Stablecoins Drain Money from Banks at Lightning Speed, Raising Concerns

The rise of stablecoins is transforming the way money moves across borders, raising questions about the role of traditional banks in the financial system.

According to Anthony Vassallo, director of crypto at Silicon Valley Bank, competition from stablecoins will have two key effects: a slow erosion of currency substitution and weakening policy transmission over months or years, and a faster depeg, issuer shock, or banking event that can move capital at software speed within hours.

The European Central Bank (ECB) has expressed concerns about the impact of large stablecoin reserves held in bank deposits, which could trigger cascading withdrawals if there were a surge in redemptions. The ECB points to a 'liquidity mismatch' between digital money and the banking system that supports it.

A recent study by the Bank for International Settlements (BIS) found that stablecoins can provide a dollar-based alternative that's harder for local governments to contain, especially during times of currency pressure or banking crises. In Argentina, Nigeria, and Turkey, for example, stablecoin demand has been closely connected to demand for dollar exposure.

However, stablecoins are not replacing traditional banks overnight. Pankaj Bengani, former executive at Block and co-founder of stablecoin payments company MELD, notes that close to half of the company's B2B stablecoin offramp volume is in North America, with businesses using it for cross-border commercial payments rather than holding onto digital dollars.

Bengani suggests that stablecoins may not be removing banks from the financial system as much as changing where the friction sits, reducing the correspondent layer and replacing intermediary steps that exist only because banks historically needed each other to cross borders.