Stablecoins May Pull $1T from Emerging Market Banks

According to research from Standard Chartered’s digital assets team, stablecoins are poised to draw approximately $1 trillion away from traditional banking systems in high-vulnerability emerging markets over the next three years. This substantial capital movement represents about 2% of aggregate deposits in countries including Egypt, Pakistan, Bangladesh, Sri Lanka, Turkey, India, and Kenya. While the figure appears massive in absolute terms, the relatively small percentage of total deposits indicates both the scale of emerging market banking systems and the potential for further outflows if economic conditions deteriorate.

The analysis from Standard Chartered Global Head of Digital Assets Research Geoff Kendrick and Global Head Economist Madhur Jha identifies specific vulnerability metrics driving this projected shift. Many of these countries, with the notable exception of China, face twin deficits that signal economic fragility. The researchers noted that “given weakness on several metrics, we see a relatively high risk that deposits in Egypt, Pakistan, Bangladesh, and Sri Lanka will flow into stablecoins as local depositors seek an external store of value.” This represents a fundamental shift in how depositors in these markets approach wealth preservation.

The driving force behind this projected deposit flight isn’t the pursuit of higher returns, but rather the fundamental desire for capital security and accessibility. Standard Chartered analysts emphasize that “return of capital matters more than return on capital” for depositors in these emerging markets. This distinction explains why stablecoins remain attractive even without yield opportunities, as the primary concern shifts from earning interest to ensuring money remains accessible and retains its value during economic uncertainty.

Recent economic turmoil in several of these countries illustrates why depositors are seeking alternatives. In Kenya, crypto adoption became intertwined with civil unrest as officials attempted to address national debt through tax increases, including a 16% sales tax on bread and 25% tax on vegetable oil. As protests erupted, some groups encouraged citizens to use cryptocurrency to bypass what they perceived as unfair taxation. Similarly, Turkey has responded to growing crypto adoption by expanding regulatory oversight, while India has seen stablecoin adoption become central to political debates about financial innovation.

The U.S. GENIUS Act represents a significant regulatory attempt to mitigate the potential impact of stablecoins on traditional banking systems. By prohibiting U.S.-compliant stablecoin issuers from paying direct yields, lawmakers aimed to reduce the incentive for deposit flight. However, as Standard Chartered analysts noted, this prohibition hasn’t eliminated the appeal of stablecoins for capital preservation purposes in vulnerable economies.

Meanwhile, market participants have developed alternative incentive structures that operate within regulatory boundaries. Coinbase, as a USDC distribution partner and major shareholder, offers users 4.7% in rewards on USDC held in Coinbase Wallets. Because Coinbase isn’t the stablecoin issuer itself, this arrangement potentially circumvents the GENIUS Act’s restrictions, though it has attracted scrutiny from the SEC. This demonstrates how financial innovation continues to evolve despite regulatory constraints.

The stablecoin market has already demonstrated remarkable growth in 2024, with the total market capitalization surging from approximately $205 billion at the start of the year to over $302 billion within recent weeks. This rapid expansion suggests the infrastructure and adoption necessary to facilitate Standard Chartered’s projected $1 trillion deposit shift are already developing at an accelerated pace. If this growth trajectory continues, the analysts’ three-year projection may prove conservative rather than ambitious.