Stablecoin fears are being blown out of proportion, and much of the banking industry’s narrative is built on shaky assumptions rather than data, argues Columbia Business School adjunct professor Omid Malekan. As US lawmakers rush to finalize a sweeping crypto market structure bill, he warns that political momentum is being stalled by misunderstandings about how stablecoin yields actually work — and who really benefits from them.
According to Malekan, the controversy centers less on whether stablecoins are dangerous, and more on a quieter but crucial question: who should earn the interest on the cash and Treasury bills that back those tokens — banks, or the issuers and their users?
He challenges what he describes as five major misconceptions circulating in the banking sector and on Capitol Hill. A core point of confusion, he says, is the assumption that stablecoins will inevitably drain deposits from traditional banks and cripple lending. In reality, many leading stablecoins are fully reserved, with their backing assets held in bank deposits and short-term government securities. Far from starving banks of funding, this flow of reserves can support banking activity by increasing balances and transactions across the system.
Malekan emphasizes that current debate in Washington is being distorted by “unsubstantiated myths” about stablecoin yields. Instead of discussing how to safely integrate a new kind of dollar instrument into the financial system, policymakers are being drawn into alarmist scenarios in which every dollar that enters stablecoins supposedly disappears from the banking system. This, he argues, simply does not match how reserves are structured in practice.
He further notes that a large share of credit in the US no longer comes from small community banks alone. Money market funds, private credit funds, and capital markets now play a major role in financing corporations, governments, and households. Against this backdrop, treating stablecoins as a unique existential threat to bank lending oversimplifies a far more complex credit landscape. Stablecoins may change how some customers move and store dollars, but they do not automatically sever the link between savings and lending.
The legislative timing adds urgency. The Senate Banking Committee is preparing to mark up a market structure bill, with a key session set for January 15, 2026. Behind the scenes, negotiators are still divided over how strictly to regulate yield-bearing arrangements connected to stablecoins. Some proposals would heavily limit or even prohibit third-party yield features, such as sharing interest from reserves with stablecoin holders through partner platforms.
Community banks and industry associations are pressing hard for tighter restrictions. They warn that “yield loopholes” could encourage customers to pull deposits out of insured bank accounts in search of higher returns via stablecoin-based products. From their perspective, unregulated or lightly regulated yield offerings could create new liquidity pressures, especially during times of stress, as deposits migrate away from smaller institutions.
Malekan’s critique targets this narrative head-on. He argues that the real policy question is not whether stablecoins should exist, but how the interest on the underlying reserves is allocated. In many designs, the reserves that back each token consist of Treasury bills and bank deposits that generate safe, predictable interest. That return is considerable at current rates, and deciding who gets it is a high-stakes economic choice.
Under the traditional model, banks take deposits, buy Treasuries or other assets, and keep much of the interest as profit, passing only a fraction to depositors. Stablecoin issuers invert that structure. They issue tokens pegged to the dollar, hold the cash in similar reserve assets, and then decide whether to keep the interest themselves, share it with users, or split it with partners. If lawmakers allow issuers or platforms to distribute a portion of that yield to customers, banks could face real competitive pressure to improve their own offerings.
This is precisely the scenario banks want to avoid, Malekan suggests, and it helps explain the intensity of their lobbying. For them, the danger is not that stablecoins will make the financial system inherently fragile, but that they could expose how little interest many depositors receive today relative to the returns banks earn on their assets. In other words, stablecoins threaten a business model, not the fundamental mechanics of money and credit.
Negotiations in the Senate reflect this tension. Staff have been working to finalize a bipartisan text that balances innovation with stability. One idea under discussion is a middle-ground approach: permitting some forms of reward or yield sharing on stablecoins, but imposing strict rules to minimize run risk and prevent sudden, destabilizing flows out of the banking system. For example, lawmakers could require clear disclosures, conservative reserve portfolios, and liquidity buffers for any issuer offering yields tied to reserves.
Such compromises would aim to recognize stablecoins as a legitimate financial instrument while drawing lines around risky practices. Caps on yield, restrictions on leverage, and mandatory stress testing could all play a role. The objective would be to allow competition in how dollar savings are packaged and delivered, without repeating the mistakes that led to past banking and money-market crises.
A crucial element in this debate is the structure of stablecoin reserves themselves. High-quality, fully backed stablecoins are designed so that each token can be redeemed for a dollar, supported by safe, liquid assets like short-term Treasuries or insured bank deposits. When built this way, they resemble a modern, programmable money market instrument. Problems arise when issuers chase higher returns with riskier securities, lack transparency, or fail to hold a full reserve. Malekan’s arguments implicitly assume regulators focus on enforcing strong reserve standards rather than banning yield outright.
Another often overlooked point is how stablecoins interact with payment systems. For many users, the appeal is not just about yield but about speed, accessibility, and interoperability across borders and platforms. Stablecoins can enable instant settlement, 24/7 transfers, and easy integration with digital applications. If regulators craft rules that only target yields while ignoring these functional advantages, they risk misunderstanding why demand for stablecoins exists in the first place.
The political economy of the issue also matters. Banks are established, heavily regulated entities with direct access to policymakers and deep experience in shaping legislation. Stablecoin issuers and crypto firms, while increasingly influential, do not yet have the same institutional weight. As a result, the early framing of stablecoin yield as a systemic threat has been heavily influenced by incumbent concerns, not necessarily by neutral analysis of costs and benefits.
From a consumer perspective, the outcome of this fight could determine how much choice people have in where and how they hold digital dollars. A stricter regime that effectively bans yield sharing on stablecoins would likely preserve the status quo, protecting bank margins and keeping most interest income confined within traditional institutions. A more open framework, with strong safeguards, could give individuals and businesses access to safer, more transparent, and potentially better-paying digital cash instruments.
There is also a broader macroeconomic angle. As interest rates fluctuate, the value of stablecoin reserves and the incentives around them change. During periods of high rates, the interest earned on reserves becomes a substantial revenue stream, intensifying the contest over who captures it. When rates fall, yield becomes less central, and the focus may shift back to efficiency, cost of payments, and programmability. Well-designed rules need to be robust across both environments, not tied to a particular rate cycle.
Malekan’s intervention underscores a deeper theme: technological innovation is challenging long-standing assumptions about who controls the infrastructure of money. Stablecoins represent one strand of this evolution, alongside central bank digital currency experiments and the continued growth of electronic payments. Policymakers who approach this shift primarily through the lens of protecting incumbent revenue may miss the opportunity to foster a more competitive, resilient, and user-friendly financial system.
In the near term, the legislative debate will hinge on relatively technical questions — definitions of “yield,” classifications of different stablecoin designs, supervisory roles for regulators, and conditions for third-party partnerships. But behind those details lies a simple issue: should the benefits generated by modern, digital forms of dollar savings accrue mainly to banks, or should they be shared more widely with the people and businesses whose money is actually being held?
Malekan’s answer is clear: the panic over stablecoin yields is overstated, and the myths surrounding them are distracting from a constructive conversation about fair competition and sound regulation. Whether lawmakers agree will become evident as the market structure bill moves through markup and, eventually, to a full vote. The outcome will help decide not only the future of stablecoins, but also the balance of power between legacy banks and the next generation of digital finance.