Stablecoins are digital assets designed to maintain a stable value, primarily pegged to the U.S. dollar. To date, dollar-backed stablecoins have been used primarily as a store of value between crypto trades, an instrument of money laundering and a store of value in unstable countries.[1] There are currently about $290 billion in dollar-pegged stablecoins outstanding, but the amount may rise, especially if new use cases are developed. As described below, recent estimates for potential stablecoin growth range from a low of $500 billion over three years to a high of $2 trillion over three years and $2.9 trillion over five years. The estimates assume that stablecoins do not pay interest. Those estimates obviously depend on projected use cases for stablecoins.
The recently passed GENIUS Act, which establishes a regulatory framework for stablecoins in the United States, prohibits stablecoin issuers from paying interest. However, the prohibition does not apply to exchanges, which could make such payments, as some already do in order to incentivize users to retain assets with them between crypto trades. Thus, the general prohibition is easily evaded.[2]
Thus, it is worth considering how much higher demand for stablecoins would be if this evasion continues to be permitted. Estimating the impact of allowing interest on the demand for stablecoins is statistically difficult, especially because the wider adoption of stablecoins is predicated on new use cases. However, an 80-year-old theoretical model of money demand – the Baumol-Tobin model, detailed further below – may provide some insight.
Using reasonable assumptions, the Baumol-Tobin model suggests that the demand for stablecoins would double if stablecoins pay interest.
There are at least two broad reasons to be concerned about potential rapid growth in stablecoins. First, if backed by government securities, stablecoins would reduce demand for bank deposits and thus the supply of bank credit – in effect, bank depositors would transform from funders of economic growth to funders of government growth, assuming the predominant asset backing stablecoins was Treasury securities and reverse repos backed by Treasury securities. Second, if invested in uninsured deposits at banks, stablecoins could increase the risk of a financial crisis in the event that a run on stablecoins prompted issuers to withdraw their deposits. Thus, stablecoins put policymakers between a rock and a hard place.
The stakes are significant and depend on a series of assumptions: first, how much stablecoins will grow; second, if backed by government securities, how much bank lending will decline; third, how much that growth would be amplified by the ability to pay interest; and fourth, what assets (government securities versus bank deposits) will back the stablecoin. This note focuses on the latter two questions; it takes as given current estimates for stablecoin growth absent the ability to pay interest.
Thus, if stablecoins are backed mostly by Treasury securities and reverse repos, there could be a substantial decline in deposits. In a worst-case scenario where all stablecoin growth came from deposits, it would be a 20 percent decline (Huther and Wang (2025)). But even if some of the funding came from money market funds or other sources, a substantial decline in deposits would seem likely.
Alternatively, stablecoin issuers could maintain a material share of their reserves in bank deposits. While that would mitigate the decline in deposits, it would also result in serious financial stability risks. Given the size of the stablecoin market, these deposits would almost certainly be so large as to be predominantly uninsured. Stablecoins could become a new vehicle for the propagation and amplification of systemic risk akin to prime money market funds in 2008. Stablecoin issuers would be at high risk of runs.[3] If a run on stablecoins were to happen, the issuers would pull their deposits out of banks, putting severe strain on the banking system. The issuers would also liquidate their other assets, putting pressure on the financial system more broadly. The resulting financial crisis is not hypothetical – such a buildup and collapse closely resembles the dynamics that led to the Global Financial Crisis.[4]
Background
Stablecoins are digital assets designed to maintain a stable value relative to a reference asset or portfolio of assets, in most cases, the U.S. dollar. Dollar-denominated stablecoins have grown rapidly in recent years, and currently there are about $290 billion in dollar-denominated stablecoins.[5]
The recently passed GENIUS Act provides a regulatory framework for stablecoins in the United States. It requires a “permitted payment stablecoin issuer” to maintain reserves backing the issuer’s outstanding payment stablecoins on a 1:1 basis. Permitted reserve assets include U.S. currency, deposits at insured depository institutions, short-term Treasuries and short-term Treasury repurchase agreements.[6] Importantly, given the $250,000 limit on deposit insurance and the size of the stablecoin market, the deposits at insured DIs will likely be almost entirely uninsured.
