As the U.S. Senate nears finalizing the digital asset market structure bill, a seemingly simple issue has become a major obstacle: the returns of stablecoins
Although the media focuses on DeFi regulation and token classification, Omid Malekan, a visiting professor at Columbia Business School and a crypto policy analyst, warns that most debates in Washington are based more on misconceptions than facts
Banks vs. stablecoins: Is the U.S. Congress fighting a hoax or a real threat?
Malekan highlights five key misconceptions about stablecoins and their impact on the existing banking system.
As Malekan, who has been a speaker at Columbia Business School since 2019, stated, if these misconceptions are not addressed, they could become major obstacles to meaningful crypto legislation.
Misconception 1: Stablecoins shrink bank deposits.
Contrary to what most people believe, stablecoin adoption does not necessarily mean that U.S. bank deposits will be diverted.
Malekan explains that foreign demand for stablecoins, combined with the reserves held by providers backed by the Treasury, often leads to increased domestic deposits.
Every additional stablecoin issued often stimulates more banking activity through government bond trading, repo markets, and foreign exchange transactions.
Malekan noted that stablecoins increase demand for USD everywhere, and yield-bearing stablecoins further amplify this effect.
Misconception 2: Stablecoins threaten bank lending.
Critics argue that deposits flowing into stablecoins could reduce lending, but Malekan views this as a mistaken conflation of profitability potential and credit supply.
In a late-December post, Justin Slaughter, Vice President of Regulatory Affairs at Paradigm and former senior advisor to the SEC and CFTC, emphasized that the core purpose of stablecoins should be neutral or supportive of lending and bank deposits.
Malekan argues that banks, especially large U.S. institutions, have strong capital reserves and net profit margins. Even if deposit competition slightly affects profits, it does not diminish their lending capacity.
In reality, banks can offset shortfalls by reducing reserves held at the U.S. Federal Reserve or adjusting interest rates paid to depositors.
His stance aligns with the Blockchain Association, which previously criticized large banks for claiming that stablecoins threaten deposits and credit markets.
Misconception 3: Banks must be protected from competition.
The third misconception is that banks are the primary source of funding and should be protected from stablecoins.
However, data suggests a different picture, as the BIS data portal has shown that U.S. banks account for only about 20% of total credit, with non-bank financial institutions being the primary source of funding for households and businesses, including money market funds, mortgage-backed securities, and non-bank lenders.
Malekan argues that stablecoins could reduce borrowing costs by increasing demand for assets backed by government bonds—key indicators for non-bank financial institution lending.
Misconception 4: Community banks face the greatest risk.
The idea that small or local banks are most vulnerable to stablecoin adoption is misleading.
Malekan emphasizes that large banks, known as 'money center' banks, actually face real competition, especially in payment processing and services for corporations, while community banks serving local customers—often older individuals—are less likely to see deposits flow into digital dollars.
In short, the institutions most at risk from stablecoins are precisely those already benefiting from high-profitability and global business expansion.
Misconception 5: Borrowers are more important than depositors.
Ultimately, the idea that protecting borrowers should take precedence over depositor interests is fundamentally flawed.
Rewarding stablecoin holders will help strengthen savings, which supports overall economic stability.
Malekan stated that banning stablecoin issuers from sharing returns is a policy that harms American depositors to benefit borrowers.
Meanwhile, promoting savings innovation would benefit both sides of the lending system, increasing consumer flexibility and economic dynamism.
The real obstacle to reform.
Malekan said that current debates about stablecoin returns are driven by fear and are merely strategic delays.
Despite The Genius Act having clarified the legal status of stablecoin returns, Washington remains stuck on outdated issues pushed by special interest groups.
Malekan compares this situation to Congress being asked to ban Tesla instead of allowing the automotive sector to continue developing and innovating.
Digital currencies are no different; most concerns raised by banks lack solid evidence or clear proof, concluded the Columbia Business School professor.
Nevertheless, with two-party legislative drafts, including a 278-page Senate bill, preparing for consideration, the time for evidence-based decision-making has arrived.
Misunderstandings about stablecoins hinder regulatory clarity, potentially delaying processes and also affecting the U.S.'s competitiveness in the global digital USD economy.
Therefore, Malekan urges policymakers to focus on facts rather than fear, pointing out that well-designed stablecoin adoption can promote savings, increase bank deposits, reduce borrowing costs, and also drive innovation in payments and DeFi.
In summary, stablecoins are not the threat many fear, but rather the false myths are. If these misunderstandings are cleared up, it could unlock a new chapter for U.S. crypto reform, balancing consumer benefits, market efficiency, and financial stability.