Stablecoin Growth Poses Alarming Threat To Bank Deposits, Warns Standard Chartered

LONDON, April 2025 – A stark warning from global investment bank Standard Chartered signals a fundamental shift in the financial landscape. The bank’s latest analysis reveals that the explosive growth of dollar-pegged stablecoins presents a substantial and direct threat to traditional bank deposit bases. According to the report, this emerging challenge could trigger the migration of hundreds of billions of dollars from the conventional banking system, with regional institutions facing the most severe consequences.

Stablecoin Threat to Bank Deposits: A Quantitative Analysis

Geoff Kendrick, Head of Digital Assets Research at Standard Chartered, provided a detailed quantitative assessment of the risk. His analysis directly links potential regulatory changes to tangible financial outcomes. Specifically, Kendrick examined the implications of the proposed U.S. CLARITY Act, legislation designed to establish a clear market structure for crypto assets. Passage of this act, he argues, could catalyze a significant movement of capital.

Kendrick’s model suggests U.S. bank deposits could decrease by an amount roughly equivalent to one-third of the total market capitalization of dollar-pegged stablecoins. This correlation stems from the mechanics of stablecoin adoption. As users convert traditional bank deposits into stablecoins for transactions, investments, or savings, those funds exit the banking system’s ledger. Crucially, the report highlights that the flow back into banks as deposits is limited.

The Mechanics of Capital Flight and Reserve Holdings

The analysis delves into the reserve structures of the two dominant stablecoin issuers, Tether (USDT) and Circle (USDC), to explain why returning funds is not a simple process. According to Kendrick’s research, these entities hold only a minuscule fraction of their backing assets in traditional bank deposits.

Tether (USDT): Holds approximately 0.02% of its reserves in bank deposits.
Circle (USDC): Holds a larger but still limited 14.5% of its reserves in bank deposits.

Consequently, when money moves into stablecoins, it is predominantly reallocated into other asset classes like U.S. Treasury bills, commercial paper, or other secure, short-term instruments. This process effectively breaks the direct link between user deposits and bank balance sheets. The capital does not simply sit in another bank account under a different name; it leaves the commercial banking system entirely for the issuers’ reserve portfolios.

Projecting the Scale of the Challenge by 2028

Standard Chartered’s research extends beyond immediate effects to project a medium-term scenario. The bank’s analysts forecast that the total stablecoin market capitalization could expand to a staggering $2 trillion by 2028, up from approximately $160 billion in early 2025. This growth is driven by increasing adoption for payments, decentralized finance (DeFi), and as a digital dollar alternative in both developed and emerging markets.

If this projection materializes, Kendrick’s model indicates that up to $500 billion in deposits could exit the banking systems of developed nations. This scale of outflow would represent a systemic challenge, impacting bank lending capacity, liquidity ratios, and overall financial stability. The shift would force banks to compete for funding in new ways, potentially increasing costs for consumers and businesses.

Why Regional Banks Face the Greatest Risk

The report identifies a disproportionate impact on regional and community banks. Several interconnected factors create this heightened vulnerability for these institutions.

Firstly, regional banks often rely more heavily on retail deposit funding compared to larger global banks, which have diverse funding sources like institutional debt and international markets. Secondly, their customer base may be more susceptible to adopting fintech and crypto-related products seeking higher yield or different utility. Finally, these banks typically have less capital to invest in competing digital asset products or loyalty programs to retain deposits.

A significant outflow would impair their ability to issue loans, particularly mortgages and small business loans, which are central to their business models and local economies. This scenario could accelerate consolidation in the banking sector as smaller institutions struggle to maintain their deposit bases.

Regulatory Crossroads: The Role of the CLARITY Act

The potential passage of the U.S. CLARITY Act serves as a critical juncture in this analysis. The legislation aims to provide regulatory clarity for digital assets, defining the roles of the SEC and CFTC. While intended to protect consumers and foster responsible innovation, Standard Chartered’s warning suggests a significant unintended consequence.

Clear regulations could legitimize stablecoins in the eyes of institutional and retail investors alike, accelerating adoption. A well-defined legal framework reduces perceived risk, making stablecoins a more viable alternative to bank accounts for everyday financial activities. This creates a paradox for regulators: the very rules designed to manage risk in crypto could inadvertently shift risk to the traditional banking sector.

Historical Context and Broader Market Implications

This is not the first time technology has disrupted banking. The rise of money market funds in the 1970s similarly drew deposits away from banks, leading to regulatory changes. The stablecoin phenomenon, however, operates at digital speed and global scale. Its impact extends beyond deposits.

Banks may face pressure on their payment revenue as stablecoin transactions bypass traditional networks like SWIFT or card processors. Furthermore, the competition could compress net interest margins—the difference between what banks earn on loans and pay on deposits—as they are forced to offer higher rates to retain customers.

Conclusion

The analysis from Standard Chartered presents a clear-eyed, evidence-based warning about the stablecoin threat to bank deposits. By quantifying the potential outflow and identifying the vulnerable points in the banking system, the report provides crucial data for policymakers, bankers, and investors. The projected movement of up to $500 billion by 2028 underscores the transformative pressure stablecoins exert. As the market grows and regulations like the CLARITY Act evolve, traditional financial institutions must innovate to retain relevance. The coming years will likely see a fierce battle for the most fundamental component of finance: the customer’s deposit.

FAQs

Q1: What exactly is the “stablecoin threat to bank deposits” that Standard Chartered identified?
The threat is the potential for large amounts of money to flow out of traditional checking and savings accounts into dollar-pegged stablecoins (like USDT or USDC). This reduces the amount of deposits banks hold, which can limit their ability to lend money and operate profitably.

Q2: Why would the CLARITY Act cause bank deposits to decrease?
The CLARITY Act would provide clear legal rules for cryptocurrencies in the U.S. This regulatory clarity could make stablecoins seem safer and more legitimate to the general public and businesses, encouraging more people to use them instead of traditional bank accounts, thus moving funds out of the banking system.

Q3: Why are regional banks more at risk than large global banks?
Regional banks depend more on everyday customer deposits for their funding. Large global banks have many other ways to get money, like issuing bonds. If deposits leave, regional banks have fewer options to replace that funding, which can hurt their core lending business.

Q4: If I buy stablecoins, where does my money actually go?
When you buy a stablecoin from an issuer like Tether or Circle, your money typically goes into that company’s reserve fund. According to Standard Chartered, these reserves are mostly held in assets like U.S. Treasury bills, not as cash in a regular bank account. This means the money leaves the commercial banking sector.

Q5: What could banks do to prevent this deposit outflow?
Banks could develop their own digital currency products or partner with stablecoin issuers. They could also offer higher interest rates on savings accounts or improve their digital banking apps to make them more competitive with crypto wallets and services. Ultimately, they need to innovate to meet changing customer demands.

Stablecoin Growth Poses Alarming Threat to Bank Deposits, Warns Standard Chartered