Stablecoins redirect U.S. bank deposits under GENIUS Act

Compliant stablecoins could channel foreign capital into U.S. bank deposits

Compliant dollar stablecoins are being positioned as a conduit for non-U.S. savings into the American banking system when foreign users exchange local currency for u.S.-issued tokens. As reported by odaily.news, Patrick Witt has argued that, under the GENIUS Act, issuers would be barred from lending or rehypothecating reserves, an operating model meant to differentiate them from banks and mitigate deposit instability.

According to Axios, Treasury Secretary Scott Bessent frames stablecoins as a tool to preserve U.S. dollar dominance by attracting external demand into dollar assets such as Treasury bills, effectively increasing global demand for U.S. financial instruments. In this view, compliant issuance could add to U.S. funding rather than drain it, particularly if adoption is led by foreign users that currently lack access to safe dollar savings.

Whether bank deposits ultimately rise or fall depends on two linked variables: who holds the coins (domestic users versus foreign savers) and how issuers allocate reserves (bank deposits versus Treasuries or money market funds). The balance of these forces will determine how much stablecoin activity recycles back into insured bank funding versus remaining outside banks in short-term government securities.

Flow of funds: from users to reserves to Treasuries and banks

The flow-of-funds mechanics are straightforward: users deliver cash to a stablecoin issuer, which must hold reserves; those reserves are typically placed in short-duration U.S. instruments (e.g., Treasury bills), money market funds, and in some cases bank deposits. From there, funds either flow directly into commercial bank balance sheets (when held as deposits) or indirectly into the broader financial system via Treasuries and money funds, which can still influence bank liquidity through repo and secondary channels.

Reserve composition is pivotal. As reported by Cointelegraph, Tether reportedly holds about 0.02% of reserves in bank deposits, versus roughly 14.5% for Circle’s USDC, illustrating how one issuer’s model returns far less funding to banks than another’s. The data imply that, even with strong dollar demand, the banking system’s deposit base benefits only to the extent issuers actually park reserves in deposits rather than exclusively in Treasuries or money market funds.

Bank leadership has cautioned that if issuers were permitted to pay interest, the substitution risk for retail and corporate deposits would rise meaningfully. “As much as $6 trillion could shift from traditional bank deposits to stablecoins” if interest were allowed, said Brian Moynihan, CEO, Bank of America, a change he warned would push banks toward more expensive wholesale funding and constrain lending.

GENIUS Act limits yield and lending, influencing bank deposit mix

According to CoinDesk, Federal Reserve Governor Stephen Miran has projected that stablecoin demand could reach roughly $1–$3 trillion by decade’s end, driven largely by foreign users, while also noting that the GENIUS Act framework does not allow issuers to pay yield, limitations that reduce direct competition with interest-bearing deposits. Taken together with operational restrictions on lending and rehypothecation, compliant issuers could function more like pass-through vehicles to high-quality liquid assets than like banks.

As reported by Ainvest.com, standard chartered estimates that as much as $500 billion in U.S. bank deposits could migrate to stablecoins by 2028, with regional banks seen as more exposed given their reliance on deposits. The realized impact will hinge on where reserves are parked (e.g., Circle’s relatively higher deposit share versus issuers favoring only Treasuries) and whether foreign-led demand adds net new dollars into the system.

In scenario terms, the deposit mix effect is most benign when issuers cannot pay yield and hold a meaningful portion of reserves as bank deposits, and most acute if paying yield becomes permissible and reserves remain outside banks. Under today’s described constraints, the balance of evidence points to outcomes that vary by issuer model, reserve allocation, and the split between domestic and foreign demand rather than a single, uniform result.