A crucial policy question raised about stablecoins – particularly stablecoins that pay interest or economically equivalent rewards – is how they will affect demand for bank deposits. That question is important because, unlike stablecoins, deposits play a critical role in funding loans to consumers and businesses and supporting economic growth. Unsurprisingly, advocates for yield-bearing stablecoins have argued that the effect of stablecoin issuance and adoption on bank deposits will be minimal.
In support of that contention, a blog post from crypto investment firm Paradigm describes recent research that models the impact of stablecoin growth on bank deposits. The post asserts that “stablecoin adoption should be neutral or help credit creation and bank deposits.”[1] But in fact, that research paper states just the opposite – namely, that an increase in yield-bearing stablecoins will reduce the amount of bank deposits and bank lending.
We describe and explain key elements of that paper below.
The new research paper actually finds that any growth in stablecoin adoption will reduce bank deposits and lending.
The paper at issue is “Stablecoins and Banking: Deposit Dynamics, Financial Stability, and Regulatory Design,” authored by Lin William Cong and published late last year.[2] To assess the potential impact of stablecoins on bank deposits and lending, the paper draws heavily on the analytical framework of another paper, “Bank Power and Central Bank Digital Currency: Theory and Quantitative Assessment” by Jonathan Chiu, Seyed Mohammadreza Davoodalhosseini, Janet Jian and Yu Zhu. That paper describes a model for analyzing the consequences for bank deposits and bank lending of the introduction of an interest-paying central bank digital currency (CBDC). The Cong paper simply updates the Chiu et al. paper’s analysis by using more recent economic data and assumes that the issuance of interest-paying stablecoins by private firms would have the same impact on deposit and lending markets as the issuance of an interest-paying CBDC by the Federal Reserve.[3]
Thus, to understand the full implications of the Cong paper, one must first understand the analysis set forth in the Chiu et al. paper on which it is based. The Cong paper states that if banks are monopoly suppliers of deposits, the threat of competition from the potential entry of an interest-bearing CBDC will lead banks to increase deposit rates, provide more deposits and make more loans.[4] In a theoretical sense, the economic logic is sound: monopolists maximize profits by reducing output and fetching a higher price, so reducing monopoly power leads to more output. Importantly, Chiu et al. find that the threat (but not the actuality) of the Federal Reserve issuing an interest-bearing CBDC would lead banks to raise deposit rates to attract more deposits. With the threat alone, there is, of course, no possibility of substitution of CBDC for deposits. Cong simply assumes that the same would be true for interest-bearing stablecoins.
However, the Chiu paper also shows that if the amount of CBDC rises above zero – in other words, if the threat of the issuance of a CBDC becomes a reality – bank deposits would in fact fall, and potentially fall to zero, with a corresponding drop in bank lending. Again, the Cong paper assumes the same effect for interest-bearing stablecoins. Thus, stated comprehensively, the Chiu et al. paper argues (and the Cong paper thus assumes) that the impact of CBDC (or stablecoin) adoption could take four different forms: (i) a baseline state without the threat of CBDC (or stablecoin) issuance; (ii) a zone in which the threat of CBDC (or stablecoin) issuance causes deposit levels to rise above the baseline; (iii) a zone in which a low level of issuance of a CBDC (or stablecoins) causes deposit levels to decline, but with such levels still above the baseline; and (iv) a zone in which a high level ofCBDC (or stablecoin) adoption causes deposit levels to fall below the baseline and ultimately to zero.
Neither the research paper nor the Paradigm blog post highlights this distinction between the impact of the threat of CBDC or stablecoin issuance and the consequence of the actual issuance and adoption of CBDC or stablecoins. Instead, the Cong paper and the Paradigm blog post produce the below figures, which the Paradigm paper suggests show that “stablecoin adoption should be neutral or help credit creation and bank deposits.” What none of these authors makes clear, however, is that according to the relevant model, the period in which loans and deposits peak (circled by us in red) is one in which there is only a threat of CBDC/stablecoin issuance but there is no CBDC/stablecoins actually circulating. And, perhaps even more importantly, under the Cong and Chiu et al. papers’ analysis, at any point that CBDC or stablecoins are actually being issued, bank deposits and loans are declining, and the greater the quantity of stablecoins, the greater the reduction in deposits and loans. Notably, the reduction in loans and deposits is a direct consequence of the stablecoins paying interest. If stablecoins are not allowed to pay interest, bank deposit and credit supply are unaffected.
