Banks confront stablecoins; where will deposits ultimately flow?

Writing: Prathik Desai

Translation: Chopper, Foresight News

In the long history of banking development, depositors have always been in a disadvantaged position. People deposit funds into banks, which then lend out these funds to earn returns many times the interest paid to depositors. Depositors accept this model because there are no better alternatives: holding cash in hand only causes its value to continuously depreciate over time.

Currently, the average interest rate for ordinary savings accounts in the United States is only 0.6%, but investing in U.S. Treasury bonds and money market funds can yield at least 4%. This traditional model can operate long-term mainly because depositors have lacked convenient alternatives. However, every few decades, new options always emerge.

Stablecoins, relying on blockchain technology for round-the-clock circulation, enable transactions with instant settlement, and transfer costs are less than a cent. Although relevant laws prohibit stablecoin issuers from directly paying interest to holders, the composability of decentralized finance allows users to transfer stablecoins into lending protocols to earn annual yields of 5% to 8%. This provides depositors with a new way to allocate funds without sacrificing convenience.

In this article, we will analyze the measures banks have taken to prevent deposit outflows and how this transformation will reshape the global banking industry and capital flow patterns.

Depositor Behavior

In 1977, wealth management and investment firm Merrill Lynch launched the Cash Management Account (CMA). At that time, U.S. Regulation Q limited the maximum interest rate on bank deposits to 5.25%, while U.S. Treasury yields exceeded 7%. Merrill Lynch discovered a regulatory loophole: by using the CMA feature, they automatically transferred idle funds from clients’ securities accounts into money market funds daily. At the same time, Merrill also provided check and debit card services.

With multiple functions combined, clients could enjoy high market-level yields while being able to withdraw funds at any time, just like using a checking account. As a result, the size of money market funds experienced explosive growth, soaring from about $4 billion in 1977 to $220 billion in 1982, a 55-fold increase. Behind this growth was a massive loss of bank deposits.

The banking industry protested collectively. Ultimately, the U.S. Congress abolished the interest rate cap under Regulation Q, and major banks launched money market deposit accounts to regain deposits with higher yields. From the emergence of cash management accounts to the removal of deposit rate restrictions, the entire process took nine years.

Today, technological innovations have shortened fund transfer times to minutes or even seconds, and depositors are no longer willing to wait long.

During the Silicon Valley Bank collapse on March 8, 2023, depositors initiated withdrawal requests totaling $42 billion in less than eight hours, with an average withdrawal of about $1.5 million per second. Over 85% of the bank’s deposits were not protected by deposit insurance, which was a core reason for the concentrated bank run.

Cautious depositors always transfer funds to safer places where their capital can at least be preserved or even appreciated.

Two Types of Digital Dollars

In response to this issue, two competing forms of digital dollars have emerged, each heading in a different direction: one could detach funds from the banking system entirely, while the other remains within the banking system but changes the form of existence.

First: Stablecoins

Take USDC issued by Circle as an example. After users exchange dollars for USDC, the corresponding fiat funds are used to purchase U.S. Treasury bonds, causing these funds to leave the bank’s balance sheet. The principal that banks use for lending and earning interest decreases accordingly. Meanwhile, these funds no longer enjoy insurance coverage from the Federal Deposit Insurance Corporation (FDIC). If the stablecoin issuer ceases operations, holders will find it difficult to recover their principal.

The “GENIUS Act,” which took effect in July 2025, specifically establishes regulatory rules for the issuance and use of stablecoins. The law explicitly prohibits stablecoin issuers from paying interest to users, mirroring the restrictions of Regulation Q back in the day. However, just as Merrill Lynch bypassed Regulation Q by leveraging money market funds to achieve high yields, today’s stablecoin issuers also offer rewards as a way to provide indirect returns. Related debates are currently ongoing in the legislative discussions of the “CLARITY Act.” Additionally, users can also deposit stablecoins into various lending protocols to earn yields.

For the banking industry, this is undoubtedly a threat to survival. After the Silicon Valley Bank failure, massive deposits flowed out within hours. Standard Chartered Bank predicts that by 2028, about $500 billion in bank deposits may gradually shift to stablecoins, with regional banks in the U.S. being hit hardest, as their revenue heavily depends on net interest margin.

Even if these predictions are not entirely accurate, the trend of deposit outflows is clear. For this reason, the four largest U.S. banks have, for the first time in decades, jointly explored new countermeasures.

Second: Tokenized Deposits

The core advantage of stablecoins is low transfer costs and sub-second settlement. To address this pain point, banks have introduced tokenized deposits.

Banks can convert user deposits into on-chain tokens, which can circulate on blockchain networks at low cost and high efficiency. Meanwhile, the original dollar deposits remain on the bank’s balance sheet, allowing banks to continue lending and earning interest, and these tokenized deposits are still protected by FDIC insurance.

Currently, two major banking alliances are actively promoting the implementation of tokenized deposits.

The first is the Clearinghouse Network, which includes JPMorgan Chase, Citibank, Bank of America, Wells Fargo, and more than ten other institutions. They are building a unified tokenized deposit platform, scheduled to go live in the first half of 2027. This platform mainly targets institutional clients and will enable round-the-clock settlement, programmable fund clearing, and cross-border payments, directly competing with stablecoins.

The second is Cari Network, formed by five regional banks including Huntington, M&T, KeyCorp, First Horizon, and Old National, managing a combined asset scale of about $780 billion. This alliance relies on the zero-knowledge proof blockchain ZKsync’s Prividium technology stack to develop a tokenized deposit platform for retail users, expected to launch in Q4 2026. The focus on regional banks also reflects how severe the deposit outflow risk triggered by stablecoins is—these banks’ survival heavily depends on net interest income.

