Congress should address ‘Schrödinger’s deposit’ paradox with stablecoin policy fix

The stablecoin debate has produced no shortage of bold promises from the digital assets sector: faster payments, broader access, and a financial system newly wired for the digital age. But one claim deserves far more skepticism: that stablecoins can grow into a major payments network without draining deposits from the community banks that fund local economies.

That argument calls to mind a famous thought experiment. In 1935, physicist Erwin Schrödinger imagined a cat sealed in a box, seemingly suspended between life and death until someone opened the lid and observed the result. The point was not that cats possess magical properties. It was that theory can only evade reality for so long.

As the Senate considers the Clarity Act, stablecoin proponents are asking policymakers to accept their own version of this paradox: Schrödinger’s deposit. They argue that stablecoins can revolutionize payments, attract widespread adoption, and potentially grow into a multitrillion-dollar market by the end of the decade. At the same time, they insist this growth—facilitated by yield-like incentives on payment stablecoins—will have no meaningful impact on bank deposits, especially at community banks.

But dollars cannot exist in two places at once. Funds for the stablecoin market inevitably must come from bank deposits, including from the community banks whose deposits are the raw material for loans to small businesses, farmers, ranchers, homeowners, and local governments. Once money leaves a community bank account and becomes part of a stablecoin reserve, it is no longer available to support that bank’s lending in the local community.

According to research from the Independent Community Bankers of America, the potential consequences could be enormous. If crypto entities can continue to pay yield on stablecoins, community banks may lose $1.3 trillion in deposits, leading to an overall $850 billion reduction in lending. Small businesses—the nation’s primary engine for new job creation—would be particularly exposed, with lending estimated to plummet by $165 billion, threatening credit creation that sustains nearly 3.4 million jobs nationwide.

This potential loss is what makes the stablecoin debate much more than a fight over payments technology. It is a fight over Main Street credit. Community banks transform local deposits into local loans. Stablecoin issuers, by contrast, would concentrate transaction balances in reserve structures that do not serve the same relationship-based lending function in rural towns, small cities, and local markets.

That is the policy significance of opening the box. Stablecoin advocates want the deposit question to remain in a state of useful ambiguity: transformative enough to justify special treatment, but somehow harmless enough to avoid hard tradeoffs. Policymakers should force the theory to meet the real-world balance sheet.

The test is not whether stablecoins sound efficient in theory; it is where the money goes in practice. If stablecoins scale as proponents envision, deposit migration is not a remote side effect—it is the mechanism that makes the model work. Every dollar used to back a stablecoin must come from somewhere. When it comes from a community bank deposit, it no longer supports a small-business loan, farm operating line, mortgage, or municipal project down the street.

For that reason, Congress must ensure that statutory provisions on crypto exchanges paying yield or interest are not undermined by loopholes, workarounds, or functionally equivalent rewards programs. If policymakers are serious about protecting Main Street credit, they should close these gaps before stablecoins scale—not after the damage to local deposit bases has already occurred.

Stablecoin advocates cannot keep the box closed forever. A payment system cannot be revolutionary in adoption but irrelevant in consequence. And policymakers should not be asked to believe in a quantum dollar—one that leaves the bank, backs a stablecoin, and somehow keeps working for the local borrower. That is not financial innovation. It is fiction. The sooner policymakers open the box, the clearer the threat to community banking becomes.

Kevin Paintner is the Wyoming regional president for ANB Bank in Cheyenne, Wyo., and chairman of the Independent Community Bankers of America’s Digital Assets Subcommittee.