Written by: Prathik Desai
Compiled by Chopper, Foresight News
Throughout the long history of banking, depositors have always been in a disadvantaged position. People deposit their funds into banks, which then lend out these funds, earning returns many times greater than the interest paid to depositors. Depositors accept this model because they have no better alternative: holding cash only leads to a continuous erosion of its value over time.
Currently, the average interest rate for standard U.S. savings accounts is only 0.6%, whereas investing in U.S. Treasury securities and money market funds yields at least 4%. This traditional model has sustained itself over the long term because savers have consistently lacked convenient alternatives. However, every few decades, the market introduces new options.
Stablecoins enable 24/7 circulation on the blockchain, with transactions settling in seconds and transfer costs under one cent. Although regulations prohibit stablecoin issuers from directly paying interest to holders, the composability of decentralized finance allows users to deposit stablecoins into lending protocols and earn annualized returns of 5% to 8%. This provides savers with a new destination for their funds—without compromising on convenience.
In this article, we will analyze the measures banks are taking to prevent deposit outflows and how this transformation will reshape the global banking and capital flow landscape.
Depositor behavior
In 1977, Merrill Lynch, a wealth management and investment firm, introduced the Cash Management Account (CMA). At the time, U.S. Regulation Q capped bank deposit interest rates at no more than 5.25%, while U.S. Treasury yields exceeded 7%. Merrill Lynch identified a regulatory loophole and used the CMA to automatically transfer clients’ idle funds from their securities accounts into money market funds on a daily basis. Meanwhile, Merrill Lynch also provided clients with checking accounts and debit cards.
With the combination of multiple features, customers can enjoy high yields at the market level while also having the ability to withdraw funds at any time, just like using a checking account. As a result, money market funds experienced explosive growth, surging from approximately $4 billion in 1977 to $220 billion in 1982—a 55-fold increase—driven largely by massive outflows from bank deposits.
The banking industry immediately protested collectively. Eventually, the U.S. Congress repealed the interest rate caps under Regulation Q, allowing banks to introduce money market deposit accounts and regain deposits with higher yields. The entire process, from the introduction of cash management accounts to the removal of deposit interest rate restrictions, took nine years.
Today, technological innovations have reduced fund transfers to just a few minutes or less, and depositors are no longer willing to wait for long periods.
During the collapse of Silicon Valley Bank on March 8, 2023, depositors initiated withdrawal requests totaling $42 billion in less than eight hours, averaging approximately $1.5 million withdrawn per second. Over 85% of the bank’s deposits were uninsured, which was the primary reason for the concentrated bank run.
Cautious savers always move their funds to safer places where the money can at least maintain its value, and potentially grow.
Two digital dollars
In response to this issue, the market has developed two competing forms of digital dollar, each taking a distinctly different path: one removes funds from the banking system, while the other keeps them within the banking system, merely changing their form.
First type: Stablecoin
Taking USDC, issued by Circle, as an example, after users exchange U.S. dollars for USDC, the corresponding fiat funds are used to purchase U.S. Treasury securities, removing these funds from the bank’s balance sheet. This reduces the bank’s principal available for lending and earning interest spreads. At the same time, these funds no longer benefit from insurance coverage by the Federal Deposit Insurance Corporation (FDIC). If the stablecoin issuer ceases operations, holders may find it difficult to recover their principal.
The GENIUS Act, set to take effect in July 2025, establishes specific regulatory rules for the issuance and use of stablecoins, explicitly prohibiting issuers from paying interest to users—a regulatory approach mirroring the historical restrictions on deposit interest rates under Regulation Q. However, just as Merrill Lynch circumvented Regulation Q by leveraging money market funds to deliver higher returns, today’s stablecoin issuers are indirectly providing yields through reward programs, a practice currently under debate in the legislative discussions surrounding the CLARITY Act. In addition, users can also deposit their stablecoins into various lending protocols to earn returns on their own.
