Why banks are afraid you're going to ditch them for stablecoins

By Jurica Dujmovic

Regulated U.S.-dollar stablecoins could become as ordinary as money-market funds

Circle Internet Group developed the popular USDC stablecoin.

By mandating that stablecoin issuers hold much of their reserves in U.S. Treasury bills, Congress has effectively created a new contingent buyer for U.S. government debt.

If bitcoin (BTCUSD) is "digital gold," stablecoins are "digital cash." Stablecoins - designed to maintain a steady $1 value - have become the backbone of moving funds around the crypto ecosystem (providing a stable currency for trading and payments).

Until recently, there were no clear, uniform rules for stablecoins, and oversight was patchy at best. Last July, Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins Act, better known as the GENIUS Act. This first-of-its-kind federal crypto law dictates how these digital coins can be issued and managed, introducing clear rules that will bring investors new opportunities and new risks.

Stablecoins had been in a regulatory gray zone. Some issuers were highly transparent, holding reserves in cash and U.S. government bonds, but others were far more opaque about what backed their tokens. Meanwhile, the stablecoin market had grown to more than $100 billion, raising concerns about what might happen if a major stablecoin failed to meet redemption requests.

U.S. regulators and lawmakers were especially worried about a potential "run" on a poorly backed stablecoin, destabilizing crypto markets. Rather than banning stablecoins outright, the U.S. chose to legitimize them with strict oversight. The GENIUS Act imposes regulatory requirements on every stablecoin issuer. Here are the key rules at a glance:

Every digital U.S. dollar must be backed by an actual U.S. dollar: For each stablecoin token issued, the issuer must hold at least $1 of high-quality, liquid assets in reserve. In practice, that means reserves can only be in U.S. dollars DXY or short-term U.S. government securities (like Treasury bills). Issuers can no longer back their coins with risky or unclear assets.

Complete transparency: Stablecoin issuers must now open their books. They are required to publish regular reports detailing the total amount of stablecoins they've issued and the assets backing the coins. Such disclosures will be reported monthly and must be audited by independent accountants. In addition, issuers must spell out clear redemption terms - in other words, any holder has the right to redeem their token 1-for-1 for U.S. dollars, generally on demand. The goal is to have both regulators and the public always be able to verify a stablecoin's solvency.

The GENIUS Act explicitly prohibits stablecoin issuers from paying any interest or yield to token-holders. This was done to draw a clear line between stablecoins and bank accounts - stablecoin is meant to behave like digital cash, not an investment product.

But that doesn't stop crypto platforms from offering you returns. Digital exchanges, wallets and lending apps that custody stablecoins can pay "rewards" - essentially interest-income by another name. This loophole means you can earn yield on a stablecoin if you're located in the U.S., even though the coin's issuer isn't the one paying it.

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U.S. dollar stablecoins could accelerate 'dollarization' in other countries.

This reform isn't only about crypto regulations - it also affects the U.S. dollar's global standing. By mandating that stablecoin issuers hold much of their reserves in U.S. Treasury bills, Congress has effectively created a new contingent buyer for U.S. government debt.

In effect, whenever someone obtains a stablecoin (by handing over a real dollar), the issuer likely puts that dollar into Treasurys or similar assets. That means the stablecoin user is indirectly lending money to the U.S. government via those reserves. As the stablecoin market expands, it could translate into extra demand for U.S. Treasurys. In the long run, this is strategically reinforcing the dollar's dominance. If digital money worldwide is mostly backed by U.S. government bonds, it anchors the global financial system even more firmly to the U.S. dollar.

Officials abroad have taken note. China's former central bank governor warned that U.S. dollar stablecoins could accelerate "dollarization" in other countries, and the president of the European Central Bank has voiced concern that dollar-pegged stablecoins might diminish the role of the euro (EURUSD) if left unchecked.

European regulators view high-interest 'digital cash' as a threat to bank deposits and financial stability.

