A ban with no winners.
Written & compiled by: KarenZ, Foresight News
Last summer, when the U.S. Congress was debating the GENIUS Act, economist Andrew Nigrinis put forward a figure— if stablecoins could pay interest, bank loans could evaporate by $1.5 trillion .
This figure spread rapidly in Washington. Banking lobbying groups used it as evidence, some lawmakers used it as justification, and ultimately the bill included an explicit ban: any stablecoin issuer may not pay interest or returns to holders. The logic is straightforward—if you can earn more money on the blockchain, who will keep their money in banks? Fewer deposits mean less money for banks, and borrowers suffer as a result.
That sounds reasonable, doesn't it?
However, the GENIUS Act does not explicitly restrict third-party platforms from offering interest-like returns. But the proposed CLARITY Act attempts to close this loophole in some aspects.
In April of this year, the White House Council of Economic Advisers (CEA) released a research report stating: Wait, that might be a bit of an overstatement. The CEA responded to this logic with a complete set of equilibrium models and reached a potentially unexpected conclusion: banning stablecoins from issuing yields has little effect on protecting bank loans.
Their calculation showed $2.1 billion, not $1.5 trillion, a difference of nearly 700 times.
Where does the dollar go when it enters a stablecoin?
The idea that "stablecoins are siphoning off deposits" sounds vivid, but it skips a crucial step—what do issuers do with the money after it's used to buy stablecoins?
CEA will be broken down into three scenarios:
Scenario 1: The issuer uses its reserves to buy government bonds:
A user withdraws $1 from Bank A to buy a stablecoin. The issuer receives this $1 and immediately buys government bonds from a dealer. The dealer sells the government bonds and deposits the $1 received into Bank B. The final result: Bank A has one less deposit, and Bank B has one more deposit. The total amount of deposits in the entire banking system remains unchanged; only the ownership of the banks has changed.
Scenario 2: The issuer deposits its reserves as cash into a bank, but the bank is required to provide 100% coverage.
When $1 enters the stablecoin system, the issuer deposits it into Bank C. Bank C's book deposits remain unchanged, but regulations require Bank C to offset this deposit with 100% central bank reserves—meaning that this $1 is "locked up" and cannot be expanded into loans through the credit multiplier. This is the true meaning of "loss of bank lending capacity."
Scenario 3: Reserves flowing into money market funds:
If the fund buys government bonds again, the logic returns to scenario one.
If a fund deposits cash into the Federal Reserve's overnight reverse repurchase facility (ON RRP), the money becomes a Fed liability and is no longer a commercial bank deposit—but the CEA points out that this phenomenon is common to the entire non-bank financial system and is not unique to stablecoins.
Therefore, the core issue is not the total amount of deposits, but the structure of deposits—what percentage of stablecoin reserves actually go into the "100% reserved, non-lending" pocket?
CEA breaks this down. Currently, the two largest issuers in the market, Tether and Circle, together account for over 80% of the stablecoin market share. The US dollars they receive from users are essentially used for one thing: buying short-term US Treasury bonds. Circle's reserve report at the end of 2025 shows that 88% of its USDC reserves are held in Treasury bonds and repurchase agreements, with only 12% held as bank deposits. Tether is even more extreme; of its $147.2 billion in reserves, only $34 million is in bank deposits—a negligible amount.
The only scenario that truly impacts a bank's lending capacity is when the issuer deposits its reserves with a bank, and regulations require that bank to maintain 100% reserves of that money. In other words, only 12% of Circle USDC's reserves go through this route. The remaining 88% circulates within the banking system.
Even if it leaks out, it will be caught in three nets.
Assuming stablecoins stop paying interest, users start moving their money back to banks. However, for this money to become an actual bank loan, it still needs to pass through three hurdles.
