Starting from Bank of America’s warning: The battle over stablecoin interest rates, and how it reveals the lucrative profit structure of bank deposit interest rate spreads

Bank of America (BofA) CEO recently warned that if Congress allows stablecoins to pay interest, it could lead to a potential outflow of up to $6 trillion in bank deposits. However, after dissecting how traditional banks generate nearly trillions of dollars in risk-free interest margin income each year from users’ low-interest deposits, the reasons behind the controversy and conflicts over stablecoin interest become clearer.

$6 Trillion Outflow Crisis: Why Are Bank Deposits the Foundation of Finance?

Bank of America CEO Brian Moynihan cited research from the Treasury Department during an earnings call, indicating that if stablecoins can pay interest, approximately 30% to 35% of U.S. commercial bank deposits, about $6 trillion, might flow out to the stablecoin ecosystem.

In the current financial system, banks can lend out user deposits through a fractional reserve system, creating interest income. If a large portion of deposits shifts to stablecoins backed fully by short-term assets like U.S. Treasuries, these funds will no longer cycle back into bank lending, directly impacting the bank’s business structure.

(U.S. Banking Industry Demands to Close the “GENIUS” Loophole: Stablecoin Interest Could Trigger $6.6 Trillion Deposit Outflows)

Bank of America: Stablecoins Will Compress Bank Lending Profit Margins

Moynihan describes stablecoins as similar to money market funds, with funds mainly held in short-term U.S. Treasuries and other low-risk assets, rather than converted into loans to businesses or households. From a bank’s perspective, this means funds are isolated outside the system and cannot generate leverage through lending:

If users withdraw deposits, banks can only turn to wholesale funding (wholesale funding) or other market sources to maintain lending levels, but these sources typically have higher costs, which will squeeze bank profit margins.

Profit Reality Under the Spotlight: Why Do Banks Oppose Stablecoin Interest?

In response, Dragonfly investor Omar pointed out that the long-term deposit interest rates in the U.S. banking system remain extremely low: average savings account interest rates are below 0.5%, and checking accounts are close to zero; meanwhile, U.S. Treasury yields are approaching 4%. The over 3 percentage point gap between these rates is the zero-cost interest margin that banks have long earned.

Nic Carter, partner at Castle Island Ventures, provided a more specific figure: “Just the top six U.S. banks earn a net interest income (NIM) of up to $250 billion annually.”

In this context, if stablecoins can directly pass the entire yield of government bonds back to users, it effectively redistributes the profits originally concentrated within the banking system back to the capital providers themselves. This explains why banks generally oppose passive interest payments on stablecoins.

Legislative Compromise: Prohibiting Interest for Mere Holding, Encouraging Investment Behaviors

The current Senate discussion on the Crypto Market Structure Bill aims to strike a balance between banks and the crypto industry. The draft explicitly bans the model of “earning interest solely by holding stablecoins,” but also allows rewards linked to specific activities such as staking, providing liquidity, or asset collateralization.

This design differentiates the roles of stablecoins in “investment activities” versus “deposits,” but with industry giants like Coinbase pushing back, whether this classification will be accepted by the market remains to be seen.

Stablecoin interest as a systemic debate over “fund ownership and revenue sharing” has always been a key point of contention between regulation and innovation. When traditional banks rely long-term on low-interest deposits to painlessly earn interest margins, any alternative that allows users to directly access risk-free yields is bound to provoke resistance from vested interests.

Today, this tug-of-war is also expected to lead the transformation of the current financial system.

This article, starting from Bank of America’s warning: How the Stablecoin Interest Dispute Unveils the Rich Profit Structure of Bank Deposit Margins, first appeared on Chain News ABMedia.