Thus, the assertion in the Paradigm blog post that Cong’s analysis indicates that “…the impact of high stablecoin adoption will be largely neutral” is simply false. There is a zone where stablecoins are circulating and the amount of deposits and bank loans are higher than they would have been without any stablecoins. To be sure, deposits are higher than in the base case without stablecoins in the narrow green rectangle to the right of the peak but to the left of the brown rectangle. In that zone, the increase in bank deposits resulting from the initial threat of CBDC/stablecoin issuance is not swamped by a high level of stablecoins that drives banks out of credit intermediation.[5] Nevertheless, deposits are reduced by every increase in stablecoins outstanding.
Thus, the Paradigm blog post draws the entirely wrong lesson from the Cong paper. Rather than demonstrating that widespread adoption of an interest-paying stablecoin would either be neutral or increase the level of bank deposits and loans, the paper finds that once a market reality, the greater the growth in stablecoins, the greater the contraction in bank deposits and loans.
Notably, that key takeaway is consistent with a recent FEDS Note research paper issued by Jessie Jiaxu Wang, titled “Banks in the Age of Stablecoins: Some Possible Implications for Deposits, Credit, and Financial Intermediation,” which was issued a few weeks after Cong’s paper was published.[6] Wang’s note finds that “stablecoin adoption could reshape the landscape of bank credit provision in both quantitative and qualitative ways,” concluding that “[t]he aggregate supply of credit is likely to decline, lending costs may rise, and access to financing could become more uneven across borrower types, sectors, and regions.”[7]
The new research paper understates the financial stability risks of stablecoins.
In addition to assessing the impact of stablecoin adoption on bank deposits and lending, the Cong paper also purports to examine the financial stability implications of yield-bearing stablecoins. However, in doing so it largely glosses over the widely recognized financial stability risks of stablecoins’ vulnerability to de-pegging and runs. The paper points to supposed mitigants that will “substantially reduce” the risk of runs, asserting that when a stablecoin’s “reserve management, the credibility of its redemption mechanisms, and the transparency of its operations . . . are well designed and consistently enforced, the likelihood of runs can be substantially reduced.” Specifically, the paper asserts that stablecoins “that are fully backed one-to-one with highly liquid assets are less vulnerable to runs or de-pegging episodes, as issuers can more easily meet redemption requests even during periods of market stress.”
These assertions, however, ignore history and understate the run risk of stablecoins. Indeed, as we have previously discussed, we have seen real-world examples of stablecoins possessing these characteristics being vulnerable to runs. For example, USDC, whose reserves are held entirely in highly liquid assets, primarily U.S. Treasuries and Treasury repos, and which provides transparent disclosures of its holdings and operations, suffered a depegging event and a subsequent run in spring 2023. USDC kept 8 percent of its reserves deposited at Silicon Valley Bank. However, troubles at SVB led investors to doubt Circle’s ability to access its deposits at SVB amid the bank’s imminent collapse, causing the price of USDC to trade as low as $0.87 per coin. Large USDC redemptions prompted major exchanges like Binance and Coinbase to pause USDC-to-dollars redemptions.[8] The run on the stablecoin subsided only a few days later once the FDIC, the Treasury Department and the Federal Reserve announced that the resolution of SVB would fully protect all depositors, both insured and uninsured – with Circle the largest beneficiary of this bailout.[9] Similar depegging incidents have occurred when redemption mechanisms fail unexpectedly. For example, in October 2018, the exchange affiliated with Tether (Bitfinex) upgraded its processing systems, leading to delays in withdrawals. Investors ran on USDT, resulting in a sizable depeg as USDT traded as low as $0.90 on some platforms[10].
Thus, even stablecoins predominantly backed by “safe” holdings or those with redemption mechanisms that typically function well are not immune to runs, because the risk of runs is inherent in stablecoins’ very structure, which is premised on the promise to maintain a 1:1 value peg, as we have previously discussed.
Perhaps recognizing that these mitigants are overstated, Cong ultimately recognizes that “run dynamics in tokenized liabilities remain an active empirical question, particularly as market structure evolves.”
The new research paper finds that stablecoin adoption may pose a disproportionate risk to traditional branch-based banks.
