Banks’ Stablecoin Fears Are Unsubstantiated Myths, Says Professor

Banks’ Stablecoin Fears Are Built on Myths, Says Columbia Professor

As US lawmakers prepare to move forward with long-awaited crypto market structure legislation, a fierce battle is unfolding behind the scenes — and stablecoins have become the unexpected flashpoint. According to a Columbia Business School professor, the loudest objections coming from the banking sector are not based on evidence, but on fear of losing profits.

Omid Malekan, an adjunct professor at Columbia and a well-known crypto educator, argues that much of the resistance to stablecoin yield-sharing is rooted in misinformation deliberately pushed to protect the traditional banking model. In a recent post on X, Malekan expressed frustration that progress on crypto legislation is being slowed by what he described as  unsubstantiated myths  surrounding stablecoin economics.

The Real Fight: Who Controls Stablecoin Yield?

At the heart of the debate lies a simple but powerful question: who should benefit from the interest generated by stablecoin reserves?

Stablecoin issuers typically hold reserves in US Treasury bills and bank deposits, which generate yield. Banks and their lobbyists argue that allowing issuers or platforms to share this yield with users creates a dangerous loophole. Their fear is that consumers, attracted by passive returns of around 5%, could pull billions of dollars out of traditional savings accounts, triggering a so-called  deposit flight.

Malekan rejects this argument outright, calling it a convenient narrative designed to shield banks from competition rather than protect the financial system.

Why Stablecoins Don’t Drain Bank Deposits

One of the most persistent claims from the banking industry is that stablecoin adoption will inevitably shrink bank deposits. Malekan says this assumption ignores how the stablecoin market actually works.

Much of the demand for stablecoins comes from outside the United States. When foreign users purchase dollar-backed stablecoins, issuers are required to place reserves into US-based assets, including Treasury bills and bank deposits. Rather than draining the system, this process can inject new capital into American banks and government debt markets.

From this perspective, stablecoins are not a threat to deposits but a mechanism that can expand financial activity across borders.

Competition Isn’t the Problem — Profits Are

Another key myth, according to Malekan, is that stablecoins will cripple bank lending. In reality, stablecoins do not prevent banks from issuing loans. What they do is challenge banks’ ability to pay near-zero interest while earning substantial returns elsewhere.

Today, the average US savings account yields just over half a percent. If banks fear losing customers to yield-bearing stablecoins, Malekan argues, the solution is straightforward: pay savers more. Stablecoins introduce competition, not collapse.

Banks Are No Longer the Main Credit Engine

The argument that stablecoins could choke off credit also ignores a structural shift in the US financial system. Banks now provide only about one-fifth of total credit in the economy. The majority comes from non-bank sources such as money market funds, private credit firms, and capital markets.

These sectors could actually benefit from stablecoin adoption through faster settlement, lower transaction costs, and potentially reduced Treasury yields. Rather than weakening the system, stablecoins may enhance its efficiency.

Community Banks Aren’t the Real Victims

Much of the lobbying effort frames community and regional banks as the most vulnerable players. Malekan calls this another misleading narrative.

According to him, large money-center banks have far more to lose if stablecoins disrupt the status quo. Community banks are often used as a shield in public messaging, while the real objective is protecting the outsized profits of the largest financial institutions.

He describes the situation as an uncomfortable alliance between big banks defending their margins and certain crypto startups pitching services to smaller banks under the guise of protection.

Savers Matter Too — Not Just Borrowers

Public policy discussions often focus heavily on borrowers, but Malekan insists that savers deserve equal attention. Preventing stablecoin issuers from sharing yield effectively forces consumers to subsidize bank profits by accepting minimal returns on their money.

A healthy economy depends on both savers and borrowers. Blocking innovation that benefits savers simply to preserve existing profit structures undermines that balance.

Congress Faces a Choice: Consumers or Corporations

Malekan concludes with a clear message to lawmakers. The stablecoin yield debate should not be about preserving legacy advantages but about encouraging innovation and serving consumers.

He warns that many of the claims circulating in Washington lack empirical support and urges Congress to remain focused on progress rather than pressure from powerful lobbies.

Growing Pushback Against Banking Influence

The debate has also drawn reactions from legal and political figures. Lawyer and Senate candidate John Deaton recently reminded voters that senators are facing intense pressure from banking interests to prevent platforms like Coinbase from offering stablecoin rewards.

Deaton’s message was blunt: banks and career politicians do not necessarily act in the public’s best interest. He pointed out that restrictions on stablecoin yields could stifle innovation and limit consumer choice.

Coinbase has reportedly gone as far as warning that it may withdraw support for the CLARITY Act if lawmakers impose restrictions on stablecoin rewards beyond basic disclosure requirements — a sign of how high the stakes have become.

A Defining Moment for Crypto Regulation

As the market structure bill heads toward markup, the stablecoin yield issue may determine whether the US embraces a more competitive, consumer-focused financial system or reinforces the dominance of traditional banks.

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