Stablecoin Yields Pose Risks to Traditional Banks, But Opportunities for Puerto Rico’s International Financial Entities

In a recent report highlighted by CoinTelegraph, Citi’s Future of Finance head, Ronit Ghose, has sounded the alarm on the potential for stablecoin yields to erode traditional bank deposits, drawing parallels to the money market fund surge of the 1980s. As stablecoins—digital assets pegged to fiat currencies like the U.S. dollar—begin offering competitive interest rates, they could trigger significant outflows from conventional banking systems, forcing banks to adapt or face higher funding costs. This development underscores the growing tension between traditional finance and the burgeoning crypto economy, but for forward-thinking institutions like those licensed in Puerto Rico, it presents a unique chance to thrive.

The Warning: Stablecoins as the New Money Market Funds

Ghose’s concerns stem from historical precedents. In the late 1970s and early 1980s, money market funds exploded in popularity, growing from $4 billion in assets in 1975 to $235 billion by 1982, as they offered higher yields than regulated bank deposits. This led to net withdrawals of $32 billion from banks between 1981 and 1982 alone. Today, stablecoins could replicate this shift on a much larger scale. According to the Bank Policy Institute, a regulatory loophole might enable stablecoin issuers to indirectly pay interest, potentially resulting in up to $6.6 trillion in deposit outflows from the traditional banking sector.

Experts like Sean Viergutz from PwC warn that this migration to higher-yielding stablecoins would compel banks to source funds from more expensive wholesale markets or hike deposit rates, ultimately making credit pricier for households and businesses. The issue is compounded by the U.S. GENIUS Act, which prohibits direct interest payments on stablecoins but leaves room for indirect mechanisms through affiliated entities, such as crypto exchanges. Banking groups are pushing regulators to close this gap, arguing it disrupts credit flows, while crypto advocates counter that such restrictions would stifle innovation and favor incumbents.

Looking ahead, U.S. Treasury Secretary Scott Bessent has expressed support for dollar-pegged stablecoins to preserve the dollar’s status as the global reserve currency, suggesting a regulatory environment that might evolve to accommodate these assets. For traditional banks, this spells competition and potential deposit erosion. However, for international financial entities (IFEs) and international banking entities (IBEs) in Puerto Rico, the story is different—these institutions are uniquely positioned to capitalize on the trend.

Embracing the Digital Economy: Benefits for Puerto Rico-Licensed International Banks

Puerto Rico’s regulatory framework under Acts 52 and 273 allows for the establishment of IFEs and IBEs, which can attract both U.S. and international depositors while enjoying tax incentives and flexible operations. Unlike mainland U.S. banks bound by stringent federal regulations, these entities can integrate seamlessly into the digital economy, offering services like on-ramp and off-ramp facilities for fiat-to-crypto conversions, custody of digital assets, and even tokenized products. By leaning into stablecoin yields and the broader crypto industry, such banks can not only mitigate the risks highlighted by Citi but turn them into competitive advantages.

1. Attracting Diverse Deposits with Competitive Yields

An international bank in Puerto Rico can pay interest on stablecoin-linked deposits, drawing in yield-seeking depositors from the U.S. and abroad who might otherwise flee traditional banks. This creates a virtuous cycle: higher yields funded by investing in low-risk assets (e.g., U.S. Treasuries backing stablecoins) can boost deposit inflows, enhancing liquidity and reducing reliance on volatile wholesale funding. In a scenario where traditional banks lose $6.6 trillion in deposits, Puerto Rico-licensed entities could capture a portion by offering hybrid products that blend stablecoin yields with insured banking services.

2. Becoming a Hub for On-Ramp/Off-Ramp Services

By providing seamless on-ramps (converting fiat to crypto) and off-ramps (crypto to fiat), these banks position themselves as gateways to the digital economy. This is particularly appealing for international clients navigating cross-border transactions, where stablecoins offer faster, cheaper alternatives to traditional wires. Custody services for digital assets further add value, ensuring secure storage compliant with AML/KYC standards, which builds trust and attracts institutional investors wary of unregulated exchanges.

3. Profiting from the Crypto Industry’s Growth

Participating in the crypto ecosystem allows these banks to generate revenue streams beyond traditional interest margins. For instance, fees from custody, trading facilitation, and tokenized asset issuance can offset any costs associated with paying stablecoin yields. Moreover, as the U.S. supports dollar-stablecoins, Puerto Rico banks can leverage their U.S. territory status to offer regulated, dollar-denominated products that appeal globally. This integration not only hedges against deposit drains but positions the bank as a leader in fintech innovation, potentially increasing valuations and partnerships with crypto firms.

In essence, while stablecoin yields may drain deposits from rigid traditional banks, agile international banks in Puerto Rico can benefit by embracing them. By offering competitive returns, digital asset services, and global accessibility, these institutions can thrive in a hybrid financial world, turning potential threats into opportunities for growth and profitability.