The Cong paper also highlights that “the distributional effects of stablecoin growth are unlikely to be uniform across bank types.”[11] Specifically, the paper argues that while “[d]igital banks would be well positioned to adapt to” greater stablecoin growth, more traditional “branch-based banks” would be more significantly affected. Cong concludes that “while the resulting redistribution of deposits [from traditional branch-based banks to digital banks] may change how funding is allocated across banks,” consumer welfare is more likely to be enhanced “through higher returns and more competitive pricing of retail financial services rather than reduce the overall availability of deposits.”[12] In other words, less innovative, “non-digital” banks may indeed lose depositors and therefore the ability to provide credit to their customers. But Cong simply concludes that consumers may nonetheless be better off overall, without engaging in a more nuanced analysis of the effect on the types of consumers and communities served by “non-digital” branch-based institutions, which would clearly be net losers according to Cong’s assessment.
The disproportionate impact of stablecoin issuance on more traditional, branch-based banks is also highlighted in the recent FEDS Note research paper authored by Wang. That paper similarly recognizes that the “effects of stablecoin-driven deposit shifts on bank credit provision” will vary across banks of different sizes.[13] She notes that mid-sized regional banks “may face the greatest vulnerabilities,” as they “often lack both the scale advantages of large institutions and the relationship depth of community banks, while having limited access to alternative funding markets.”[14]
Wang finds that smaller community banks “serving primarily retail and small business customers in which deposits serve as a key component of the bank-customer relationship may be less affected by stablecoins, especially in less digitally oriented regions,” although other banks, “particularly those operating in deposit markets with younger, more tech-savvy populations, may face significant deposit substitution without ready access to replacement funding.”[15] Those banks “may be forced to contract lending more sharply or substantially increase loan pricing.”[16] However, Wang does not draw conclusions about the possible benefits or drawbacks of any such dynamics.
Key Takeaways
What is clear from both Cong and Wang’s recent research is that, far from having a neutral impact on deposits, stablecoin growth will reduce bank deposits and lending, and the greater the growth, the greater the reduction. Cong’s research shows that allowing stablecoins to pay interest or rewards will lead to wider stablecoin adoption, reducing deposits and loans, while Wang assesses that bank lending could be reduced by between $65 billion and $1.26 trillion, with the higher number resulting when stablecoin issuers are granted interest-bearing Federal Reserve master accounts, which likely would increase deposit flows out of banks, particularly during times of stress.[17]
[1] See Justin Slaughter, “Data Banishes Fear” (Dec. 17, 2025), available at https://www.paradigm.xyz/2025/12/data-banishes-fear.
[2] See Lin William Cong, Stablecoins and Banking: Deposit Dynamics, Financial Stability, and Regulatory Design, available at https://cornell.app.box.com/s/njs6ovw8mvtyj06slrlzlcrwjij7a0y1. The paper notes that it “was prepared with financial support from Coinbase, Paradigm, PayPal, and Stripe.” Id. at n.1.
[3] Indeed, we note that a stablecoin with access to reserves at the Federal Reserve could serve as a synthetic CBDC.
[4] We note that even this initial rise where the latent threat of an interest-bearing CBDC increases deposits and loans is premised entirely on the view that each bank has monopoly power in the supply of deposit accounts. That premise is laughable when there are over 9,000 depository institutions in the United States and a new deposit account is merely a mouse-click or phone-tap away for most consumers. Deposit markets are in fact highly competitive. See Kristian Blickle et al., “The Rise in Deposit Flightiness and Its Implications for Financial Stability,” Liberty Street Economics, Federal Reserve Bank of New York (July 9, 2025), available at https://libertystreeteconomics.newyorkfed.org/2025/07/the-rise-in-deposit-flightiness-and-its-implications-for-financial-stability/. Moreover, in addition to the thousands of banks competing for deposits, rate-sensitive bank depositors can and do shift into money market mutual funds (although that means of course that they forgo deposit insurance and the transaction services that banks provide, among other benefits).
[5] As described above in note 3, this premise derives from an economic theory of monopoly power that does not actually reflect the highly competitive deposit market.
[6] Jessie Jiaxu Wang, “Banks in the Age of Stablecoins: Some Possible Implications for Deposits, Credit, and Financial Intermediation.” FEDS Notes, Board of Governors of the Federal Reserve System (Dec. 17, 2025), available at https://www.federalreserve.gov/econres/notes/feds-notes/banks-in-the-age-of-stablecoins-implications-for-deposits-credit-and-financial-intermediation-20251217.html.
[7] Id.
[9] See https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm. The entire cost of this bailout of uninsured deposits was absorbed by insured banks through a special assessment and higher deposit insurance premiums.
[11] Cong at 13.
[12] Id.
[13] Wang, supra note 5.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