The FDIC, Federal Reserve, NCUA and OCC (now the primary federal payment stablecoin regulators) and any applicable state payment stablecoin regulator are required to issue regulations applicable to permitted payment stablecoin issuers. The regulations will establish capital requirements, a liquidity standard, reserve asset diversification and interest rate risk management standards and operational, compliance and information technology risk management principles-based requirements and standards, including Bank Secrecy Act and sanctions compliance standards. The GENIUS Act provides that no stablecoin issuer “shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of” a stablecoin.[7]
Projecting the future path for stablecoins is difficult, in large part because future growth may depend on the adoption of new uses. Standard Chartered projected that there would be $2 trillion in dollar-denominated stablecoins by the end of 2028. Citing the Standard Chartered projection, the Treasury Borrowing Advisory Council, a group of market participants, recently presented an analysis to the Treasury Department that also projected stablecoins growing to $2 trillion by 2028.[8] JPMorgan Chase analysts have projected that there will be $500 billion in stablecoins by 2028 and Citigroup analysts have projected in their base case that stablecoins will reach $1.6 trillion and in their “bull case,” $2.9 trillion by 2030. The JPM and Citi forecasts assume stablecoins do not pay interest.[9]
What would be the future amount of stablecoins outstanding if the coins were allowed to pay interest indirectly?[10] The Baumol-Tobin model can help economists investigate this question.[11] “Money” consists mostly of bank deposits, and the model relates bank deposits to market interest rates.[12] The model was developed by the Nobel Prize-winning economist and physicist Maurice Allais in 1947 and developed independently by William Baumol and Nobel Prize-winning economist James Tobin. Baumol published the model in 1952 and Tobin in 1956, but Tobin had been using the model to teach since before 1952.
Analysis
The Baumol-Tobin model describes an individual’s demand for money. In their model, money does not pay interest. The individual can also invest in bonds that pay interest. The individual needs money to make purchases but can’t just transfer bonds into money in advance of each purchase, because there is a transaction cost for each transfer. The individual chooses the number of transactions that minimize the sum of the transaction costs and the opportunity cost of not investing in bonds and earning interest.
As shown in the mathematical appendix, this model can assess the impact of allowing stablecoins to pay interest. A household’s decision to keep some of its wealth in stablecoins to facilitate transactions is similar to its decision to keep some of its wealth in bank deposits to facilitate transactions. Although the model is in terms of the interest rate on the bonds, it is straightforward to express it as the difference between the bond interest rate and the interest rate on stablecoins.
If households and businesses will demand $2 trillion in stablecoins that do not pay interest, how much demand would they have for stablecoins that do pay interest? According to the Baumol-Tobin model, a lot more. Consider the case where the market interest rate is 4 percent (about where it is now) and stablecoins pay 3 percent. In that case, the demand for stablecoins would be $4 trillion. If the interest rate on stablecoins were 2 percent, demand would be $2.8 trillion. If the interest rate were 3.5 percent, demand would be $5.7 trillion.[13]
These are results from a relatively simple theoretical model conditional on outside estimates of baseline stablecoin growth, so the dollar amounts should be taken as indicative.
Consequences
Bank lending
In a recent note, Jeff Huther and Yikai Wang (2025) calculate the potential effect of an additional $2 trillion in stablecoins on banks’ cost of funds. They assume that 100 percent of the rise in stablecoins comes out of bank deposits, and that stablecoin continue to invest about 3.4 percent of their reserves back into bank deposits. They conclude that the increase in stablecoins could reduce bank deposits by 10 percent, increase banks’ cost of funds by 24 basis points, and lead banks to raise lending rates. Using Huther and Wang’s calculations, if stablecoins paid interest and increased instead by $4 trillion, banks’ cost of funds would increase by 42 basis points.[14]
The Huther and Wang assumption that all growth in stablecoins comes out of bank deposits is a worst-case scenario. For example, the Citi “bull case” scenario assumes that 24 percent of stablecoin growth comes from bank deposits.
Huther and Wang assume that banks’ assets do not decline – an increase in non-deposit funding makes up for the entire decline in deposits. Another possibility is that banks maintain their current loan-to-deposit ratios and therefore reduce loans by the same percentage as deposits.
Loan amounts could decrease by more. For example, the baseline increase in stablecoins without interest could be higher: As noted, Citi’s analysts project an increase that is nearly twice as high. If so, and allowing stablecoins to pay interest doubles that baseline amount, the reduction in bank deposits would be correspondingly higher. Also, deposits, especially insured deposits, are assumed to have low runoff rates in liquidity regulations. A bank that lost deposits may therefore have to hold a greater share of its assets as liquid assets, such as reserve balances. If so, lending would decline by more than the percent decline in deposits.
Loan amounts could also decrease by less. Stablecoins could continue to be used primarily for crypto trading, money laundering and as a store of value in unstable countries. These activities are unrelated to why businesses and households maintain bank deposits in the United States, so a rise in stablecoins need not result in a similarly sized decline in bank deposits. Or the demand for stablecoins could be less sensitive to interest rates than suggested by the Baumol-Tobin model: The Miller-Orr (1966) model – a stochastic cash management model – finds a lower sensitivity of money demand to interest rates than the Baumol-Tobin model. Or less than 100 percent of stablecoin growth could come out of bank deposits.