The first question: How much of the money will actually flow back to banks? The report, using historical data from money market funds to calibrate elasticity, estimates that in the baseline scenario, approximately $54.4 billion would shift from stablecoins back to traditional deposits due to zero yields. This figure is already high—a significant portion of stablecoin holders are not primarily interested in the returns; they prioritize the speed of cross-border transfers or a dollar account independent of their domestic banking system. Whether or not they receive interest has little impact on their decisions.
The second question: Of these $54.4 billion, how much actually changed banks' lending capacity? Only 12% (in USDC terms), which is about $6.5 billion. The other 88% circulated in the Treasury bond market before and after the ban, having no net impact on banks' lending capacity.
The third question: If $6.5 billion enters the banks, can it all be lent out? No. Banks need to hold reserves. Currently, the effective reserve ratio of the US banking system is about 30%, leaving 70% as loanable funds. Moreover, the Federal Reserve is currently maintaining an "ample reserve" framework, meaning that banks already hold more than $1 trillion in excess liquidity buffers. For every additional $1 in lending capacity, less than 50 cents ultimately becomes a real loan; the rest is actively absorbed into the liquidity buffers by the banks.
After passing through the three hurdles, the $54.4 billion became $2.1 billion, accounting for only 0.02% of the total loans (approximately $12 trillion).
Then consider the cost on the other side: stablecoin holders lose the approximately 3.5% annualized return they would have received, resulting in a net welfare loss of $800 million per year.
In the words of the CEA, the cost-benefit ratio of this ban is 6.6, meaning the cost is 6.6 times the benefit, which is very uneconomical.
How was that 1.5 trillion calculated?
If the White House model gives $2.1 billion, where did the original $1.5 trillion come from?
The CEA traced the origins of this problem in its report. Nigrinis (2025) directly borrowed the model developed by Whited, Wu, and Xiao (2023) for central bank digital currencies (CBDCs)—CBDCs, as liabilities of the Federal Reserve, would directly withdraw deposits from the commercial banking system, with bank loans decreasing by approximately 20 cents for every dollar that entered. Nigrinis directly applied this multiplier to the stablecoin scenario, assuming that stablecoins would expand on a large scale after providing competitive returns, ultimately calculating a loan contraction of 1.5 trillion.
The problem lies in a fundamental difference between CBDCs and stablecoins: CBDCs are central bank liabilities, meaning that once deposited, they leave the commercial banking system; stablecoin reserves, on the other hand, mostly flow back into commercial banks through the government bond market. Nigrinis's model doesn't track where this money goes; it only sees a decrease in deposits at one bank but not an increase at another.
This is the fundamental difference between partial equilibrium and general equilibrium. Treating the loss of one bank as the loss of the entire system will naturally result in an error of orders of magnitude.
Another overlooked account
The report concludes by highlighting an effect that the model did not cover but which is in the opposite direction: the overseas demand for US Treasury bonds by stablecoins.
Over 80% of stablecoin transactions occur outside the United States, driven by ordinary users in countries with unstable currencies using dollar-denominated stablecoins as savings instruments. This group underpins genuine demand for US Treasury bonds; IMF data shows that stablecoin issuers hold more US Treasury bonds than Saudi Arabia. BIS research indicates that every $3.5 billion in stablecoin inflows can lower the 3-month Treasury yield by 5 to 8 basis points. If a ban suppresses stablecoin adoption, this overseas demand channel will shrink, increasing the cost of US Treasury financing, which could directly offset any increase in bank lending.
So, what does all of this really mean?
It's not that stablecoins have no impact on banks, but rather that the source of that impact isn't primarily about "whether they can pay interest." The real key factor is what percentage of stablecoin issuers' reserves is held in the mandatory 100% safety net. If regulators push this percentage up in the future, the impact will begin to become significant.
Regarding the ban on interest payments, the cost-benefit ratio for bank loans is 6.6; for the stablecoin ecosystem, it cuts off its ability to provide competitive returns to ordinary users; and for US Treasury financing, it may be the opposite.
A piece of legislation that has no obvious beneficiaries but clearly disadvantages. This is what truly makes this report thought-provoking.