Speaking of Europe, its approach to stablecoins diverges sharply from that of the U.S. The E.U.'s Markets in Crypto-Assets (MICA) regulation is much stricter on the interest issue. MICA not only bans stablecoin issuers from paying interest (similar to the U.S. regulation) but goes further, forbidding crypto-service providers from offering any interest or rewards on stablecoin holdings. European regulators explicitly wanted to close this loophole because of worries that users might pull their money out of traditional banks if stablecoins offered attractive yields. They view high-interest "digital cash" as a threat to bank deposits and financial stability.

This difference in policy is already reflected in market trends. Right now, about 99% of all stablecoin value in circulation is tied to the U.S. dollar. The United States' more permissive stance toward yield rewards is likely to further entrench the dollar's lead in the crypto economy, potentially widening that gap over time. European officials, for their part, are responding by pushing for innovations like the digital euro to compete in the digital asset space.

What this means for your money

If you plan to use stablecoins (for trading, earning yield or as digital cash), keep these tips in mind:

1. Safety: Under the new rules, a reputable U.S. stablecoin will be a low-risk asset. Think of it as similar to a money-market fund share or a bank certificate of deposit - fully backed by cash and T-bills and tightly regulated. A compliant stablecoin is designed to be safe and, as its name implies, stable.

In fact, the biggest risk of a regulated stablecoin isn't the coin failing to hold its $1 value - it's something adverse happening to the exchange or wallet where you keep it. So you must ensure the platform holding your coins is trustworthy and solvent. (Notably, the law even built in protections like putting stablecoin holders first in line if an issuer goes bust, which adds to their safety.)

2. Shop smart: Just as you'd check a bank's credibility before opening an account, due diligence on stablecoin issuers and the platforms offering them is a must. Stick to issuers that are fully transparent - they should publish regular, detailed reserve reports (showing exactly what's backing the coins) and undergo independent audits of those reserves.

Also, check for clearly outlined redemption policies (how you can convert the stablecoin back to cash and how quickly). Under the GENIUS Act, the top issuers will disclose this information monthly and certify its accuracy. Use that to pick a stablecoin that plays by the rules.

3. Understand where the yield comes from: If you see a crypto exchange or DeFi app offering, say, 4% annual interest on your stablecoin holdings, remember that this yield comes from somewhere. In today's environment, it's essentially coming from interest on U.S. government bonds. This means the yield on stablecoins will move with interest rates. If the Federal Reserve cuts rates, Treasury bill yields will fall - and so will stablecoin rewards.

4. Spread risk: While the GENIUS Act greatly reduces the risk of a stablecoin collapse, it does not protect you from failures at the exchanges or lenders that hold your coins. If your crypto-trading platform mismanages funds or goes bankrupt, your stablecoins could be temporarily locked or even lost, just like any other asset on that platform.

To be safe, consider spreading stablecoin holdings across more than one platform (especially if you hold a large amount). And make sure you know how to redeem directly with the stablecoin issuer if things go south. Regulated issuers will typically let you redeem your tokens for cash through a bank or their website or app - it's wise to have that option set up so you're not solely reliant on a third-party exchange in a crisis.

If the Fed cuts interest rates significantly, yields on the Treasury securities that back stablecoins would fall, and those attractive stablecoin "rewards" would shrink. On the flip side, if the Fed keeps rates unchanged, stablecoins will continue to yield relatively high returns on platforms. That scenario sets the stage for growing competition between crypto fintech platforms and traditional banks. Banks - which operate under heavier regulations and costs - are not happy about having to compete with crypto apps offering 4%-5% yields on what is effectively cash.

In the U.S., this tension could rise; consumers could favor digital dollars that provide high yield, and banks could lose deposits. It's one reason U.S. regulators cautiously allowed stablecoin interest-payments via third parties, while European regulators banned it outright. So watch the Fed's decisions. They'll not only affect your stablecoin earnings, but also the competitive dynamics between DeFi/crypto finance and traditional banks. High rates give an edge to stablecoin platforms (and put pressure on banks to raise deposit rates), while lower rates would ease that pressure.

The GENIUS Act has achieved something remarkable - it made U.S. stablecoins boring.

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09-15-25 1819ET