Are commercial banks in trouble?
If the actions of its lobby is any indication, this might be the case. It seems the banks are not too happy about the potential of yield-bearing stablecoins. This could completely disrupt their business, sucking billions in capital from the traditional banking system.
To comprehend how much of a risk this is, it is crucial to understand how the banking and more specifically, the USD dollar, system operates.
Commercial banks depend upon deposits. Their entire system is build on people providing money to the banks for which the banks pay a return. Of course, the bank seeks to garner a higher return on the money, pocketing the spread.
All of this is ultimately tied to the ability to lend, i.e. create money. We also have regulation which directs the banks as to how they can operate in specific environments.
Let us take a look at what could be brewing.
Banks Fear Yield Bearing Stablecoins
What is a yield-bearing stablecoin?
For those unaware, all stablecoins that are asset backed, provide a return. Tokens such as USDC are backed by cash (20%) and yield bearing securities (Tbills, Repo contracts, MBS). This means money is generated off each stablecoin issued.
The question is who keeps the money. With USDC, it goes to the issuer, Circle in this case.
A yield-bearing stablecoin is one that pays a percentage of the interest to the token holders. This are rare at this point but expected to expand in the coming years. In fact, the SEC only approved the first back in February.
As reported by Cointelegraph, the US Securities and Exchange Commission (SEC) in February approved the first yield-bearing stablecoin security by Figure Markets. At the time of its launch, the new YLDS token offered a 3.85% yield.
This is a market that is going to expand rapidly.
In February, Tether co-founder Reeve Collins announced that his Pi Protocol will allow investors to mint the USP stablecoin in exchange for USI, an interest-paying equivalent.
Spark Protocol’s USDS also offers holders interest payments generated through decentralized lending and tokenized Treasurys.
For the moment, there is regulatory uncertainty. The SEC has ruled that stablecoins are not securities since they are a payment mechanism. It did, however, punt on the question of whether yield bearing stablecoins would fall under that category.
Once this is resolved, the many will likely flood into this area.
Why The Banks Are Scared
Austin Campbell, a New York University professor and founder of Zero Knowledge Consulting took issue with the bank lobby and fired back. He was very pointed in his attacks towards the Democrats who has taken an anti-crypto and thus, pro-bank, stance.
I realize this gets a bit more into political rhetoric but the core of his attack is valid. He does describe how the banks have operated for decades. As mentioned above, their basic model is to take money in, pay minimal interest, then use the money to garner a greater return.
This is why a bank will pay 2% interest on a savings account when a T-bill pays 3.5%. The bank profits from the spread.
So why is this is a threat?
Simply put, this can pull money away from the banks. If people start to pick up yield bearing stablecoins, which can still be used for payments, deposits to the banks will fall. This means their business starts to contracts as their balance sheet becomes constrained.
The best way to understand this is with an example.
A stablecoin issuers brings out 1 billion in asset backed tokens. This means there is $200 million in cash and $800 million in T-bills (for our discussion). We will presume this is yield bearing although it equally applies to regular stablecoins.
The 1 billion in stablecoins provides $1 billion in transactional power. This means, on the surface, the "money supply" doubled. This is not the case because the $200 million is locked up. It is not used until the stablecoins are redeemed. The remaining $800 million is circulating, buying up Treasuries which puts the dollars in the TGA at the Fed. Over time, the government pays its bills out of this account, putting the money into the banking system.
The total is $1.8 billion in money transaction capability (1 billion stablecoins and $800 million in cash).
Here is where the problem for the banks arises.
To start, the $200 million in backing is not held in a saving account. It is likely in a money-market account. These are run by investment firms such as Schwab, Vanguard, Fidelity, and Blackrock.
The other issue is return. If the yield-bearing stablecoins are paying 3.85%, why would I put my money in a bank account paying 2%. By having the yield-bearing stablecoin, I get the return when it is in my wallet and then make a payment when I need to.
Hopefully, through this example, you can see how the commercial banks are facing some serious risk. The foundation of their entire model could be pulled out from under them. If deposits dry up, banks are apt to, at best, have to downsize. The entire industry will contract.
It is why the bank lobby is pushing so hard. This could doom the banks as they are obsolete. The ones that will survive are going to have to adopt the new technology and compete.
This is not something that cartels operating under a forced monopoly tend to excel at.