4Q07, average deposits per personal money market accounts were $55,000. After it went to zero, that number declined to its trough of $45,000 in 4Q08. Perhaps it was households burning through cash. But once rates went to zero and stayed there until 2017, personal money market average balances per account methodically climbed to $93,000. Why not keep it in an FDIC insured account with immediate availability if rates were minimal no matter the instrument of choice?
When rates shot up again in 2022, something different happened. At Covid's start in 1Q20, average balances per account was $94,000. Two years later, 1Q22, the average balance was $131,000. Zero rates. Government stimulus. Economic uncertainty.
Then inflation and the Fed's rapid response to try and curtail it in 2022 and 2023 by raising rates faster than at any time in recent memory. What happened to the average balances per personal money market accounts? They plummeted from its 1Q22 peak to a 3Q24 trough of $76,000 per account, a 42% decline. A similar thing happened in interest bearing retail checking accounts. Where did the money go?
The below chart shows that some flowed into CDs, as the proportion of CDs to total deposits shot up from around 15% to over 30% during the rates up period.
That would be the good news. Lower cost interest bearing checking and money market balances flowed to higher cost CDs. Still in our bank. But that isn't the whole story. Not by a long shot.
The above chart shows the Breckenridge ski lift rise of money market mutual fund assets, a clear alternative to bank accounts. Sofi Bank, a neo bank that has high yielding assets (mostly student loans) funded by high-cost deposits, grew from $155 million in deposits in 2022 when it acquired a small California bank to $47 billion in deposits today. Where did those deposits come from?
So my concern is less about where the stablecoin deposit headwind will take us, and more about where neo banks and alternatives to bank deposits will take us if we continue to manage our funding like we have done in the past. Because if we keep rates low during Fed tightening periods, people will seek alternatives, like they did in 2022-23. And they won't even call us to complain.
How will we change our funding strategy to mitigate this risk?
~ Jeff
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