Regulators are revisiting long standing assumptions about how stablecoins should function in financial markets as new research challenges the logic of banning interest payments on these instruments. The rapid expansion of stablecoins has forced policymakers to determine whether restrictions placed on issuers are genuinely stabilising or whether they could be creating a more volatile competitive gap between tokenised money and traditional deposits. The central argument emerging across policy circles is that preventing stablecoins from offering returns does not safeguard bank funding. Instead, it creates a cyclical dependence on shifting rate environments and increases the frequency of structural flows that move between banks and token issuers depending on how attractive either product appears at any moment. That dynamic is particularly visible as rate expectations adjust and both sectors experience sharper shifts in liquidity conditions.
Financial authorities continue to emphasise the threat of rapid redemptions, where mass conversions of stablecoins could force issuers to liquidate reserve assets at speed, affecting short term funding markets. That risk is credible, but policymakers are increasingly separating it from the concern that stablecoins will drain deposits from regulated banks. Funding structures have diversified significantly, and banks today rely on a broader set of wholesale channels rather than deposits alone. As analysts point out, a migration of savings into stablecoins does not automatically signal a systemic failure, nor does it justify a regulatory stance designed to reduce the competitiveness of tokenised money purely by eliminating remuneration. The view gaining ground is that stablecoins should not be weakened intentionally to protect banks, because weakening trust in a widely used settlement asset amplifies instability rather than reducing it.
The prohibition on remuneration has also introduced an unintended rate sensitivity. When interest rates rise, the gap between a non-yielding stablecoin and an interest bearing bank deposit expands, reducing stablecoin demand. When rates fall, the attractiveness of stablecoins improves instantly, lifting demand and driving flows back toward on chain instruments. This rate dependency makes stablecoins more pro cyclical than regulators expected, and central banks are increasingly cautious about regulatory frameworks that amplify liquidity swings. Some argue the policy mirrors the earlier CBDC debate, where banks lobbied to prevent central bank digital money from offering interest to avoid competitive displacement. Critics now suggest that a similar influence shaped the treatment of stablecoins.
A growing alternative proposal is to allow stablecoin issuers to hold reserves directly at central banks and earn limited remuneration on those balances. This could align incentives, provide a safer backing asset, and allow central banks to modulate inflows through variable remuneration bands during periods of excessive demand. Supporters argue that offering a controlled level of interest while maintaining prudential safeguards would create a more stable environment for both banks and token issuers. Opponents, however, note that stablecoins benefiting from central bank level safety should not receive the same remuneration as deposit taking institutions because of the societal role of banking and the residual seigniorage tied to public trust in sovereign money.
