Rising US bank deposit rates are associated with slower growth in the stablecoin market, according to a new working paper from the Bank for International Settlements (BIS), the Basel-based institution owned by central banks and often described as the central bank for central banks. Researchers found that stronger returns on bank deposits may dampen demand for dollar-backed digital tokens, with Circle's USDC showing greater sensitivity to deposit rate changes than Tether's USDT. The findings, however, do not establish that stablecoins have reduced overall bank deposits or lending.

Higher Deposit Rates Linked to Slower Stablecoin Growth

The study, titled "Are Stablecoins and Bank Deposits Substitutes?", analyzed 339 weekly observations and concentrated on reserve-backed stablecoins, including USDT and USDC. Stablecoins are digital tokens designed to hold a steady value against a fiat currency such as the US dollar, with each token backed by reserves. The researchers compared movements in deposit rates with changes in stablecoin market capitalization over subsequent weeks.

The results indicated that a one-basis-point increase in deposit rates predicted slower stablecoin growth over the following ten weeks. Under the baseline model, cumulative growth declined by roughly three percentage points—from an average of 15% to 12%. A basis point equals 0.01 percentage point. Notably, the estimate reflects slower growth rather than a three-percent contraction in the existing stablecoin market value. The substitution logic is straightforward: because stablecoins during the study generally paid no direct interest to holders, higher deposit rates made conventional bank balances comparatively more attractive.

To isolate the effect of deposit pricing from broader market conditions, the researchers controlled for Bitcoin prices, Treasury yields, federal funds rates, dollar movements, and wider financial market volatility.

USDC Shows Stronger Response Than USDT

Separate estimates revealed that USDC responded more sharply than USDT when bank deposit rates rose. At the ten-week mark, baseline estimates pointed to a reduction of approximately 4.8 percentage points for USDC, compared with roughly 1.9 percentage points for USDT.

The authors attributed the gap to differences in each token's user base. USDC maintains closer ties to US institutions and decentralized finance activity, while USDT enjoys broader usage in offshore markets and developing economies.

An alternative statistical approach yielded a larger estimated effect for the overall stablecoin market, suggesting approximately nine percentage points slower ten-week growth following a one-basis-point increase. That estimate, however, rests on additional statistical assumptions. A comparison with non-stablecoin cryptocurrencies found no statistically significant corresponding response to deposit rate changes.

The researchers also examined differences among deposit products and assessed periods surrounding major crypto market disruptions. The findings remained broadly consistent across several robustness checks, including adjustments for decentralized finance lending yields.

Researchers Caution Against Claims of Bank Deposit Losses

Despite evidence of competition between stablecoins and deposits, the paper did not measure bank withdrawals attributable to stablecoin adoption. Its market-level data cannot identify which customers moved funds or which banks were affected.

Stablecoin issuers may also reinvest reserves within the banking system. Consequently, shifts in stablecoin balances could redistribute deposits across institutions without reducing total deposits.

The study period presents another limitation. The available data spanned only one prolonged high-interest-rate episode, leaving uncertainty about how the relationship behaves under different monetary conditions.

The authors further cautioned that yield-bearing stablecoins could alter how holders respond to deposit rates, since their findings primarily reflect a market in which stablecoins generally paid no direct interest to holders.

For banks and policymakers, the research suggests that deposit pricing can influence demand for stablecoins. The paper represents the views of its authors and not necessarily those of the BIS or its member central banks.