USA's Senate is close to finalizing the proposal for digital assets. However, an unexpected simple issue is halting the process: returns on stablecoins.
Headlines mostly focus on DeFi regulation and how cryptocurrencies are classified. But Omid Malekan, adjunct professor at Columbia Business School and a cryptocurrency policy expert, warns that much of the discussion in Washington is based on myths rather than facts.
Banks vs. stablecoins: Are U.S. lawmakers fighting a fabricated threat?
Malekan identifies five common misconceptions about stablecoins and their impact on the banking system.
According to Malekan, who has taught at Columbia Business School since 2019, these misunderstandings risk blocking critical cryptocurrency legislation if they continue to spread.
Myth 1: Stablecoins reduce bank deposits
It is not true that increased use of stablecoins automatically reduces deposits in American banks.
Malekan explains that increased global demand and the reserves issuers hold in U.S. government securities often lead to more deposits in American banks.
Each new USD in stablecoins often triggers more activity in the banking world through purchases and sales of government securities, repo markets, and foreign exchange trading.
"Stablecoins increase demand for USD worldwide," says Malekan, noting that interest-bearing stablecoins amplify this effect.
Myth 2: Stablecoins threaten banks' ability to lend
Critics argue deposits could shift to stablecoins and reduce lending. Malekan believes this confuses profit with credit supply.
In December, Paradigm's CEO for regulation, Justin Slaughter, wrote that stablecoins should be neutral or even capable of increasing lending and bank deposits.
Malekan notes that large American banks have ample reserves and high interest income. Competition for deposits may slightly reduce profits, but it does not prevent banks from lending.
Banks can instead reduce their reserves at the Federal Reserve or adjust the interest rates they offer depositors if needed.
The Blockchain Association agrees with Malekan and has criticized large banks for claiming stablecoins threaten deposits and the credit market.
Myth 3: Banks must be protected from competition
Another myth is that only banks provide credit in society and therefore must be protected from stablecoins.
They show something else. The BIS Data Portal shows that American banks account for about 20% of lending. In fact, other lenders—such as money market funds, mortgage-backed securities, and private credit firms—provide the majority of loans to households and businesses.
Malekan argues that stablecoins can lower borrowing costs by increasing demand for government securities, which serve as benchmarks for non-bank interest rates.
Myth 4: Small banks are most vulnerable
The claim that small and regional banks are most exposed to stablecoins is also untrue.
Malekan explains that large 'money center' banks face real competition, especially in payments and services for businesses. Small banks often serve local and older customers, who are unlikely to switch to digital USD.
The institutions most threatened by stablecoins are actually the large, profitable, and global banks.
Myth 5: Borrowers are more important than savers
Finally, it is wrong to assume that borrowers should always be protected over savers.
Returns for those holding stablecoins strengthen saving. This makes the economy more stable.
"If you prohibit stablecoin issuers from sharing returns, you quietly harm American savers in favor of borrowers," says Malekan.
Innovation that makes saving more profitable strengthens both borrowers and savers. It makes households more stable and the economy more vibrant.
The real obstacle to reform
Malekan says the discussion about stablecoin returns is largely driven by fear and used to delay progress.
The Genius Act has already confirmed that stablecoin returns are legal. Despite this, Washington remains stuck in old fears and lobbyist interests.
Malekan compares the situation to asking Congress to ban Tesla instead of allowing the auto industry to evolve:
"Digital currencies are no different. Most concerns raised by banks are unfounded and unsupported," concluded the professor from Columbia Business School.
With bipartisanship legislation, including the Senate's 278-page draft, ready for voting, it's now time to make decisions based on facts.
Misunderstandings about stablecoins hinder clear regulations, slow down the process, and cause the U.S. to fall behind in the digital USD economy.
Malekan urges decision-makers to focus on facts, not fear. He shows that well-designed stablecoins can lead to increased saving, more bank deposits, and lower borrowing costs. They can also advance payment systems and DeFi.
In short, stablecoins are not as dangerous as many believe. Misunderstandings pose the real threat. Removing them could allow the U.S. to take the next step in cryptocurrency reform and achieve a good balance between consumer benefits, market efficiency, and financial stability.