The burgeoning stablecoin market is sparking a contentious debate within the financial sector, with contrasting views on its potential impact on traditional banking deposits. While some financial institutions warn of significant risks to established banking models, others contend that the feared "deposit flight" is a mischaracterization of evolving financial flows.
A Brewing Debate Over Deposit Flows
Standard Chartered Bank has issued a stark warning, projecting that U.S. banks could face a loss of $500 billion in deposit outflows by 2028, primarily due to the growing adoption of stablecoins. This significant shift is identified as a structural risk, particularly impacting regional banks that heavily rely on deposit-funded lending for interest income. Geoffrey Kendrick, head of digital asset research at Standard Chartered, underscores that this risk is intensifying as core banking activities migrate to on-chain alternatives. The bank further estimates that the overall stablecoin market could swell to $2 trillion within the same timeframe, with a substantial portion of this growth expected from emerging markets and U.S. bank contributions.
Reframing the Risk: Migration, Not Flight
Conversely, Galaxy's head of research, Alex Thorn, challenges the notion of "deposit flight," reframing it as "deposit migration." Thorn draws a parallel to money market funds (MMFs), where cash pulled from savings accounts to invest in MMFs eventually returns to the banking system when MMFs purchase treasuries and the sellers deposit the proceeds. Similarly, he argues that funds used to purchase stablecoins will ultimately reside with stablecoin issuers, who in turn buy treasury bonds. The sellers of these bonds will then deposit the cash back into banks. Therefore, while deposits might shift from less competitive institutions, the money does not exit the banking system entirely, but rather undergoes a "migration" to more competitive services.
