A recent $93 million loss tied to a stablecoin depegging incident has reignited concerns about the broader risks stablecoins may pose to the financial system, prompting renewed calls for stricter regulation—or even outright bans—on specific crypto practices. At the center of the debate is the Bank Policy Institute (BPI), a powerful banking lobby group, which argues that stablecoin-related activities, particularly those offering high-yield rewards through decentralized finance (DeFi), could destabilize markets and siphon deposits away from traditional banks.
The flashpoint came after a fund suffered a staggering $93 million loss due to a depegging event involving Stream Finance, a relatively niche stablecoin platform. This triggered a cascade of liquidations across the DeFi ecosystem, exposing vulnerabilities in leveraged yield farming strategies and raising alarms about the lack of insurance protections for deposited assets.
BPI contends that such events are not isolated and could have far-reaching consequences, especially as crypto becomes more intertwined with traditional financial systems. They referenced the October 10 market crash, when the collapse of USDe’s peg led to over $20 billion in forced liquidations, as an example of how quickly systemic risk can materialize.
In response, BPI is pushing for the prohibition of stablecoin rewards, claiming these incentives serve as a magnet for capital that would otherwise remain within the banking system. They argue that this diverts deposits away from insured, regulated institutions into volatile, loosely governed crypto platforms. “The GENIUS Act was never designed to address these types of risks,” BPI stated, criticizing existing legislation for failing to mitigate the structural dangers posed by DeFi.
However, the crypto community has pushed back hard against what it sees as a self-serving narrative. Critics argue that BPI’s stance is less about protecting consumers and more about preserving the traditional banking model. Alexander Grieve, Vice President of Government Affairs at Paradigm, called BPI’s position “narrow-minded,” accusing the institute of painting all DeFi innovations with the same negative brush. “The Bank Policy Institute seems to have adopted a ‘if you can’t beat them, destroy them’ mentality,” Grieve said.
Rather than banning stablecoin rewards altogether, many in the crypto industry advocate for more nuanced, transparent regulation. They argue that DeFi, while still a maturing space, offers powerful tools for financial inclusion and innovation. Calls for better oversight, clearer disclosure requirements, and standardized risk frameworks have grown louder, as the industry seeks legitimacy and long-term stability.
Behind the scenes, the banking lobby is reportedly shifting its focus from the failed GENIUS Act to the CLARITY Act in an attempt to introduce more restrictive measures. The objective appears to be retaining control over capital flows and curbing the appeal of crypto-based alternatives, which have seen explosive growth. According to recent data, the stablecoin market cap has climbed north of $300 billion, with transaction volumes crossing the $1 trillion mark. Unlike earlier phases of crypto hype, this growth seems increasingly decoupled from speculative trading, hinting at more organic, utility-driven adoption.
The debate highlights a fundamental tension between traditional financial institutions and decentralized alternatives. Banks rely on deposits to fund lending and maintain liquidity, while DeFi protocols attract users by offering higher, albeit riskier, returns. As stablecoins become more embedded in commerce, remittances, and fintech services, the competition for user trust and capital intensifies.
What’s particularly concerning for regulators is the speed at which a stablecoin depeg can spread risk across both crypto and traditional markets. In leveraged DeFi strategies, the collapse of a single asset’s value can trigger margin calls, mass liquidations, and systemic contagion. Without FDIC insurance or centralized oversight, users are exposed to a level of risk many may not fully understand.
Yet, banning rewards may not be the most effective solution. Instead, policymakers could focus on implementing stress testing mechanisms for stablecoins, requiring transparency around collateralization practices, and developing interoperable standards for smart contracts used in yield farming. These measures could mitigate risk without stifling innovation.
Moreover, public education remains a major gap. Many users entering the DeFi space are drawn by high yields without comprehending the potential downsides. Regulatory frameworks should include mandates for investor education, similar to disclosures required in traditional finance.
Another consideration is the role of algorithmic stablecoins, which rely on code rather than reserve backing. These are particularly vulnerable to market sentiment and speculative attacks, as seen in past failures. The Stream Finance incident underscores the fragility of such models and the need for robust auditing and contingency planning.
Looking ahead, the stablecoin sector is likely to face increased scrutiny, especially as central banks move forward with digital currency pilots. The presence of government-backed digital currencies could shift the narrative, forcing both banks and DeFi platforms to adapt.
In conclusion, while the $93 million loss serves as a stark reminder of the risks inherent in unregulated crypto ecosystems, an outright ban on stablecoin incentives could do more harm than good. A balanced approach—combining regulation, transparency, and innovation—offers a more sustainable path forward. As crypto continues to evolve, the challenge will be designing regulatory structures that protect consumers without stifling the transformative potential of decentralized finance.