ECB, US banks sound alarm as stablecoins threaten deposits

The European Central Bank, led by Executive Board member Piero Cipollone, has sounded alarms over stablecoins as a significant threat to traditional banking stability, warning that increased stablecoin adoption could drain retail deposits essential for banks’ lending activities. Cipollone emphasized that deposits are the "raw material banks use to extend credit to businesses and homebuyers," highlighting the risk that stablecoins, by siphoning off these deposits, could undermine banks’ ability to finance the real economy. To mitigate this, the ECB plans to impose guardrails on the digital euro, such as no interest payments and holding limits, ensuring it does not itself become a source of liquidity risk to banks.

In response to the deposit drain threat, the ECB has launched a digital euro pilot involving 36 payment providers, including major banks Deutsche Bank and UniCredit, aiming to integrate the digital euro into the existing banking ecosystem rather than replace it. By distributing the digital euro through commercial banks, the ECB enables these institutions to retain customer accounts, earn interchange fees, and keep transaction data, thereby preserving their central role in payments and customer relationships. This pilot, set to begin in the second half of 2027 and extend to 2029, reflects a strategic effort to counterbalance stablecoin-driven outflows and protect banks’ retail deposit base.

While the digital euro is often presented as a payment innovation, there is an ongoing debate about its true primary purpose, with many experts viewing it chiefly as a defensive measure to safeguard banks from the erosion of deposits, fees, and transaction data caused by mobile payments, fintech startups, and stablecoins. Cipollone described the digital euro as "the structural answer" to these challenges, underscoring that beyond enhancing payment systems, the initiative aims to preserve banking stability by preventing stablecoins from disintermediating traditional banks. This dual narrative raises questions about whether the ECB’s digital euro is more about protecting incumbents than fostering innovation.

Despite Europe’s robust regulatory framework under MiCA, the ECB acknowledges that stablecoin adoption is propelled more by liquidity and network effects than regulation, limiting Europe’s ability to promote euro-denominated stablecoins over dominant dollar-backed alternatives. This dynamic intensifies the urgency for the digital euro pilot as a strategic countermeasure to stablecoins’ growing influence, which perform key banking functions such as payments and transaction settlement, thereby threatening the traditional deposit base and complicating monetary policy transmission and currency stability.

Circle's recent approval by the U.S. Office of the Comptroller of the Currency to establish a national trust bank marks a pivotal regulatory milestone, enabling it to offer federally supervised digital asset custody and settlement services under the same framework as traditional national trust banks. This new entity, Circle National Trust, operates without engaging in retail deposit-taking or lending activities, positioning USDC as a more credible and regulated stablecoin that facilitates institutional adoption without becoming a full-service bank.

Despite Circle’s federal trust bank status enhancing USDC’s regulatory credibility, banks express growing concern that the legitimization and institutional adoption of federally supervised stablecoins could accelerate a significant migration of deposits away from traditional banks. Standard Chartered projects that stablecoins like USDC could siphon up to $500 billion from U.S. bank deposits by 2028, potentially constraining credit availability and destabilizing the traditional banking sector’s funding model.

USDC’s reserve composition intensifies banks’ worries about stablecoin-driven deposit drains, as approximately 84% of its reserves are held in Treasury bills and overnight reverse repurchase agreements rather than traditional bank deposits. This structure channels funds away from local bank deposit bases, reducing stable funding sources for regional banks even though the dollars remain within the broader financial system, highlighting a subtle but impactful shift in how liquidity is allocated.

While Circle’s national trust bank charter allows fiduciary custody of digital assets under federal oversight, it notably refrains from traditional banking functions such as gathering retail deposits or issuing loans. This separation underscores ongoing uncertainties about how the rapid growth of stablecoins might indirectly weaken local bank funding and disrupt conventional lending channels, raising critical questions about the future interplay between stablecoins and traditional banking.

US regulators and banking groups have raised alarms that stablecoins, particularly federally supervised ones like Circle's USDC, could siphon up to $500 billion in deposits from traditional US banks by 2028, posing significant risks to local bank funding and credit availability. This concern is underscored by a December 2025 Federal Reserve note estimating that stablecoin adoption might reduce lending by anywhere from $65 billion to $1.26 trillion, depending on how widely stablecoins are adopted and where their reserves are held. Such a massive shift threatens the traditional banking model, which relies on stable, low-cost deposits to fund lending activities.

The core of the banking sector’s unease lies in stablecoins’ ability to offer interest-like yields without being subject to the capital, liquidity, and supervisory requirements that banks endure. Banking groups argue that this creates a functional substitute for interest-bearing deposits, enabling stablecoins to attract consumer and business cash away from checking and savings accounts into tokens backed largely by Treasury securities and overnight repos. This reallocation of funding away from local banks undermines their cheap and stable deposit base, which is crucial for extending credit to communities and businesses.

The legitimization of Circle’s USDC through its federal trust bank charter has intensified banking sector concerns, as it signals deeper institutional adoption without the stablecoin issuer taking on traditional banking roles like retail deposit-taking or lending. Banks view this regulatory endorsement as sharpening competition for deposits, since stablecoins can now operate within serious financial infrastructure while sidestepping the regulatory burdens that constrain banks. Consequently, banking groups have lobbied for legislative changes, such as amendments to Section 404, to prohibit stablecoin companies from offering yield or rewards that could further drain deposits from community lenders and weaken credit provision.

These warnings are not confined to the US; European voices, including European Central Bank executive board member Piero Cipollone, have echoed similar concerns about stablecoin-driven deposit drains weakening banks’ ability to provide credit. Cipollone’s remarks add an international dimension to the debate, highlighting that as stablecoins grow, they could erode traditional deposit bases on both sides of the Atlantic, complicating regulatory negotiations such as those surrounding the US CLARITY Act and prompting central banks like the ECB to pilot digital euros as a countermeasure to preserve banking stability.