As stablecoins gain traction in payments, settlement, cross-border transfers, and treasury management, traditional financial institutions face a growing challenge: keeping deposits from migrating to digital dollar alternatives. The scale of that potential shift could have significant implications for banks and credit unions across the U.S.
Financial institutions and stablecoin issuers alike are trying to assess how much money could shift from bank and credit union accounts to stablecoin wallets and platforms. A report from Javelin Strategy & Research, Migration Not Flight: The Impacts of Stablecoins on Deposits, offers a model for estimating that shift, along with recommendations for banks looking to enter the market.
Assessing the Impact
The report estimates how much conventional deposit balances customers could replace with payment stablecoins once adoption reaches a steady state, assuming the stablecoins offer no passive yield. Under that assumption, utility becomes a key factor in adoption, while deposits held primarily to earn interest may be less likely to move out of traditional bank accounts.
The model estimates potential deposit losses of roughly 1% to 5%. While that range falls short of some of the more dramatic projections, the potential outflows is still significant enough to warrant banks’ attention.
“It came in smaller than I was initially thinking,” said Joel Hugentobler, Cryptocurrency Analyst at Javelin. “There have been headlines saying they’re going to lose trillions of dollars. I didn’t think that was the case, at least not for several years until this stuff really starts taking off. But it’s enough for banks and financial institutions to notice, for sure.”
Surprising Impacts
The model predicts that some of the largest deposit outflows from commercial operating accounts, corporate treasury accounts, and small business. That’s consistent with the types of entities already using stablecoins for payments and other financial activities.
“Banks have to tie up capital on the cross-border side with payouts, and that costs money,” said Hugentobler. “Stablecoins can lower that time needed to hold those funds in an account. There are a lot of use cases, but it definitely makes more sense on the commercial side.”
More surprising is the finding that consumer demand deposit accounts could face the largest potential losses. This does not necessarily mean consumers will ask their banks to offer stablecoins directly. Rather, banks may need to incorporate stablecoins into their offerings to meet consumers’ evolving payment and money management needs.
“People don’t necessarily want to open up a wallet and manage seed phrases and connect the wallets,” said Hugentobler. “If this product is really going to take off specifically for consumers, it’s going to be from companies providing a simple user experience where they don’t have to manage all that stuff. If banks rely on consumer demand as an indicator to get involved with this technology, they’re going to be well behind their competitors.”
According to Javelin, larger banks are likely to face the greatest impact from stablecoins, but they are also among the best positioned to support the new use cases.
“The balance sheets are just so much bigger,” said Hugentobler. “They have room in their budget to build this technology and implement these solutions with their partners and the businesses that they interact with.”
“We’re seeing J.P. Morgan and Citi leading the way as far as large banks goes,” he said. “If the other large banks don’t follow suit, they have the risk of losing additional deposits as well.”
An Uneasy Relationship
Banks and stablecoins have had an uneasy relationship for some time. Stablecoin ecosystems can operate with limited reliance on traditional banks beyond services such as providing consumers with access to digital assets. But as the technology and its use cases evolve, banks need to support stablecoins and tokenized deposits to remain competitive.
“Banks were threatened by this technology,” Hugentobler said. “They saw the disruptive power in it. There’s enough talent in the industry and enough providers where they’re saying, we can either build this out ourselves or partner with someone and we can give our customers optionality.”
“You’re looking at all these huge players like the DTCC [Depository Trust & Clearing Corporation] who handle quadrillions in settlements each year, that are getting involved in the tokenized side of assets,” he said. “The banks and financial institutions are starting to understand this is where things are going. They definitely need stablecoins, I would argue.”
Financial institutions looking to enter the market have several options. Jack Henry, a technology provider to banks and credit unions, takes a hub-and-spoke approach, placing its platform at the center and connecting institutions to different solutions, including tokenized deposits and stablecoins. Fiserv, by contrast, has introduced its own stablecoin for use within its financial services ecosystem.
“Banks need to understand the models of each,” Hugentobler said. “If they go a Fiserv route, Fiserv is going to gain all the benefits from having their own coin. If they go Jack Henry, they’ve got a partner with an issuer. And if they go with the open standard, that has other incentives they can participate in.”
“They need to understand all of this, but they also need to make it super simple for the customer, and they need to make it so that the customer can benefit as well,” he said. “That’s what has been so appealing about stablecoins.”
Key Takeaways
Finding the right partners will be critical for banks seeking to make stablecoins easy for customers to use, whether for personal transactions or business needs. The financial institutions best positioned for successful will be those that can offer customers access to relevant stablecoin use cases when and where they need them, rather than pushing customers toward a particular solution.
“Having that optionality is a differentiator,” said Hugentobler. “At the end of the day, a customer doesn’t care what product is used if they can send money faster and cheaper. They don’t even need to know they’re using a stablecoin. It’s just option D on the platform, click this button, send the money, and that’s it.”