Columbia Business School Debunks 5 Stablecoin Myths Stalling US Crypto Reform

As the US Senate edges closer to finalizing its digital asset market structure bill, one surprisingly simple issue is holding up progress: stablecoin yield.

While headlines focus on DeFi oversight and token classification, Columbia Business School adjunct professor and crypto policy analyst Omid Malekan warns that much of the debate in Washington is based on myths rather than evidence.

Banks vs. Stablecoins: Are US Lawmakers Fighting a Phantom Threat?

Malekan identifies five persistent misconceptions about stablecoins and their impact on the banking system

According to Malekan, who has reportedly been lecturing at Columbia Business School since 2019, these misconceptions, if left unchallenged, threaten to stall meaningful crypto legislation.

• Myth 1: Stablecoins shrink bank deposits

Contrary to popular belief, stablecoin adoption does not necessarily cannibalize US bank deposits.

Malekan explains that foreign demand for stablecoins, coupled with the Treasury-backed reserves that issuers hold, actually tends to increase domestic bank deposits.

Every additional dollar in stablecoin issuance often generates more banking activity through the buying and selling of government securities, repo markets, and foreign exchange transactions.

“Stablecoins increase demand for dollars everywhere,” Malekan notes, emphasizing that reward-bearing stablecoins amplify this effect.

• Myth 2: Stablecoins threaten bank credit supply

Critics argue that deposits flowing into stablecoins could reduce lending. Malekan calls this a false conflation of profitability and credit supply.

In a late December post, Paradigm VP for regulatory affairs Justin Slaughter, who also served as a former senior advisor at the SEC and CFTC, highlighted that stablecoin adoption should be neutral or help facilitate credit creation and bank deposits.

Malekan challenges that banks, particularly large US institutions, maintain substantial reserves and strong net interest margins. While deposit competition may slightly affect profits, it does not reduce banks’ ability to lend.

In fact, banks can offset any shortfall by reducing reserves held at the Federal Reserve or by adjusting interest paid to depositors.

His stance aligns with that of the Blockchain Association, which called out big banks for claiming stablecoins threaten deposits and credit markets.

• Myth 3: Banks must be protected from competition

A third misconception is that banks are the primary source of credit and must be shielded from stablecoins.

Data tells a different story, with the BIS Data Portal showing banks account for over 20% of total credit in the US Non-bank lenders deliver the majority of financing to households and businesses. This includes money market funds, mortgage-backed securities, and private credit providers.

Malekan argues that stablecoins could even lower borrowing costs by boosting demand for Treasury-backed assets, which serve as benchmarks for non-bank credit.

• Myth 4: Community banks are most at risk

The narrative that small or regional banks are the most vulnerable to stablecoin adoption is also misleading.

Malekan highlights that large “money center” banks face real competition, particularly in payment processing and corporate services. Community banks, serving local and often older client bases, are less likely to see deposits migrate to digital dollars.

In essence, the institutions most threatened by stablecoins are the same ones already benefiting from high profitability and global operations.

• Myth 5: Borrowers matter more than savers

Finally, the idea that protecting borrowers should outweigh the interests of savers is fundamentally flawed.

Rewarding stablecoin holders strengthens savings, which in turn supports overall economic stability.

“Barring stablecoin issuers from sharing their economics is a tacit policy of hurting American savers to benefit borrowers,” Malekan notes.

Encouraging saving through innovation benefits both sides of the lending equation, enhancing consumer resilience and economic dynamism.

The Real Barrier To Reform

According to Malekan, the ongoing debate over stablecoin yields is largely driven by fear and serves as a delay tactic.

The Genius Act has already clarified the legality of stablecoin rewards, yet Washington remains mired in outdated concerns pushed by lobbying interests.

Malekan likens the situation to asking Congress to outlaw Tesla instead of letting the automotive industry innovate:

“Digital currencies are no different. Most concerns raised by banks are unproven and unsubstantiated,” the Colombia Business School professor concluded.

With bipartisan legislation, including the Senate’s 278-page draft, poised for markup, the time for evidence-based decision-making is now.

Misconceptions about stablecoins hinder regulatory clarity, potentially slowing down the process, and may also impede US competitiveness in a global digital dollar economy.

Malekan urges policymakers to focus on facts over fear, highlighting that well-designed stablecoin adoption could enhance savings, boost bank deposits, and lower borrowing costs, all while fostering innovation in payments and DeFi.

In short, stablecoins are not the threat many fear. Misplaced myths are. Clearing these misconceptions could unlock the next chapter of American crypto reform, potentially striking a balance between consumer benefits, market efficiency, and financial stability.

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