Considerations In Banks’ Responses to the Proliferation of Stablecoins

On December 17, 2025, a FEDS Note (“Note”) was issued by the Federal Reserve discussing the possible implications of the adoption of stablecoins on bank deposits, credit availability and cost, banks’ continuing role in the payment ecosystem, and possible shifts in the banking industry’s competitive dynamics. This Alert summarizes key points made in the Note.

Although not considered official policy or guidance by the Federal Reserve, the nuanced discussion in this Note could be helpful for policymakers, boards of directors and bank management in developing their strategies in response to the anticipated proliferation of payment stablecoins (“stablecoins”). If not already started, it is anticipated that bank executives, product and risk managers will be under increasing pressure to make recommendations whether to add stablecoins to the bank’s product offering and to deploy strategies to retain bank deposit customers, as well as the bank’s overall funding base.

Stablecoin Demand and Deposit Implications

The Note posits that the impact on U.S. bank deposits depends on the type of customer that demands stablecoins (retail or commercial, domestic or foreign), what assets are converted for stablecoin purchases, and how stablecoin issuers manage reserves. At this point, it is unclear whether stablecoins will ultimately reduce, recycle, or restructure bank deposits rather than simply drain them.

The impact of stablecoins on bank deposits depends significantly on where stablecoin demand originates, the type of customer funds being converted to purchase stablecoins, and dynamics over the economic cycle.

• Domestic conversion of bank deposits into stablecoins may directly reduce U.S. bank deposits systemically, especially to the extent stablecoin issuers allocate their reserves outside of bank deposits (i.e. government securities, Federal Reserve Accounts, and Repurchase Agreements).
• Foreign demand for USD stablecoins as a safe haven could increase deposits in U.S. banks, potentially offsetting some domestic deposit outflows.
• The type of funds being converted into stablecoins also matters.
  • Research cited in the Note asserts that initially the sources for stablecoins have come more from money-market or similar funds than core deposits.
  • Effects on deposits are likely to differ between household retail deposits, including small business entities (SBEs) and institutional operational deposits. Retail balances tend to be more stable and relationship-driven while institutional deposits tend to be more volatile. If retail and SBE customers adopt stablecoins for their payments, this may significantly alter the composition of banks' core deposit base.
  • During periods of elevated interest rates, the opportunity cost of holding non-interest-bearing stablecoins would be high, potentially slowing their adoption.
  • During financial stress periods, stablecoins could benefit from perceived safety or balance-sheet transparency advantages if their reserves are viewed as less risky than bank deposits, notwithstanding deposit insurance.
  • While stablecoins trade rapidly on exchanges, formal redemptions typically take longer than deposit withdrawals, so their liquidity advantage may be situational rather than universal.
• How stablecoin issuers manage their reserve assets critically influences the net effect on bank deposits.
  • If stablecoin issuers invest reserves primarily in bank deposits, there would likely be no impact to the overall size of the banking system. If issuers invest most of their reserves in non-deposit assets, such as government securities, this could reduce bank deposits unless issuer counterparties ultimately deposit proceeds back into the banking system.
  • The Note identifies and compares three stablecoin issuers with 1.89%, 14.24% and 100% respectively of their reserves in bank deposits.
• Issuers' allocation of reserves to bank deposits also depends on whether issuers have access to central-bank accounts (Federal Reserve Master Account).
  • When issuers have no master account access, they remain dependent on banks for payment services and reserve management.
  •  When issuers have access to limited purpose master accounts, they bypass intraday correspondent banking services and keep some deposits out of banks.
  • The most significant reduction in bank deposits would occur if stablecoin issuers gain access to master accounts that pay the IORB rate, allowing them to bypass the banking system entirely.

The Note indicates that the extent of the substitution of bank deposits for stablecoins is determined by a variety of factors that must be considered for each bank in the development of a response to stablecoin and blockchain payment technology.

Resulting Bank Balance Sheet Composition

Even if aggregate bank deposits maintained by stablecoin issuers remain in the banking system generally, it is likely that such deposits will migrate from a large number of FDIC-insured retail deposits held by households and businesses to a smaller number of uninsured wholesale deposits held at a handful of banks.

