How banks learned to stop being anxious and fall in love with stablecoins

Author: Christian Catalini Translator: Shan Ouba, Jinse Finance

Banks have long worried that stablecoins would drain deposits. But data shows that this is not the case. The real value lies in replacing the current clearing network, which is barely maintained by "tape and COBOL language," with a truly functional dollar system.

Back in 2019, when we announced Libra, the global financial system reacted, to put it mildly, quite violently. The survival fear at the time was that stablecoins, which could be used instantly by billions of people, would disrupt banks' control over deposits and payments. If you can hold a digital dollar that can be transferred instantly on your phone, why keep your money in a zero-interest, fee-charging checking account that "closes on weekends"?

At the time, this was a reasonable question. For years, the mainstream narrative has been that stablecoins are going to steal banks' jobs.

People fear an imminent "deposit drain," arguing that the low-cost funds supporting the US banking system will evaporate once consumers realize they can hold digital cash backed by assets like US Treasury bonds. However, a rigorous new research paper by Cornell University Professor Will Cong suggests the industry may be panicking prematurely. By examining evidence rather than sentiment, Cong proposes a counterintuitive view: under proper regulation, stablecoins are a complement to the traditional banking system, not a disruptor that drains deposits. The "sticky deposit theory" states that the traditional banking model is essentially betting on "friction costs." Because checking accounts are the only truly interoperable layer for funds, any transfer of value between external services must go through the bank. The system is designed so that not using checking accounts increases friction, and the bank controls the only bridge connecting the various islands of your financial life. Consumers accept this "toll" because of the power of the bundled services. You keep your money in your checking account not because it's the best place, but because it's the central hub where your mortgage, credit cards, and payroll are all interconnected. If the "death of banks" theory were true, we should have already seen a massive flow of bank deposits to stablecoins. But we haven't. As Cong writes, despite the soaring market capitalization of stablecoins, "to date, empirical research has found almost no evidence that the emergence of stablecoins is related to deposit erosion or capital outflows." Transaction costs are at play. So far, the adoption of stablecoins has not caused a significant loss of traditional deposits. Warnings about deposit outflows have proven to be largely panic narratives by vested interests, ignoring basic economic laws of the real world. Deposit stickiness is a powerful force. Most customers value the convenience of the entire service too much to move their life savings to a digital wallet for a few more basis points of return. Competition is a characteristic, not a flaw. But the situation is changing. Stablecoins may not kill banks, but they will almost certainly "annoy" them and make them better. This Cornell paper argues that the very existence of stablecoins is a constraint, forcing banks to move away from relying on user inertia and instead increase deposit rates and improve operational efficiency. When banks face credible alternatives, the cost of complacency rises. They suddenly have an incentive to offer competitive pricing for deposits, rather than assuming your money won't leave. In this model, stablecoins won't shrink the pie; instead, they will promote "more lending, broader intermediation, and ultimately, improved consumer welfare." As Professor Cong stated, "Stablecoins will not replace traditional intermediaries, but can serve as a complementary tool, expanding the business boundaries that banks are already good at." The threat of "potential user exodus" has proven to be an excellent incentive for giants.

Regulatory Breakthrough

Of course, regulators' concerns about "bank run risk" are reasonable—they worry that a loss of confidence could trigger a panic sell-off of stablecoin reserve assets. But the paper points out that these are not new risks, but standard risks for financial intermediaries, roughly equivalent to those faced by other institutions. We already have solutions for liquidity management and operational risks. The challenge is not to create entirely new rules, but simply to apply existing systems to new technologies.

This is where the GENIUS Act becomes a key bridge. The Act requires stablecoins to be fully backed by cash, short-term Treasury bonds, or depositary deposits, legally establishing security. The paper points out that these safeguards "appear to address core vulnerabilities identified in the academic literature, including bank runs and liquidity risks."

While the Act sets a legal baseline—adequate reserves and enforceable redemption rights—it leaves the specific implementation details to banking regulators.

The Federal Reserve and the OCC will be responsible for implementing these rules, ensuring issuers cover operational risks, custody failure risks, and the specific details of large-scale reserve management and blockchain integration. Efficiency Dividend: Once we lower our defensive stance on deposits, we can see upside potential: the underlying financial infrastructure itself urgently needs a major overhaul. The true value of tokenization is not just 24/7 availability, but atomic settlement—the ability to instantly transfer value across borders while eliminating counterparty risk that plagues the industry in the current model. Cross-border payments are currently expensive and slow, often taking days to complete after multiple intermediaries. Stablecoins compress this process into a single, final on-chain transaction. This has profound implications for global money management: funds are no longer tied up in transit for days, but can be instantly rebalanced across borders, releasing liquidity currently pent up in correspondent banking gaps. Domestically, the same efficiency also means cheaper and faster merchant payments. For the banking industry, this presents a rare opportunity to modernize its outdated clearing system, currently teetering on the brink of collapse with duct tape and the COBOL language. Ultimately, the US faces an either-or choice: either lead the development of this technology or watch the future of finance take shape in overseas jurisdictions. The dollar is the world's most popular financial product, but its transmission channels are showing signs of aging. The GENIUS Act provides a framework for genuine competition. It brings the industry under regulation: by bringing stablecoins within regulatory boundaries, the US has transformed a shadow banking anxiety into a transparent, resilient upgrade of the global dollar system. It has turned something foreign and novel into core domestic infrastructure. Banks should stop worrying about competition and start thinking about how to use this technology to their own advantage. Just as the music industry was dragged from CDs to streaming, only to discover later that streaming was a goldmine—banks are also resisting a transformation that would ultimately save them. They will learn to love stablecoins when they realize they can charge for speed, not latency.