The popularity of stablecoins would not take all deposits from banks. Just some of the best ones.

The U.S. Senate is about to approve the so-called Genius Act, which will establish guidelines for stablecoin issuers — digital tokens fully backed by fiat currencies like the dollar. One of the major debates about the convenience of offering a regulatory framework for stablecoins revolves around how they could affect the banking system if they gain scale.

Technically, stablecoins do not withdraw resources from the banking system. One way or another, those dollars end up returning to the banks. The question is that the type of deposit banks would receive could be quite different: they would be large uninsured deposits, which makes many people uncomfortable.

When a dollar-pegged stablecoin is created, the issuer receives dollars, which are placed in reserve. According to the guidelines proposed in the different versions of the Genius Act, issuers can hold these reserves in bank accounts.

They can also purchase assets like U.S. Treasury securities, which transfers money to the accounts of the sellers of those assets. Or they can, basically, lend money to banks through operations known as repos (repurchase agreements), as money market funds typically do.

"Stablecoins can be seen as a digital version of money market funds," wrote strategists from JPMorgan Chase in a recent report. With this type of fund, "bank deposits are not 'destroyed' by this movement, just transferred to other economic agents," said the strategists, highlighting that this does not reduce the availability of credit.

Even so, how deposits and bank financing would be transformed is a crucial point.

For example: if a person withdraws money from an account with a balance below $250,000 — fully covered by the U.S. government's deposit insurance — and transfers those funds to a stablecoin issuer, that money may end up in an account with a much higher balance, without full coverage. These deposits are more expensive for banks and more susceptible to rapid outflows.

"Attracting deposits from stablecoin issuers turns retail deposits — which serve as a stable source of funding for banks — into volatile deposits, which cannot fulfill that role," according to a recent study conducted by researchers at the European Central Bank.

Large uninsured corporate deposits were a concern during the regional banking crisis of 2023. Among the depositors of Silicon Valley Bank (SVB) at the time was Circle Internet Group, the issuer of the USDC stablecoin.

The company, which went public last week, stated in its prospectus that, in March 2023, it started transfers of "more than $3 billion in deposits" from SVB, but that these transfers were not completed before the bank was taken over by regulators. At that time, USDC was trading below $1 on some exchanges. The situation was resolved shortly after the government announced that all SVB deposits would be guaranteed, the company reported.

Larger deposits would likely concentrate in the largest banks, which are already required to keep a large portion of their assets in high liquidity and, therefore, may face less risk if funds move quickly. In the prospectus, Circle stated that it invested in and enhanced its reserve management structure, including the decision to keep "the significant majority" of its cash reserves in banks considered globally systemic. This category includes names like Bank of America, Citigroup, JPMorgan, and Wells Fargo.

And this is even before considering the possibility that banks themselves could be the issuers of stablecoins in the future. The Wall Street Journal had already reported: major banks had discussed, in early stages, the possibility of launching a joint stablecoin.

The rewards paid to stablecoin holders and the emerging market for 'tokenized' versions of assets like Treasury bonds also increase the likelihood that people will have more options to earn yield. Banks, in general, may have to raise the rates paid to depositors to compete.

For the largest banks, managing all of this should be manageable. Smaller banks may face greater disruption if stablecoins really become popular.