White House economists say stablecoin rewards pose minimal risk to banks

Stablecoin rewards pose minimal risk to the banking sector, and prohibiting yields is unlikely to produce any meaningful increase in bank lending, according to a report released on April 8 by the White House Council of Economic Advisers (CEA).

The report, titled ‘Effects of Stablecoin Yield Prohibition on Bank Lending,’ comes amid an intense lobbying battle between traditional banks and the crypto industry over whether stablecoins should be allowed to pay yield to their holders.

Banks have argued that competitive returns on stablecoins would trigger roughly $6 trillion in withdrawals from deposit accounts.

However, CEA’s analysis suggests these concerns may be overstated due to the actual mechanics of stablecoin reserves. When a household converts a dollar into a stablecoin, that dollar typically stays in the financial system. If an issuer uses the funds to buy Treasury bills, the money flows to a dealer who redeposits it, keeping aggregate bank deposits effectively unchanged.

Lending capacity is only reduced when stablecoin reserves are held as bank deposits that regulators require to be fully backed by central bank reserves. In effect, this “silos” the money and removes it from the credit multiplier.

In practice, however, major issuers like Circle allocate most of their reserves to Treasuries, with only about 12% held in cash deposits. Based on a baseline calibration, the CEA estimates that eliminating stablecoin yield would increase bank lending by just $2.1 billion, equivalent to a negligible 0.02% rise in total lending.

This modest increase comes at a high cost. Consumers would incur an estimated $800 million in lost welfare, according to the CEA.

Even under more extreme assumptions, such as the stablecoin market growing sixfold and all worst-case conditions materializing, aggregate lending would increase by only about 4.4%.

Moreover, the limited gains in lending would be concentrated among the largest institutions. Large banks are expected to account for roughly 76% of the additional lending, while community banks (those with assets under $10 billion) would capture just 24%. For these smaller banks, that translates to only about $500 million in additional lending, or 0.026%.

Overall, the CEA’s findings suggest that prohibiting stablecoin yields is an inefficient way to support bank lending. The policy delivers minimal gains to the credit market while imposing meaningful costs on consumers by eliminating competitive returns on stablecoin holdings.

“A yield prohibition would do very little to protect bank lending, while forgoing the consumer benefits of competitive returns on stablecoin holdings,” the CEA notes.

Since most stablecoin reserves are reinvested into the financial system through Treasury purchases, the so-called “narrow banking” risk to traditional lending appears to be marginal rather than systemic.