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Buying a stablecoin does not automatically erase a dollar from the banking system. The dollar may move into an issuer’s bank account, or a Treasury seller may receive a bank deposit when the issuer buys bills. But the transfer can change who holds deposits, how quickly those funds may move, and how much liquidity a bank keeps available. Those changes can raise banks’ funding costs or constrain lending, even when aggregate deposits do not fall dollar for dollar.
What does it mean for stablecoins to “drain” bank deposits?
“Drain” can mean two different things: a decline in total commercial-bank deposits, or a change in the ownership and reliability of those deposits. Stablecoin purchases do not necessarily cause the first. They can still contribute to the second, which matters because banks use deposits as a source of funding and liquidity.
The outcome depends on the stablecoin issuer’s reserves, how the purchase settles, and what happens to the money received by the other party. A dollar that moves from a household account to an issuer’s account remains a bank deposit, but it is now held by a different customer. If deposits instead settle outside commercial banks, aggregate bank deposits can fall—at least until later transactions bring funds back.
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Where does the dollar go when someone buys a stablecoin?
If the issuer holds bank deposits
Suppose a customer pays $100 from a bank account to buy $100 of stablecoins, and the issuer keeps the corresponding reserve in a commercial-bank deposit. The customer’s deposit falls by $100 and the issuer’s deposit rises by $100. In this simplified case, the banking system’s total deposits do not change; ownership does.
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That accounting does not make the change irrelevant. A bank may lose many smaller customer deposits and gain a larger balance from an issuer. The issuer’s funds may be uninsured wholesale funding, concentrated at particular banks, and more exposed to large or rapid redemptions than a diversified pool of household accounts. The Federal Reserve’s Jessie Jiaxu Wang noted in December 2025 that reserve management “should critically influence the net effect on bank deposits.”
If the issuer buys Treasury bills
An issuer may use customer payments to buy short-term Treasury bills instead of keeping all reserves as bank deposits. The seller receives the payment, which may become a deposit at a commercial bank. So a purchase can shift deposits between parties rather than remove them from the system. The final effect depends on where the seller holds the proceeds and whether they later move elsewhere.
Settlement outside the commercial-bank system can reduce deposits temporarily. The Council of Economic Advisers (CEA) notes that some outflows, including settlement to the Treasury General Account, can reverse when the Treasury spends. The source of the stablecoin buyer’s funds also matters: the buyer may be selling a bank deposit, another financial asset, or something else. The Kansas City Fed’s 2025 analysis cautions that the resulting demand for bank loans and Treasuries depends on those flows and on what sellers do with the proceeds.
How can deposits stay in the system while lending gets harder?
Banks do not lend out deposits mechanically, dollar for dollar. But deposits are one way they fund assets, and changes in the amount, location, and stability of that funding can affect bank decisions. If a bank loses relatively stable retail funding and must replace it with more expensive funding, its funding expense can rise. If it instead holds extra reserves to manage potential payment or redemption demands, less of its balance sheet may be available for loans or other assets.
Those channels can affect the supply or price of credit, but they are not interchangeable. A higher bank funding cost does not automatically mean borrowers’ interest rates rise by the same amount. The pass-through depends on competition, other funding options, loan demand, capital and liquidity requirements, and monetary conditions. The studies discussed below address particular bank or model outcomes; they do not establish a universal increase in borrower rates.
What has the evidence found so far?
| Analysis | Question and result | What the finding does—and does not—show |
|---|---|---|
| New York Fed Staff Report 1185, Lee and Tou, February 2026 | At banks partnered with stablecoin issuers, interbank payment activity rose 67% in the nine months after new partnerships. A one-standard-deviation increase in primary-market activity corresponded to about $280 million in additional Fedwire payment activity at the average treated bank relative to controls. Partner banks retained about $1.5 billion in additional reserves in the subsequent period, and their loan share fell 14 percentage points relative to the control group. | The authors connect issuer-related activity to payment liquidity and report that “partner banks’ loan share of assets contracts relative to peers.” The results concern identified partner banks, not total U.S. lending or all stablecoin issuers. The report labels its findings preliminary. |
| CEA, “Effects of Stablecoin Yield Prohibition on Bank Lending,” September 2026 | In a modeled $300 billion stablecoin-market scenario, prohibiting yield shifts $54 billion from stablecoins to traditional bank deposits and raises modeled lending by about $2.1 billion, or 0.02%. The CEA estimates an annual household cost of about $800 million, net of the modeled lending gain. | This is a model of a particular policy scenario, not an observed outcome or a prediction that every stablecoin purchase reduces lending. The CEA’s accounting point is that “The household’s deposit is not destroyed”; its model nevertheless allows funding composition and bank constraints to affect lending. |
| Kansas City Fed, “Stablecoins Could Increase Treasury Demand, but Only by Reducing Demand for Other Assets,” 2025 | Under assumptions that current bank and issuer asset mixes persist and a marginal dollar shifts from banks to issuers, its calculation indicates about $0.50 less lending and $0.30 more Treasury holdings per additional $1 of stablecoins. | This is an illustrative portfolio-accounting scenario, not a measured universal multiplier or an estimate of loan pricing. The result changes if stablecoin purchases come from other assets or Treasury sellers use proceeds differently. |
The New York Fed paper examines payment activity and liquidity at partner banks; the CEA models the effect of a yield prohibition under a specified market-size scenario; and the Kansas City Fed traces an assumed shift in asset holdings. Their results are not a direct head-to-head test, and they should not be combined into one forecast for the banking system.
How large is the market in the dated evidence?
The Federal Reserve’s May 2026 Financial Stability Report said stablecoin assets grew 16% between July 2025 and the end of 2025 and stood at about $320 billion when the report discussed them. That is the report’s then-current figure, not a live total for October 2026. The report describes reserves that typically include Treasury bills and other short-term instruments, while noting that some stablecoins also contain loans or other digital assets. Reserve mixes therefore cannot be assumed to be identical across issuers.
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- Reserve allocation: Deposits, Treasury bills, repo, money-market fund shares, and central-bank balances have different effects on bank deposits and liquidity.
- Settlement destination: The seller or recipient of a payment may keep proceeds in a bank, move them elsewhere, or spend them later. That determines whether a deposit shift is temporary or sustained.
- Funding concentration and behavior: Replacing many diversified accounts with a few large issuer balances can make some banks more exposed to rapid, correlated flows.
- Payment and redemption timing: A bank serving an issuer may keep precautionary reserves for fast settlement needs, even as it benefits from the issuer’s deposits.
- Bank constraints and monetary conditions: Capital, liquidity rules, alternative funding costs, and whether reserves are ample or scarce can change how a bank responds.
- Scale and policy: The larger the flows, the more likely they are to matter for bank balance sheets; rules affecting issuer reserves or holder returns can also change the incentives and channels.
The GENIUS Act, signed in July 2025, established a federal framework for payment stablecoins. The CEA’s September 2026 analysis discusses the prohibition on issuers paying yield directly to holders and the debate over affiliate or third-party yield arrangements. The Federal Reserve’s May 2026 report said agencies were then drafting rules on core provisions including reserve transparency and redemption rights; that describes the status reported at that time, not a claim about later rulemaking developments.
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