So, which product will depositors ultimately prefer?

Historical experience shows that depositors tend not to judge products solely based on their intrinsic advantages but prioritize options that can most easily solve their current pain points in fund usage.

In the late 1970s, depositors’ core demand was to increase yields. Due to Regulation Q restrictions, bank deposits were safe but uncompetitive once market interest rates rose. Merrill Lynch’s innovation was to decompose banking accounts into two core needs: market-rate yields and the convenience of daily flexible withdrawals. When regulations relaxed interest rate limits, major banks launched money market deposit accounts, integrating these features.

Today, stablecoins share similar advantages with Merrill Lynch’s products back then: they operate outside the traditional deposit system, support global circulation, connect with various crypto platforms, and enable idle funds to be programmable. But they also share the same shortcoming as money market funds: they are not insured bank liabilities, and their safety depends entirely on the issuer, reserve assets, redemption channels, and overall regulatory environment.

Tokenized deposits, on the other hand, replicate the advantages of traditional banks in the 1980s: funds remain within a regulated banking system, ensuring the bank’s lending profitability, and continue to benefit from deposit insurance mechanisms. However, because they follow banking regulations, tokenized deposits lack the openness, liquidity, and composability of stablecoins. Bank deposits can be accelerated and made programmable, but if they fully adopt the open attributes of stablecoins, banks will lose control over deposit management.

Thus, the core of the competition between the two is gradually shifting toward control over fund conversion rights.

Against this backdrop, a third development path has emerged, offering a glimpse into the future shape of banking and currency.

The Bridge of Integration

On May 27 this year, SoFi Bank officially launched SoFiUSD, the first stablecoin issued by a nationwide U.S. bank. The token is available on the Ethereum and Solana blockchains, and the platform’s 15 million users can exchange and use it via a mobile app. SoFiUSD possesses all the features of a stablecoin: round-the-clock circulation, instant cross-border transfers, and a few cents per transaction fee.

At the same time, users can convert SoFiUSD into tokenized deposits within the same app. These deposits can generate interest and are protected by FDIC insurance. Users can switch flexibly: when they want quick fund circulation, they use stablecoins; when they want to earn interest and enjoy security, they convert to tokenized deposits. If they are dissatisfied with the yields offered by banks, they can switch back to stablecoins and deposit into various lending protocols for higher returns.

Perhaps SoFi will never develop as decentralized as Circle, nor surpass JPMorgan Chase in overall scale, but it has created a unique advantage: integrating banking accounts, stablecoin wallets, and tokenized deposits within a single app interface.

This model is more aligned with Merrill Lynch’s innovative approach in the past—differing from pure stablecoin issuers or traditional banking alliances. SoFi aims to eliminate the binary choice for users, removing the need to choose between blockchain convenience and bank deposit yields.

The evolution of various products confirms a principle: in fund storage and circulation scenarios, the form of the product itself is not the key; the ability to freely switch between forms is the core.

In response to the impact of stablecoins, the initial approach of banks was to lobby regulators to ban stablecoin issuance of yields and rewards. But relying solely on regulatory pressure makes winning this competition difficult. The only way for banks to break through is to actively evolve—matching or even surpassing crypto products by combining instant transfers, programmable features, interest yields, and deposit insurance. Interestingly, the vehicle for this upgrade is blockchain technology itself.

This is the market’s charm: it forces traditional industries to continuously evolve until the entire ecosystem maximizes service for participants. Merrill Lynch’s cash management accounts once prompted the U.S. to abolish Regulation Q and pushed banks to launch money market deposit accounts; today, the rise of stablecoins again drives banks to develop tokenized deposits and build round-the-clock settlement systems. In both waves of transformation, traditional industries were not completely eliminated but absorbed the advantages of innovative products to iterate and maintain their market position.

This round of upheaval hits regional banks hardest. These banks rely more heavily on net interest margins and have less room to resist deposit outflows compared to large banks. If they only optimize traditional bank accounts, they risk losing users seeking high liquidity; if they only emulate crypto transfer speeds, they risk losing deposit insurance and lending profitability. Cari Network is a self-rescue attempt by regional banks, while the Clearinghouse Alliance represents a defensive strategy by large banks. SoFi has chosen a more aggressive route: proactively building an integrated service bridge to avoid being overtaken by external entities.

Reviewing past financial development patterns, emerging sectors often break through by exploiting inefficiencies in the traditional system; once these pain points become undeniable, traditional giants absorb new functions to upgrade and stabilize their market share. Merrill Lynch identified the disconnection between deposit rate caps and market yields, prompting banks to introduce money market deposit accounts. Today, stablecoins expose the limitations of traditional banking’s weekday-only settlement and restricted fund circulation, prompting banks to adopt tokenized deposits and round-the-clock settlement features to fill the gaps.

The ownership of industry advantages has shifted from innovative products that first identified problems to institutions capable of integrating functions, operating compliantly, and deploying scalable solutions.

Recently, we have been discussing a view: that the crypto industry, or more precisely, blockchain technology, is becoming the underlying infrastructure of financial technology.

This judgment holds true in this wave of change as well. Blockchain is not about completely replacing bank deposits but about forcing the industry to decompose various service value dimensions: yields are one layer, settlement efficiency another, deposit insurance yet another, and the ability to freely switch forms may be the most valuable aspect.

No matter how the industry evolves, bank deposits will not disappear entirely—they will be deconstructed and reconstructed. The ultimate winners will be those institutions that enable seamless switching among safety, yield, and high liquidity.