White House Says Stablecoin Rewards Won’t Impact Community Banks

White House economists say a stablecoin rewards ban would not meaningfully impact community banks.

In a report issued Wednesday (April 8), the Council of Economic Advisers (CEA) addresses an issue that has held up pending cryptocurrency legislation: the idea that cryptocurrency platforms that offer a yield on stablecoins could cause a deposit flight from banks.

The CEA report argues that banning these rewards under the CLARITY Act would only lift traditional lending by 0.02%, with 76% of it coming from larger lenders and the remaining 24% from community banks.

Assuming the economists’ worst case assumptions, the model used by the CEA produces $531 billion in additional lending, or a 4.4% increase in bank loans. That figure would require the stablecoin market to expand at around six times its current size as a share of deposit, “all reserves to be locked in unlendable cash rather than treasuries,” and the Federal Reserve to jettison its current monetary framework.

“Even under those implausible conditions, community bank lending only rises by $129 billion, corresponding to an increase of 6.7%,” the report said. “The conditions for finding a positive welfare effect from prohibiting yield are similarly implausible. In short, a yield prohibition would do very little to protect bank lending, while forgoing the consumer benefits of competitive returns on stablecoin holdings.”

The CEA’s findings run counter to a study last year from the Independent Community Bankers of America (ICBA), which said community banks could lose $1.3 trillion in deposits and $850 billion in loans if stablecoin rewards were permitted.

Work on the CLARITY Act stalled earlier this year due to conflict between the banking and sectors on this topic, though lawmakers have said recently that they are making progress.

Writing about this issue last month, PYMNTS said that stablecoins have become a focal point in the debate as they “sit at the intersection of payments, banking, and capital markets.” In targeting yield, regulators would be narrowing the scope of stablecoins to that of a payment instrument instead of an investment vehicle.

New research by PYMNTS Intelligence indicates that businesses that wish to use stablecoins are more inclined to work with banks than with crypto wallets.

Those wallets, while efficient, “introduce unfamiliar risks: private key management, fragmented reporting, uncertain custody standards and evolving regulatory interpretations,” PYMNTS wrote recently. “Banks, by contrast, provide a trust layer that CFOs already understand.”