Stablecoin deposit flight is the risk bank directors raise first when the GENIUS Act comes up, and it is usually discussed as a single number: how much money leaves. Federal Reserve staff analysis suggests the more useful question is where the money goes after it leaves, because that decides whether the banking system loses deposits or only loses the kind of deposits it wants.
This article summarizes that analysis, sets out what the law already does to limit the risk, and describes three responses a community bank can choose between. None of them requires waiting for the rules to be final.
What the Federal Reserve analysis says
A FEDS Note published on December 17, 2025 works through how stablecoin adoption could affect deposits, funding and credit. It reflects the author's views and not those of the Board. Its central point is that the outcome turns on reserves.
- If customers convert deposits into stablecoins and the issuer holds its reserves in Treasury bills or similar assets, deposits leave the banking system.
- If the issuer places a large share of its reserves back with banks as deposits, the total may hold up while the mix changes. Retail deposits that tend to stay put are replaced by large, uninsured wholesale deposits from a small number of issuers.
- Those wholesale balances can move quickly in response to market signals or redemption activity, so a bank that looks fully funded can still be less stable.
The note also finds that exposure is uneven. Banks with diversified funding and the capacity to offer tokenized deposits or serve issuers are better placed than those without either. For a community bank the conclusion is uncomfortable but useful: relationship deposits are an advantage only as long as the account remains the place where customers want their money to sit and move.
What the law already does
Two provisions limit how closely a payment stablecoin can imitate a bank account.
First, section 4 of the GENIUS Act prohibits a permitted issuer from paying the holder any form of interest or yield. A stablecoin is built for payment, and the statute keeps it there.
Second, a stablecoin is not a deposit. Under the FDIC's April 2026 proposal, deposits held as reserves backing a stablecoin would not be insured to stablecoin holders on a pass-through basis. A customer who moves from a bank account to a stablecoin gives up deposit insurance. A deposit remains insured, subject to ownership category and limits, whatever technology records it.
These provisions do not remove the risk. They define the ground a bank can compete on: interest, insurance and the customer relationship.
Three responses open to a community bank
| Response | Effect on deposits | What it requires |
|---|---|---|
| Offer a tokenized deposit | Balances stay on the bank's books as deposits and can pay interest | A ledger for the bank's verified customers, reconciled to the core |
| Serve stablecoin issuers | Brings in reserve deposits that are large and can leave fast | Concentration limits, liquidity planning and custody controls |
| Issue a stablecoin through a subsidiary | Moves balances into reserves held under the subsidiary's regime | Approval as a permitted issuer, capital, reporting and monthly examination |
A tokenized deposit is the direct answer to deposit flight because it gives customers what draws them to stablecoins, instant movement at any hour, without the money leaving the bank. The legal position is covered in are tokenized deposits FDIC insured.
Serving issuers turns the threat into a business line, and the Federal Reserve's September 2026 proposal includes rules for firms that safekeep the assets backing stablecoins. The funding it brings behaves differently from retail deposits and should be limited and stress tested accordingly.
Issuing a stablecoin makes sense when customers need to pay counterparties outside the bank, across borders or on open networks. It is the heaviest option and it does not keep the balance as a deposit.
The responses are not exclusive. A bank can keep deposits tokenized for its own customers and let them convert to a stablecoin only when a payment has to leave. We describe the two instruments and how they fit in tokenized deposits vs stablecoins, and our Regulated Money Platform runs both on one compliance backbone.
Payments are where customers decide
Customers rarely move money because of a balance sheet argument. They move it because sending a payment from somewhere else is faster or simpler. A person who pays a contractor from a nonbank app on a Saturday night has already started to treat that app as the account.
The practical defense is a payment experience inside the bank's own brand that settles instantly between customers and reaches outside the bank when needed. Our white-label payments product is designed for that purpose, with the bank's compliance controls underneath.
Questions for the next ALCO meeting
- What share of our deposits is transactional, and how much of that belongs to customers who already use nonbank payment apps or crypto platforms?
- Do our outgoing transfers show a pattern of funds moving to stablecoin issuers or exchanges, and is it growing?
- If we accepted reserve deposits from an issuer, what concentration limit would we set and how would we fund a sudden withdrawal?
- Which instrument would we offer first, and to which customers?
- Who would operate it, and can we verify that the bank keeps control of the keys and the stop button?
If those questions do not have owners yet, that is the first decision. Talk to us when you are ready to look at a specific design.
Frequently asked questions
Will stablecoins take deposits away from community banks?
It depends on where issuers hold their reserves. Federal Reserve staff analysis from December 2025 finds that deposits leave the system when reserves are held in Treasury bills, and that the mix shifts toward volatile wholesale deposits when reserves are placed back with banks. Either way, banks that rely on retail transaction balances have a reason to act.
Can a payment stablecoin pay interest to holders?
No. Section 4 of the GENIUS Act prohibits a permitted payment stablecoin issuer from paying the holder any form of interest or yield. A bank deposit, including a tokenized deposit, may pay interest. That difference is one of the few structural advantages the law gives to the deposit account.
Are stablecoin reserves held at a bank covered by deposit insurance?
Reserves placed with a bank are deposits of the issuer, covered like any depositor's funds up to the standard limit. Under the FDIC's April 2026 proposal they would not be insured to the individual stablecoin holders on a pass-through basis. For the bank, such balances are large, mostly uninsured and can leave quickly.
What is the simplest response for a small bank?
Give customers instant payments inside the bank before they look for them elsewhere. A tokenized deposit for the bank's own verified customers keeps balances on the books as deposits, can pay interest and remains insured subject to ownership category and limits. It does not require approval as a stablecoin issuer.
This article is general information, not legal advice or a funding forecast. Consult your counsel, your ALCO and your primary regulator before changing your funding strategy.