Another possibility that would lessen the impact on bank lending is that stablecoin issuers could choose to hold a high fraction of their assets in bank deposits, in which case, a decline in the deposits of households and businesses would be offset by a rise in deposits of stablecoin issuers.[15] However, as discussed next, that possibility has potentially devastating consequences for financial stability.
Financial stability
The GENIUS Act allows stablecoin issuers to invest their reserves in deposits at insured depository institutions – commercial banks, thrifts and credit unions, henceforth “banks”. There is a widespread misconception that the Act requires that the deposits be insured, but that is incorrect. The FDIC only insures deposits up to $250,000, and the deposits of stablecoin issuers will be much, much larger than that. For example, Circle had deposited $3.3 billion in Silicon Valley Bank, so only 0.0078 percent of Circle’s deposit at SVB was insured.[16] [17]
DI deposits are completely safe if they are insured, but if they are uninsured, they are an unsecured loan to the depository institution, similar to commercial paper issued by the institution. Indeed, large certificates of deposit (CDs) and CP are treated as similar instruments in money markets, and prime (although not government) money market mutual funds invest in both. Thus, uninsured deposits remain safe if the bank is safe; but if the bank is risky, perhaps because it is poorly managed and poorly supervised, as was the case with SVB, the deposits are risky.
DI deposits are highly liquid if they do not make up a large share of the DI’s funding and if their withdrawal is not likely to be correlated with large withdrawals by other depositors. But the deposits of stablecoin issuers are likely to be large, so if the deposit is at a relatively small bank, the deposit could easily make up a large share of the bank’s funding.
Moreover, large withdrawals by stablecoin issuers are likely to be highly correlated. As described by Doug Diamond and Philip Dybvig in 1983, If investors in stablecoins became worried that they might not get their money back because the issuer had invested in a DI that was at risk of failing, the investors would all simultaneously seek to get their money back. Moreover, those who acted fast would be the most likely to get all their money back, so all investors would seek to cash out first. Worse, investors in other stablecoin issuers that had invested in DI deposits would also be likely to seek to convert their stablecoins to cash.[18]
In “Taming Wildcat Stablecoins”, Gary Gorton and Jeffrey Zhang (2023) describe why stablecoins are especially susceptible to runs. They observe that stablecoins have an elevated risk of runs primarily because they depend on maintaining a credible 1:1 value peg with traditional money, yet their underlying assets and redemption mechanisms can be fragile during market stress. If large numbers of holders lose confidence in a stablecoin’s ability to honor redemptions at par, they may rush to redeem their holdings, overwhelming the issuer’s reserves and causing the price to fall below the peg – this dynamic can accelerate via network effects and herd behavior.
As all the stablecoin issuers sought to convert their coins to cash, the stablecoin issuers would rapidly withdraw their funds from banks and liquidate their other reserve assets. The run on bank deposits by stablecoin issuers would put the banking system under severe pressure, especially those banks that were most exposed, banks that took in a lot of stablecoin deposits. Other uninsured depositors at those banks would also seek to get their money back. As happened in spring 2023, the uninsured depositors of other, similar, but safe, banks could flee. The depositors withdrawing funds would have to put the funds somewhere, with a large fraction ending up redeposited at other banks, as happened in March 2023. While those redeposits would lessen the reduction in aggregate bank deposits, those specific banks experiencing large withdrawals would still be put under extreme pressure. Faced with the prospect of a banking crisis, the government would most likely have to guarantee uninsured depositors again, or guarantee stablecoins directly, or both.
The possibility that the government may need to guarantee all stablecoins because of a run is neither hypothetical nor alarmist. If stablecoins are allowed to pay interest, depending on how the OCC and state regulators regulate and supervise stablecoin issuers under the GENIUS Act, the issuers could closely resemble prime money funds – funds that take in investments and promise investors a dollar back (plus interest) for a dollar invested. Prime money funds also invest in uninsured bank deposits (in the form of CDs) as well as the CP of financial institutions, short-term Treasury securities, and repos. Lehman failed on Sept. 14, 2008. The Reserve Primary fund, which had invested in Lehman paper, broke the buck on Sept. 15. All prime money funds experienced a massive outflow; more than $500 billion over the subsequent few days. The Treasury guaranteed all money fund investments on Sept. 19.