This is undoubtedly an existential threat to the banking industry. In the hours following the collapse of Silicon Valley Bank, massive deposits fled the banking system. Standard Chartered predicts that by 2028, up to $500 billion in bank deposits could gradually shift to stablecoins, with U.S. regional banks being hit hardest, as their revenues heavily rely on net interest margin businesses.
Even if the above predictions do not fully materialize, the trend of deposit outflows is already clear. Precisely for this reason, the four largest U.S. banks have joined forces for the first time in decades to explore new solutions.
Second: Tokenized deposits
The key advantage of stablecoins lies in their low transfer costs and sub-second settlement. To address this pain point, banks have introduced tokenized deposits.
Banks can convert users’ deposits into on-chain tokens that can be transferred efficiently and at low cost across blockchain networks. Meanwhile, the original USD deposits remain on the bank’s balance sheet, allowing the bank to continue lending and earning interest, while the tokenized deposits remain insured by the U.S. Federal Deposit Insurance Corporation.
Two major banking consortia have already formed in the market to jointly advance the implementation of tokenized deposits.
The first is a clearinghouse network, jointly built by over ten institutions including JPMorgan Chase, Citibank, Bank of America, and Wells Fargo, to create a unified tokenized deposit platform scheduled for official launch in the first half of 2027. Primarily targeting institutional clients, the platform will enable 24/7 settlement, programmable fund clearing, and cross-border payments, directly competing with stablecoins.
The second is the Cari Network, composed of five regional banks—Huntington, M&T, KeyCorp, First Horizon, and Old National—with a combined asset under management of approximately $780 billion. Leveraging ZKsync’s Prividium technology stack based on zero-knowledge proofs, the network is building a tokenized deposit platform for retail users, scheduled for launch in the fourth quarter of 2026. The early initiative by regional banks underscores the severity of deposit outflows caused by stablecoins, as these institutions heavily rely on net interest income for their survival.
So, which product will depositors ultimately prefer?
Based on past experience, depositors, when choosing products, often do not simply evaluate the product’s merits but instead prioritize the option that most easily alleviates their current financial constraints.
In the late 1970s, depositors’ primary concern was increasing returns. Although bank deposits were safe, they were constrained by Regulation Q and lost competitiveness as market interest rates rose. Merrill Lynch’s innovation was to break down the bank account into two core needs: a yield aligned with market levels, and the convenience of flexible daily access. Once regulatory restrictions on interest rates were lifted, major banks introduced money market deposit accounts that combined similar features.
Today, stablecoins offer advantages similar to those of Merrill Lynch’s products from the past: they operate independently of the traditional deposit system, enable global circulation, integrate with various crypto platforms, and allow idle funds to be put to programmable use. However, they also share the same limitations as money market funds of that era: they are not insured bank liabilities, and asset security depends entirely on the issuer, the structure of reserve assets, redemption channels, and the overall regulatory environment.
Tokenized deposits replicate the advantages of traditional banking from the 1980s: funds remain within the regulated banking system, preserving banks’ lending-based revenue model and maintaining the familiar deposit insurance mechanism. However, precisely because they adhere to banking regulations, tokenized deposits lack the openness, liquidity, and composability of stablecoins. While bank deposits can be accelerated and made programmable, fully adopting the open characteristics of stablecoins would cause banks to lose their core control over deposits.
Thus, the core of the competition between both parties has gradually evolved into a struggle over the authority to convert funds.
Under this context, a third development path has emerged, offering us a glimpse into the early forms of future banking and monetary systems.
The bridge of integration
On May 27 of this year, SoFi Bank officially launched SoFiUSD, the first stablecoin issued by a nationwide U.S. bank. The token is now live on the Ethereum and Solana blockchains, allowing SoFi’s 15 million users to exchange and use it via the mobile app. SoFiUSD offers all the standard features of a stablecoin: 24/7 liquidity, near-instant cross-border transfers, and transaction fees of just a few cents per transfer.
