The 4 Biggest Problems Banks Have With Stablecoins

Banks view stablecoins as a new form of private money that lacks the stabilizing infrastructure developed around banking over the past century. Stablecoin advocates counter that many of those protections emerged only after innovation occurred, and that competition from blockchain-based payments could ultimately produce a more efficient financial system.

In many respects, the cryptocurrency industry has already won the first phase of the argument. The GENIUS Act regulating stablecoins was signed into law last summer and is in its rulemaking period. However, the federal rulemaking process is surfacing some of the traditional financial sector’s deepest-held concerns around stablecoins and digital assets more broadly, as banking interest groups work with federal banking agencies to operationalize the GENIUS Act’s implementation.

Rather than arguing that stablecoins should be excluded from mainstream finance, banking groups are now focused on a narrower but consequential claim. Even under a robust regulatory framework, stablecoins possess at least four key structural vulnerabilities that differ from traditional bank deposits. These four vulnerabilities relate to stablecoin runs, liquidity shocks, contagion, and systemic funding disruption.

Regulation can mitigate these vulnerabilities, according to the banking sector, but it cannot fully remove them.

Read also: Who Is Who in the Banks vs. Stablecoin-Yield Battle

Digital Banking Without Banking Safeguards

The banking industry’s first concern is also its most fundamental. Stablecoins remain vulnerable to bank runs. Traditional banking operates within an elaborate safety architecture built over more than a century. Depositors benefit from federal deposit insurance, banks have access to emergency liquidity facilities through the Federal Reserve, and supervisors continuously monitor capital, liquidity and risk management practices.

Supporters of stablecoin legislation say reserve requirements, redemption standards, audits and regulatory oversight reduce the likelihood of such events. Banking groups generally agree. Their concern is that these measures address symptoms rather than the underlying vulnerability.

A stablecoin backed entirely by safe assets can still experience a run if users collectively decide they want cash instead of tokens, making the risk a structural one rather than operational.

This leads to the second structural issue, which is around stablecoin liquidity. A stablecoin issuer facing substantial withdrawal requests must convert reserve assets into cash. During normal market conditions, that process is relatively straightforward. During periods of market stress, however, even highly liquid markets can experience strains. The banking industry’s concern is not that Treasury securities suddenly become risky. It is that concentrated selling pressure can amplify market stress when large issuers are forced to raise liquidity quickly.

As stablecoins grow from a market measured in hundreds of billions of dollars to potentially trillions of dollars, banks say redemption-driven asset sales could become increasingly relevant to the functioning of broader capital markets.

“[There] are no assurances that stablecoin issuers would have capital sufficient to absorb operational losses as they occur,” the Bank Policy Institute wrote in a Thursday (June 11) statement. “Under the OCC and FDIC proposals, stablecoin issuers would not be subject to any standardized risk-based capital requirement of any kind, let alone a specific capital charge for operational risks.”

At the same time, as stablecoins become more deeply embedded in payment infrastructure, what once might have been viewed as a crypto-market disruption could affect businesses, merchants and consumers operating beyond the digital asset ecosystem. Banks, therefore, worry that instability affecting one issuer could trigger broader questions about others.

See also: Nobody Told the ERP That Blockchain Won

Financial Impacts That Spread Faster Than Regulators Can Respond

The banking sector’s final concern is arguably the most controversial because it cuts directly to the competitive implications of stablecoins. Banks worry that widespread adoption could alter how money flows through the financial system by pulling deposits away from traditional institutions.

Deposits serve a dual purpose. They provide customers with a place to store money, and they provide banks with a critical source of funding for lending activities. Mortgages, business loans, credit lines and other forms of credit are all supported, directly or indirectly, by deposit funding. The concern is what happens during periods of stress. If businesses and households can instantly move large volumes of funds from bank accounts into tokenized dollars backed by government securities, the resulting shift could intensify funding pressures precisely when banks are needed most.

That debate has become particularly relevant as policymakers examine whether stablecoin issuers should be permitted to offer rewards or yield-like incentives to users. Banking groups say such features could transform stablecoins from payment instruments into direct competitors for deposits, accelerating migration away from the banking system.

Crypto firms counter that these products simply represent innovation and consumer choice.

The PYMNTS Intelligence and Citi report “Chain Reaction: Regulatory Clarity as the Catalyst for Blockchain Adoption” found that blockchain’s next leap will be shaped by regulation. The yield question is a big piece of that regulatory puzzle.

“When you have a federal law, it sets the playing field for what is OK versus not,” Tempo Go-To-Market Lead Dan Romero, told PYMNTS on the latest episode of “From the Block,” published Thursday (June 4), adding that for the first time, crypto has had “a regulatory tailwind, not a headwind.”

The disagreement ultimately reflects a broader question. Should stablecoins be viewed primarily as a payments technology, or are they emerging as an alternative form of money that competes directly with bank deposits?

The banking industry’s core message is that stablecoins are not simply digital versions of bank deposits. They are a distinct financial instrument with a distinct set of vulnerabilities. Better regulation can reduce those vulnerabilities through reserve requirements, redemption rules, supervision and transparency. It cannot fully erase them.

Stablecoin supporters reach a different conclusion. They say every transformative financial technology carries risks in its early stages, and regulatory frameworks should focus on managing those risks rather than preserving legacy market structures.

The answer that Congress and federal banking agencies land on will determine not only the future of stablecoins, but potentially the future architecture of money itself.

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