Such events would cause a financial crisis. Investors in stablecoins would seek their money back, and stablecoin issuers would liquidate their reserves. Stablecoin issuers not only would pull their money out of banks but also sell their Treasuries and cease rolling over their reverse repos. Institutions reliant on repo funding would come under pressure and liquidate their assets. Treasury yields would spike as happened in March 2020, once again requiring the Fed to purchase massive amounts of Treasuries.
Conclusion
Stablecoins, even without paying interest, are already projected by some to reach dramatic levels of adoption, potentially redistributing significant amounts of liquidity away from the traditional banking sector and introducing new risks to both credit supply and financial stability. If regulations ever permitted stablecoins to pay interest, demand could plausibly double, magnifying these effects and elevating the threat of destabilizing runs or contagion across banks and the broader financial system.
The GENIUS Act, by prohibiting interest payments on stablecoins and imposing robust supervisory standards, aims to mitigate these systemic risks. However, without an explicit prohibition applying to exchanges, which act as a distribution channel for stablecoin issuers or business affiliates, the requirements in the GENIUS Act can be easily evaded and undermined by allowing payment of interest indirectly to holders of stablecoins. Policymakers, therefore, must continue to monitor stablecoin innovation and adoption closely, ensuring that regulatory frameworks keep pace with a rapidly evolving market to safeguard both deposit stability and broader economic resilience.
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[1] Castle Island Ventures and Brevan Howard Digital (2024) and Chainalysis (2025).
[2] For example, Coinbase is currently paying 4.1 percent on USDC stablecoins kept on its exchange.
[3] During the March 2023 panic, USDC was exposed to SVB and suffered a 40 percent outflow in the ensuing weeks. See Capoot (2024) and Sandor (2023).
[4] See Ma and colleagues (2025) and Anadu and colleagues (2025).
[5] See CoinGecko (2025): https://www.coingecko.com/en/categories/stablecoins#key-stats
[6] The GENIUS Act also allows deposits at a Federal Reserve Bank as reserves for stablecoins, but under the Federal Reserve Act, only certain types of entities are eligible to obtain accounts at a Federal Reserve Bank in which such reserves would be held (a “master account”). See 12 U.S. Code § 342 (“Any Federal reserve bank may receive from any of its member banks, or other depository institutions . . . deposits of current funds in lawful money . . . “). Eligible entities must file a request for access to Reserve Bank master accounts and services. See Board of Governors of the Federal Reserve System, “Guidelines for Evaluating Account and Services Requests,” 87 Fed. Reg. 51099 (Aug. 19, 2022).
[7] 12 USC 5903(a)(11).
[8] The Standard Chartered projection of $2 trillion is derived by assuming that the growth rate of stablecoins will increase from 50 percent a year currently to 100 percent a year going forward. The TBAC projection is based on the assumption that a number of specific “evolving market dynamics, structures and incentives” will drive the growth.
[9] Citi’s “bull case” projection is for $3.7 trillion, but $800 billion of the growth is the result of stablecoins paying interest.
[10] As noted, while GENIUS prohibits stablecoin issuers from paying interest directly solely in connection with holding, using, or retaining a stablecoin, a material fraction, but less than the majority, of stablecoins already effectively pay interest indirectly to coin holders through the payment of “rewards” by exchanges or affiliates. Such arrangements undermine the intent of Congress in prohibiting interest being paid to stablecoin holders. In market structure legislation under consideration currently, such arrangements may be prohibited. However, we assume, for now, that these arrangements could be in place for purposes of our analysis.
[11] Hat tip to Brian Madigan of Georgetown University for pointing out this possibility.
[12] In June 2025, 88 percent of M1 was deposits and 79 percent of M2 was deposits. Federal Reserve H.6 Release, Money Stock Measures. https://www.federalreserve.gov/releases/h6/current/default.htm
[13] As explained in the appendix, if the interest rate on stablecoins equals the market interest rate, the model breaks down.
[14] Their calculation is nonlinear, so the cost of funds does not simply double.
[15] Even if stablecoins were to allocate some of their reserves to bank deposits, the deposits would be treated as risky by liquidity regulations. As a result, banks would have to hold a larger share of their assets as high-quality liquid assets, which would result in a smaller share of their balance sheets devoted to loans to households and businesses.
[16] Capoot (2024) and Sandor (2023).
[17] Although there are services that could break up the large deposits of stablecoin issuers into a large number of smaller deposits that were insured, the services are costly, and the law does not require that the stablecoin issuers maintain insured deposits.
[18] For a theoretical model of stablecoin run risks, see Ma, Yiming, Yao Zeng, and Anthony Lee Zhang. “Stablecoin runs and the centralization of arbitrage.” NBER WP No. w33882, 2025.
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