• Wholesale deposits tend to be more volatile than retail deposits in their response to economic or industry pressures directly or indirectly as a result of redemptions of stablecoins.
• Deposit concentration risks could also grow. Banks serving stablecoin issuers may experience counterparty concentration and a resulting contagion risk that could spread to other stablecoin depository banks, as demonstrated recently in the Silicon Valley collapse.
• To the extent less volatile core deposits are withdrawn to purchase stablecoins from individual banks and are not replaced by wholesale deposits from issuers, these banks will have to rely on other sources of wholesale and capital markets funding, which tend to erode net interest margins.
• To the extent that banks’ funding becomes more volatile than with core retail deposits, it is likely that banks will respond by rebalancing their balance sheets to match the risk profile of their liabilities: shortening asset duration, raising liquid asset buffers and scaling back activities that involve maturity transformation.
• Regulatory requirements could reinforce these adjustments.
  • Under Liquidity Coverage Ratio calculations, deposits from stablecoin issuers, which are classified as wholesale, carry higher runoff assumptions, requiring banks to hold larger amounts of high-quality liquid assets at the expense of lending.
  • The Net Stable Funding Ratio similarly imposes higher funding requirements for long-term lending when a bank’s liabilities are less stable.

The Note concludes that even if a portion of bank deposits remain in the system, it is likely that they will become more volatile. For those banks that do not receive recycled deposits from stablecoin issuers, they will be required to rely on more volatile wholesale funding. This could result in some restructuring of their balance sheets that could limit their ability to provide credit and impact the terms of such credit.

• Small and medium-sized enterprises, which rely heavily on relationship lending, could become less attractive when fund costs rise and volatility increases.
• Commercial real estate lending, which involves long or medium-term lending, is also sensitive to shifts in funding stability.

The Unequal Effects of Stablecoins on Banks and Credit Availability

The Note asserts that the impact of stablecoins across the banking industry will differ substantially.

• Large banks are generally better positioned to adapt to changes in deposits because they have multiple funding bases, stronger access to wholesale markets, and more sophisticated balance sheet management tools.
• Mid-sized regional banks may face the greatest vulnerability because they often lack both the scale advantages of the large institutions and the relationship depth of community banks while having limited access to alternative funding markets. The Note asserts that those with high concentrations in commercial real estate or tech-oriented markets could face disproportionately severe funding shocks and credit contractions.
• The picture for smaller community banks is mixed. Those with primarily retail and small business customers in which deposits serve as a key component of the relationship may be less affected, especially in less digitally oriented regions. On the other hand, those in regions with younger, tech-savvy customers may face deposit substitution without ready access to alternative funding.

The Note concludes its discussion of the possible effect of stablecoins on credit as follows:

“Together, these dynamics suggest that significant stablecoin adoption could reshape the landscape of bank credit provision in both quantitative and qualitative ways. The aggregate supply of credit is likely to decline, lending costs may rise, and access to financing could become more uneven across borrower types, sectors, and regions. Moreover, the uneven capacity of banks to adapt may accelerate ongoing trends toward industry consolidation, as those unable to manage deposit volatility or fund balance sheet growth face increasing competitive pressure.” 

Banks’ Response to the Proliferation of Stablecoins

The proliferation of stablecoins could affect all banks, but in different ways. Accordingly, each bank’s strategic response will differ. The Note asserts that banks that move proactively, particularly large institutions with the scale, technological capacity, and regulatory expertise to participate in the stablecoin ecosystem, may not only offset potential disintermediation, but also develop new revenue streams and customer engagement models. These could include issuing tokenized deposits, offering custodial and settlement services, or integrating programmable payment solutions into existing platforms. Smaller and less digitally advanced institutions, by contrast, may face more serious headwinds. Erosion of their deposit base and rising funding costs could weaken their lending capacity, particularly in markets where banking relationships has been central to local credit provision.

FEDS Notes are articles in which Board staff offer their own views and present analysis on a range of topics in economics and finance. They do not represent the official positions or guidance from the Federal Reserve.

“,” Wang, Jessie Jiaxu, FEDS Notes. Washington: Board of Governors of the Federal Reserve System, December 17, 2025.

This Note summarizes and paraphrases the key points made in the Note. The conclusions and statements made in the Note are those of its author. While we believe the Note is worth reading and discussing in the development of strategy, we neither confirm nor deny the Note’s conclusions or observations.

Payment stablecoins have the meaning set forth in the GENIUS Act at 12 U.S.C. § 5901(22).

While not specifically addressed in the Note, it is possible that domestic commercial customers reliant on international supply chains or sales would be more likely to use stablecoins for faster and cheaper payments to foreign suppliers and customers.

Early use of stablecoins prior to adoption of the GENIUS ACT have been primarily by commercial entities involved in the crypto assets business, rather than retail customers. Greater use by retail customers could change the allocation of funding sources for stablecoins.

This result could be reinforced if the payment of rewards, indirect interest, or other fees paid to holders in lieu of interest by third parties are prohibited.

The velocity with which these funds can move due to the 24/7 nature of crypto markets presents particular challenges for traditional bank liquidity monitoring systems. See fn. 9 of the Note.