Meanwhile, users can also convert SoFiUSD to tokenized deposits within the same app. These deposits earn interest and are protected by federal deposit insurance. Users can flexibly switch between forms: use the stablecoin for convenient fund transfers, or convert to tokenized deposits to earn interest and gain security. If unsatisfied with the interest rate offered by the bank, users can easily convert back to the stablecoin and deposit it into various lending protocols to pursue higher yields.
SoFi may never become as decentralized as Circle or grow larger than JPMorgan, but it has created a unique advantage: integrating bank accounts, stablecoin wallets, and tokenized deposits into a single app interface.
This model aligns more closely with Merrill Lynch’s innovative approach in the past, distinguishing itself from purely stablecoin issuers or traditional banking consortia. SoFi aims to eliminate the either-or dilemma for users, no longer forcing them to choose between the convenience of blockchain technology and the earning potential of bank deposits.
The evolution of various products confirms a fundamental principle: in scenarios involving the storage and transfer of funds, the specific form of the product is not crucial—what matters most is the ability to convert freely between forms.
In response to the challenge posed by stablecoins, the banking industry initially sought to lobby regulators to ban stablecoins from offering interest and rewards. However, relying solely on regulatory pressure makes it difficult to win this competition. The only way for banks to break through is to proactively evolve, matching and even surpassing the capabilities of crypto products: adding interest earnings and deposit insurance on top of instant transfers and programmability. Interestingly, the very vehicle enabling this upgrade is blockchain technology.
This is precisely what makes the market so compelling—it pushes traditional industries to continuously evolve until the entire ecosystem maximizes service to participants. Back then, Merrill Lynch’s cash management account compelled the U.S. to repeal Regulation Q and spurred banks to introduce money market deposit accounts; today, the rise of stablecoins is driving banks to develop tokenized deposits and build 24/7 settlement systems. In both transformations, traditional industries were not entirely displaced but instead absorbed the advantages of innovative products to reinvent themselves and maintain their market position.
The current transformation has hit regional banks the hardest. These banks rely more heavily on net interest margins and have far less room to withstand deposit outflows compared to large banks. Simply optimizing traditional bank accounts risks losing users seeking high liquidity, while solely matching the transfer speeds of crypto products means abandoning core advantages like deposit insurance and lending profitability. Cari Network represents regional banks’ attempt at self-rescue, the clearinghouse alliance reflects large banks’ defensive strategy, and SoFi has chosen a more aggressive path: proactively building an integrated service bridge to prevent external players from gaining the upper hand.
Looking back at the historical patterns of financial development, emerging business models often gain traction by identifying inefficiencies in traditional systems; once these pain points become impossible to ignore, established giants incorporate new functionalities to upgrade and maintain their market position. For example, Merrill Lynch highlighted the misalignment between deposit interest rate caps and market yields, prompting banks to address the gap with money market deposit accounts. Today, stablecoins have exposed the limitations of traditional banks—settling only on business days and restricting fund flows—prompting banks to now adopt tokenized deposits and 24/7 settlement capabilities to close the gap.
The advantage in the industry has gradually shifted from the original innovative products that identified problems to institutions capable of integrating features, operating in compliance, and scaling practical solutions.
We have recently been discussing the idea that the cryptocurrency industry—or more precisely, blockchain technology—is becoming the foundational infrastructure of financial technology.
This judgment holds true in this transformation as well. Blockchain is not about completely replacing bank deposits, but rather compelling the industry to decompose the value dimensions of various services: yield is one layer of value, settlement efficiency is another, deposit insurance is yet another, and the ability to freely convert between forms may be the most valuable of all.
Regardless of how the industry evolves, bank deposits will not disappear entirely—they will only be dismantled and restructured. The ultimate winners will be those institutions that enable seamless transitions of funds between security, yield, and high liquidity.
