The Catfish Effect Emerges: Stablecoins Are Forcing the Banking System to Improve Efficiency and Interest Rates

Author: Christian Catalini, Forbes

Translation: Peggy, BlockBeats

Original Title: Catfish Effect? Are Stablecoins Really Not the Enemy of Bank Deposits

Editor’s Note: Whether stablecoins will impact the banking system has been one of the most central debates in recent years. But as data, research, and regulatory frameworks become clearer, the answer is becoming more measured: stablecoins have not triggered large-scale deposit outflows, and under the real-world constraint of “deposit stickiness,” they have instead become a competitive force pushing banks to improve interest rates and efficiency.

This article approaches stablecoins from a banking perspective, offering a new understanding. They are not necessarily a threat, but rather a catalyst that may force the financial system to self-update.

Below is the original text:

In 1983, a dollar sign flashed on an IBM computer monitor.

Returning to 2019, when we announced the launch of Libra, the global financial system’s reaction was, quite frankly, quite intense. The near existential fear was: if stablecoins can be used instantly by billions of people, will the control of banks over deposits and payment systems be completely broken? If you can hold a “digital dollar” on your phone that can transfer instantly, why would you keep your money in a zero-interest, fee-heavy, weekend-closed checking account?

At that time, this was a perfectly reasonable question. For years, mainstream narratives have held that stablecoins are “stealing banks’ lunch.” There was concern that “deposit loss” was imminent.

Once consumers realize they can directly hold digital cash backed by government bonds, providing low-cost funds to the US banking system, that foundational system would quickly collapse.

However, a recent rigorous study by Professor Will Cong of Cornell University shows that the industry may have overreacted in panic. By examining real evidence rather than emotional judgments, Cong presents an counterintuitive conclusion: under proper regulation, stablecoins are not deposit drainers but rather complementary to traditional banking systems.

“Sticky Deposits” Theory

The traditional banking model is essentially a gamble built on “friction.”

Since checking accounts are the only truly interoperable hub for funds, any transfer of value between external services must almost always go through banks. The design logic of the entire system is: as long as you don’t use a checking account, operations become more complicated — banks control that single bridge connecting the fragmented “islands” of your financial life.

Consumers are willing to accept this “toll” not because checking accounts are inherently superior, but because of the power of the “bundling effect.” Putting money in a checking account is not because it is the best place for funds, but because it acts as a central node: mortgage, credit cards, direct salary deposits, all interconnect and operate in coordination here.

If the claim that “banks are about to disappear” were true, we should have already seen large amounts of bank deposits flowing into stablecoins. But reality is not so. As Cong points out, despite explosive growth in stablecoin market cap, “existing empirical research has almost found no clear correlation between the emergence of stablecoins and bank deposit outflows.” Friction mechanisms remain effective. To date, the proliferation of stablecoins has not caused substantial outflows from traditional bank deposits.

The facts prove that warnings about “massive deposit flight” are more about existing vested interests’ panic-driven exaggeration, ignoring the most basic physical laws of economics in the real world. Deposit stickiness is an extremely powerful force. For most users, the convenience of “bundled services” is too valuable — so valuable that they are unwilling to transfer their life savings into a digital wallet just for a few basis points of extra yield.

Competition as a Feature, Not a System Flaw

But real change is happening here. Stablecoins may not “kill banks,” but it is almost certain they will make banks uneasy and force them to improve. This study from Cornell indicates that even the mere existence of stablecoins already imposes a discipline constraint, compelling banks to no longer rely solely on customer inertia, but to offer higher deposit rates and more efficient, refined operations.

When banks face a credible alternative, the cost of complacency quickly rises. They can no longer assume that your funds are “locked in,” but must attract deposits with more competitive prices.

Within this framework, stablecoins will not “make small cakes,” but rather promote “more credit issuance and broader financial intermediation, ultimately enhancing consumer welfare.” As Professor Cong states: “Stablecoins are not meant to replace traditional intermediaries but can serve as a complementary tool, expanding the scope of banking’s core business.”

Evidence shows that the “exit threat” itself is a powerful motivator for existing institutions to improve services.

Regulatory “Unlocking”

Of course, regulators have ample reason to worry about the so-called “run risk” — that is, if market confidence wavers, the reserves backing stablecoins might be forced to be sold, triggering systemic crises.

But as the paper notes, this is not an unprecedented risk; it is a standard long-standing risk in financial intermediation, highly similar in essence to risks faced by other financial institutions. We already have a mature framework for liquidity management and operational risk. The real challenge is not “inventing new physical laws,” but correctly applying existing financial engineering to a new technological form.

This is where the GENIUS Act plays a key role. By explicitly requiring stablecoins to be fully backed by cash, short-term US Treasuries, or insured deposits, the law makes a hard regulatory requirement for safety. As the paper states, these safeguards “appear to cover the core vulnerabilities identified in academic research, including run risk and liquidity risk.”

This legislation sets a minimum statutory standard for the industry — full reserves and enforceable redemption rights — but the specific implementation details are left to banking regulators. Next, the Federal Reserve and OCC will be responsible for translating these principles into enforceable regulatory rules, ensuring stablecoin issuers fully account for operational risks, custody failures, and the complexities inherent in large-scale reserve management and blockchain integration.

On July 18, 2025 (Friday), US President Donald Trump demonstrates the recently signed GENIUS Act at a signing ceremony in the East Room of the White House.

Efficiency Dividend

Once we move beyond defensive thinking about “deposit diversion,” the true upside potential becomes apparent: the “underlying infrastructure” of the financial system itself is at a stage where reconstruction is necessary.

The real value of tokenization is not just 24/7 availability, but “atomic settlement” — achieving instant cross-border value transfer without counterparty risk, which has long been a challenge for the financial system.

Currently, cross-border payment systems are costly and slow, often taking days for funds to move through multiple intermediaries before final settlement. Stablecoins compress this process into a single on-chain, ultimately irreversible transaction.

This has profound implications for global fund management: funds no longer need to be trapped for days “in transit,” but can be transferred instantly across borders, releasing liquidity that is currently long occupied by correspondent banking systems. Domestically, similar efficiency improvements suggest lower costs and faster merchant payments. For banks, this is a rare opportunity to update the long-dependent, tape-and-COBOL-based traditional clearing infrastructure.

Upgrade of the US Dollar

Ultimately, the US faces a binary choice: either lead the development of this technology or watch the future of finance take shape in offshore jurisdictions. The dollar remains the world’s most popular financial product, but the “track” supporting it is clearly aging.

The GENIUS Act provides a truly competitive institutional framework. It “localizes” this domain: by bringing stablecoins into the regulatory perimeter, the US transforms what was once a shadow banking concern into a transparent, robust “global dollar upgrade plan,” turning an offshore novelty into a core part of domestic financial infrastructure.

Banks should no longer obsess over competition itself but start thinking about how to turn this technology into an advantage. Just like the music industry was forced to move from CDs to streaming — initially resisting, but eventually discovering it was a gold mine — banks are resisting a transformation that will ultimately save them. When they realize they can charge for “speed” rather than profit from “delay,” they will truly learn to embrace this change.

A New York University student downloads music files from Napster on a computer in New York. On September 8, 2003, the RIAA sued 261 file-sharing users who downloaded music via the internet; additionally, the RIAA issued over 1,500 subpoenas to internet service providers.