Coinbase pushed back against claims that stablecoins could disrupt the U.S. banking system. The crypto exchange said that fears over U.S. dollar-backed digital assets draining bank deposits and cripple lending are unfounded.

Coinbase said the claims aren’t about protecting lending capacity but about protecting banks’ payment processing profits. The company also alleged that banks are trying to protect an outdated, expensive financial system.

Coinbase says banks are trying to preserve profit streams 

According to Coinbase’s Chief Policy Officer, there’s no meaningful link between stablecoin adoption and shift from community bank deposits. The exchange believes big banks are coordinating a campaign to slow innovation and preserve their revenue from the traditional payment system.

Coinbase cited previous efforts by financial institutions to limit innovation in the financial sector, including their fight against ATMS, electronic check clearing, and online banking. The banks have always warned of potential harm to consumers or financial stability. As a result, Coinbase believes banks are just trying to protect their interests instead of those of their clients.

A report by the Treasury Borrowing Advisory Committee forecasted that there will be $6 trillion in potential deposit flight. The same report also forecasted a $2 trillion stablecoin market by 2028, which Coinbase claims doesn’t add up since it doesn’t align with misleading claims that stablecoins are siphoning funds off of savings accounts.

Coinbase pointed out that the stablecoin market could surge between $500 billion and $4 trillion over the next few years. The Chief Policy Officer argued that stablecoins are not savings accounts but payment tools used to purchase digital assets, settle trades, and move money across borders.

Coinbase’s CPO also revealed in a separate report that most stablecoin activity occurs internationally, especially in regions with weak financial infrastructure. According to the report, half of the $2 trillion transactions in 2023 occurred in Asia, Latin America, and Africa. He argued that stablecoins offer a competitive alternative to banks’ $187 billion annual swipe-fee windfall. He pointed out that the same banks warning of systemic risk are the ones pocketing tens of billions from card processing fees, which stablecoins could bypass entirely.

Financial data shows that financial institutions hold approximately $3.3 trillion in reserve at the Federal Reserve, which accounts for 20% of all deposits. Those reserves garnered risk-free interest of $176 billion last year, representing 50% of all bank earnings before taxes.

Faryar Shirzad, Chief Policy Officer at Coinbase, revealed that banks do not need to have reserves, yet they hold more than they need to with the Federal Reserve. He advised that banks should instead seize the opportunity to innovate with stablecoins rather than lobby to restrict them. Shirzard believes stablecoins can enable instant settlements, cut correspondent banking costs, and deliver 24/7 payments.

Some banks are already experimenting with dollar-backed digital assets and are partnering with issuers to include them in their services. For instance, Bank of America and Citigroup hinted last month that they are considering issuing their own stablecoins. Shirzard believes that financial institutions that embrace stablecoins will thrive, while those that don’t will be left behind.

Shirzad also said that correlations between bank stock performance and crypto firms like Circle were following the established Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act). The trend shows that stablecoins and banks can thrive together.

Hougan urges banks to find better alternatives to attract customers

Bitwise’s investment chief Matt Hougan also criticized U.S. banks for complaining about the threat of stablecoins, saying they should offer better rewards to attract and keep customers. He argued that financial institutions are worried because they’ve been abusing depositors as a free source of capital over the years.

“The idea that credit will dry up if stablecoins compete with traditional bank accounts is classic first-order thinking. Yes, banks will provide less credit if they have fewer deposits. But instead, people with stablecoins will provide credit directly to borrowers through DeFi applications. Markets are amazing at solving problems.”

–Matt Hougan, Chief Investment Officer at Bitwise.

The tech executive’s remarks came as Citi claimed in August that stablecoins could drain bank deposits. Several U.S. banks have also lobbied Congress to tighten up U.S. stablecoin laws around paying yield.

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