Banks Lend Deposits Without Consent: Is It Time to Rethink Banking?

Coinbase CEO Brian Armstrong has shed light on a common banking practice that may surprise many people: banks often lend out most of their customers' deposits without their consent. In an interview, Armstrong explained how this works and why he believes it's fundamentally different from the way stablecoin operations work.

The GENIUS Act, signed into law in July 2025, requires stablecoin issuers to maintain at least a 1:1 reserve backing every token in circulation. This means that instead of lending out customer deposits like traditional banks do, stablecoins are backed by actual reserves such as short-term US Treasuries.

Coinbase currently offers USDC rewards ranging from 3.75% to 4.5%, which are funded through a revenue-sharing arrangement with Circle, the issuer of USDC. Armstrong argues that these rewards are categorically different from interest paid by banks, as they come from the yield on fully reserved assets.

The banking lobby has raised concerns that stablecoin rewards could trigger massive deposit outflows from traditional banking systems. According to some estimates, trillions of dollars could shift if consumers were to switch to stablecoins for their savings. However, Armstrong's argument has merit on the mechanics: a stablecoin backed entirely by US Treasuries doesn't carry the counterparty risk of a bank that has lent out 90% of its deposits.