US Banks Want SEC to Weigh Crypto’s Deposit Cost
Stablecoin purchases can move deposits from local banks to the large banks holding issuer reserves. Community bankers want the SEC to study that shift before finalizing a crypto rule.
Key Takeaways
- Community bankers want deposit analysis before SEC rule.
- Group says crypto exemptions could boost stablecoin use.
- USDC reserve cash sits mostly at major banks.
- Higher deposit rates preceded slower stablecoin growth.
In a comment letter filed on October 20, the last day for comments, the Independent Community Bankers of America (ICBA) asked the SEC not to finalize Regulation Crypto Assets until it studies the rule’s effect on community-bank deposits and local lending.
What the SEC proposed and what ICBA wants
The proposal, published in the Federal Register on August 21, would exempt certain crypto-linked investment contracts from Securities Act registration in exchange for principles-based disclosures. One exemption covers raises of up to $5 million over four years; a second allows up to $75 million in each 12-month period. A conditional safe harbor would also let a token stop being treated as subject to an investment contract.
The rule covers securities offerings, not stablecoins. ICBA connects the two through the rule’s purpose. Cheaper, less risky issuance is meant to bring more tokens, trading and participants, and the letter argues that much of that activity runs on stablecoins, which serve as trading pairs, collateral and the bridge between bank money and blockchains. More trading, by that logic, means more stablecoin balances funded from community-bank accounts.
The letter also describes a slower pathway. The SEC wants exempted tokens to spread quickly and build network effects, and ICBA argues those networks could eventually carry payments that compete with checking accounts.
ICBA does not claim this proposal alone would drain a measurable sum. It frames the risk as cumulative, with the rule sitting alongside other SEC work on trading platforms, custody, broker-dealer treatment and tokenization, and says it sees no analysis of what that combined package means for bank funding. The group grounds its request in Section 2(b) of the Securities Act, which requires the SEC to weigh efficiency, competition and capital formation. In ICBA’s view, capital formation should also count deposits diverted from small-business and farm lending.
The deposits don’t vanish – they change banks
Take a customer who moves $10,000 from a community bank to buy newly issued stablecoins, where the issuer keeps the backing cash at a large bank:
Loses a $10,000 retail deposit
Issues $10,000 in tokens
Gains a $10,000 institutional balance
If the issuer buys Treasury bills instead, part of the money can still return to banks, because the dealers selling the bills deposit the proceeds. Federal Reserve staff economists, in a May note reflecting their own views rather than Fed policy, conclude that stablecoins can change the mix of deposits without shrinking the total one-for-one.
That change in mix is what worries local lenders. ICBA separates lasting losses from one-off trades: “The concern is durable displacement, not merely a one-time transfer.” Buying existing tokens shifts dollars from the buyer’s bank to the seller’s. The risk is customers who start keeping working balances in stablecoin wallets instead of local checking accounts.
Those balances can pool at a few institutions. Circle says most of the USDC reserve is held in a government money market fund managed by BlackRock, with the remaining cash mostly at a handful of the world’s largest banks. A September 2025 Fed survey of senior bank finance officers, cited in the same note, found that about 40% of respondents plan to prioritize holding reserve assets for stablecoin issuers. ICBA warns that such balances may be more rate-sensitive and quicker to move than local operating deposits.
What losing them costs a community lender
ICBA’s members lend to small businesses, farmers, ranchers and homebuyers, many of whom have few other credit options, and local deposits fund that lending. When an operating account leaves, the letter says, a bank loses both the funding and its payment relationship with the customer, and replacement funding may cost more. Smaller banks, it adds, have fewer replacement options and less room to absorb outflows that persist.
A hypothetical funding gap
low-cost deposits lost
cost of replacement funding
extra interest per year
A bank can absorb that as lower profit, charge more on loans, or drop loans whose margins no longer cover the cost. The figures are illustrative, not an estimate of stablecoin losses.
ICBA puts a far larger figure on the wider stablecoin threat. In earlier letters to the OCC and FDIC on GENIUS Act rules, it modeled a scenario in which stablecoin yield or rewards draw up to $1.3 trillion from community banks and cut their lending capacity by about $850 billion. It says those numbers do not estimate this SEC rule, which would work through a different route. For the link between deposits and credit, it cites University of Pittsburgh professor Leming Lin, whose research found that stock market booms slow deposit growth and tighten credit for small private firms.
Banks can compete on price – at a cost
A BIS working paper published on October 13 shows the lever banks hold. Rashad Ahmed and Iñaki Aldasoro used weekly US data from January 2019 to June 2025 and found that higher deposit rates were followed by slower stablecoin growth, making the two partial substitutes. The effect was stronger for USDC than for USDT, which the authors link to USDC’s closer ties to US depositors.
That supports the case that banks can compete with stablecoins by paying savers more. For community banks, it is also a trade-off: higher deposit rates raise the same funding costs ICBA wants the SEC to examine. The May Fed note makes a similar point, saying competition for liquid balances could lift deposit rates or squeeze bank margins.
Smaller banks have adapted more slowly in earlier contests, according to the same note. When money market funds drew savings away in the 1970s and early 1980s, many community banks lacked the scale to offer sweep accounts or matching rates. In digital payments, large banks built rival products earlier, while smaller ones often relied on third-party providers. The authors also observe that banks lobbied against money market funds then, as they press for limits on stablecoins now.
Some evidence cuts the other way. Foreign demand for dollar stablecoins can add deposits at US banks when issuers hold reserves domestically, the Fed economists write. The BIS paper, for its part, tracks where savers put their money and does not show that stablecoin growth reduces total deposits or lending.
What would settle the question
With comments closed, ICBA’s case is now part of the SEC’s record. Testing it would take bank-level data: which lenders lose balances for good, which collect the reserves, what replacement funding costs, and whether local lending slows as a result. National totals would reveal little, since the money can stay in the system while changing hands. For community banks, the outcome turns on two prices: what it costs to replace lost deposits, and what it costs to keep them.
This article is for informational purposes only and does not constitute financial, legal or investment advice.
Alex is Editor-in-Chief of Coindoo and co-founder of Millennial Media Group, with nearly a decade of experience covering financial markets - crypto first, then everything else. It started in 2016 with Bitcoin. Like most people at the time, he didn't fully understand it - so he kept digging. Blockchain, tokenomics, the projects, the cycles. That curiosity never stopped, and eventually pulled him into traditional markets too: equities, commodities, macro. Not because he left crypto behind, but because you can't properly understand one without the other. What drives him is straightforward: he wants to know why something is happening, not just that it's happening. Most market coverage stops at the headline - price up, price down, here's a chart. Alex finds that kind of reporting actively unhelpful. If you walk away from an article without understanding the mechanism behind the move, what did you actually learn? He holds a degree in Tourism from New Bulgarian University - not the most obvious path into financial markets, but markets have a way of pulling in people who are simply too curious to stay out. He has authored over 200 in-depth analyses and more than 10,000 articles across crypto and traditional finance. He still thinks every day in markets teaches him something new. That's probably why he hasn't stopped.
