As the U.S. Senate approaches a final digital assets law for the market, surprisingly, progress is being delayed by a single question: stablecoin returns.
Although headlines focus on DeFi regulation and token classification, Omid Malekan, an external researcher at Columbia Business School and crypto policy analyst, warns that much of the debate in Washington is based on myths rather than facts.
Banks vs. Stablecoins: Are American policymakers fighting an invisible threat?
Malekan identifies five persistent misconceptions about stablecoins and their impact on the banking system.
According to Malekan, who has reportedly taught at Columbia Business School since 2019, these misconceptions, if unchallenged, could hinder progress on meaningful crypto legislation.
Myth 1: Stablecoins reduce bank deposits
Contrary to what many believe, the use of stablecoins will not necessarily cannibalize American bank deposits.
Malekan explains that foreign demand for stablecoins, combined with government bond-backed reserves held by issuers, actually tends to increase bank deposits in the U.S.
Each additional dollar in stablecoin issuance often generates more bank activity through purchases and sales of government bonds, repo markets, and currency transactions.
"Stablecoins increase demand for dollars everywhere," notes Malekan, emphasizing that stablecoins offering returns amplify this effect.
Myth 2: Stablecoins threaten banks' credit supply
Critics argue that deposits ending up in stablecoins could reduce lending activity. Malekan says this is a mistaken conflation of profitability and credit supply.
In a late December post, Justin Slaughter, VP of regulatory affairs at Paradigm and former advisor to both the SEC and CFTC, noted that stablecoin usage should be neutral or promote increased credit access and bank deposits.
Malekan challenges the idea that banks, especially large American institutions, lack significant reserves and solid interest margins. Even if competition for deposits affects banks' profits somewhat, it does not reduce their ability to lend money.
In fact, banks can compensate for any losses by reducing the reserves they hold at the Federal Reserve or by adjusting the interest rates they pay to depositors.
His view aligns with the Blockchain Association, which has criticized large banks for claiming that stablecoins pose a threat to deposits and credit markets.
Myth 3: Banks must be protected from competition
A third misconception is that banks are the primary source of credit and must be shielded from stablecoins.
The data points in a different direction, and the BIS Data Portal shows that banks account for slightly over 20% of all credit in the U.S. Non-bank actors handle the majority of financing for households and businesses, including money market funds, mortgage-backed securities, and private lenders.
Malekan argues that stablecoins can reduce borrowing costs by increasing demand for government bonds, which are used as a reference for credit from non-bank actors.
Myth 4: Local banks are most vulnerable
The claim that smaller or regional banks are most vulnerable to stablecoin use is also misleading.
Malekan points out that large 'money center' banks face real competition, especially in payment processing and business services. Local banks, which often serve local and older customers, are less exposed to deposits moving to digital dollars.
At the core, the institutions most 'threatened' by stablecoins are the same ones already enjoying high profitability and extensive global operations.
Myth 5: Borrowers are more important than savers
Ultimately, the idea that protecting borrowers is more important than protecting savers is fundamentally flawed.
Rewarding stablecoin holders strengthens saving, which in turn supports economic stability.
"Preventing stablecoin issuers from sharing their returns is, in practice, a policy that harms American savers in favor of borrowers," says Malekan.
Promoting saving through innovation strengthens both sides of the lending equation, contributing to greater consumer resilience and increased dynamism in the economy.
The real barrier to reform
Malekan believes the ongoing debate about stablecoin returns is largely driven by fear and used as a delaying tactic.
The Genius Act has already clarified the legality of stablecoin rewards, but Washington remains stuck in outdated concerns driven by lobbying interests.
Malekan compares the situation to asking Congress to ban Tesla instead of allowing the auto industry to innovate.
"Digital currencies are not different. Most concerns raised by banks are unconscious and unfounded," concluded the professor at Columbia Business School.
With bipartisan legislation, including the 278-page Senate draft ready for consideration, it's time for decisions based on facts.
Misconceptions about stablecoins create barriers to regulatory clarity, which could potentially delay the process and also weaken the U.S.'s competitiveness in a global digital dollar economy.
Malekan urges decision-makers to focus on facts rather than fear, emphasizing that well-designed stablecoin adoption can increase saving, strengthen bank deposits, reduce borrowing costs, while also promoting innovation in payments and DeFi.
In short, stablecoins are not the threat many fear. It's false myths that are the real issue. Clearing up these misconceptions could unlock the next chapter of American crypto reform, and potentially find the balance between consumer benefits, market efficiency, and financial stability.