The "Catfish Effect" in Finance: How Stablecoins Became Banks' Unlikely Reform Agent

When Libra was announced in 2019, the global financial establishment held its breath. The existential question seemed straightforward: if billions of people could instantly hold a digital dollar on their phones, why would they tolerate traditional bank checking accounts—fee-laden, interest-starved, and locked down on weekends? The panic was palpable. Industry commentators warned of imminent “deposit flight,” suggesting that once consumers discovered they could directly hold digital cash backed by Treasury-grade assets, the entire funding model of the U.S. banking system would crumble.

Yet reality has deviated sharply from this apocalyptic narrative.

The Reality Check: What Actually Happened to Bank Deposits

Despite explosive growth in stablecoin market capitalization, empirical research reveals an uncomfortable truth for deposit-flight prophets: there is almost no significant correlation between stablecoin emergence and bank deposit losses. The massive outflows predicted by the financial media never materialized.

This absence of data-driven evidence points to a more fundamental economic principle at work. Professor Will Cong of Cornell University has documented what might be called the “catfish effect” in modern finance—the phenomenon where a new competitive threat doesn’t eliminate the incumbent, but forces it to adapt and improve. In this case, stablecoins function less like a extinction-level asteroid and more like a catalyst that challenges the banking industry’s complacency.

The reason is simpler than doomsayers realized: deposit stickiness is an extremely powerful force. The traditional checking account survives not because of superior interest rates or cutting-edge technology, but because of what economists call the “bundling effect.” Your mortgage, credit card, payroll deposits, and savings accounts are all interconnected through a single institution. For most users, the switching cost—both logistical and psychological—of moving life savings to a digital wallet for a few extra basis points of yield simply doesn’t make economic sense.

Friction as a Feature, Not a Bug

The banking system was built on a paradox: it maintains control through friction. Any substantial transfer of value between external services requires passage through the bank. The system was engineered so that operations become cumbersome without a checking account—the bank functions as the sole bridge connecting the fragmented “islands” of your financial life.

For decades, this friction benefited banks. Consumers didn’t choose checking accounts because they were optimal; they chose them because they were unavoidable. The traditional bank deposit model essentially depended on inertia as a feature, not a flaw.

Stablecoins theoretically threatened to eliminate this friction entirely. Twenty-four-hour availability, borderless transfers, instant settlement—all without passing through a traditional intermediary. Yet the Federal Reserve and banking regulators can now point to actual market data: stickiness prevailed.

The Productive Tension: Competition Strengthens the System

But here’s where the story becomes genuinely interesting. Stablecoins may not be destroying banks, but they are absolutely reshaping them. The mere existence of a credible alternative imposes what Professor Cong calls a “disciplinary constraint” on traditional financial institutions.

Banks can no longer assume that deposits are locked in by default. The psychology has shifted. When customers recognize they have genuine alternatives—options that were previously theoretical become tangible—the cost of complacency for banks rises dramatically. Suddenly, competing on deposit rates and operational efficiency is no longer optional; it’s existential.

This competitive pressure has already manifested in observable ways. Banks have responded by offering higher yields on savings accounts and money market funds. The implicit understanding that deposits were “sticky” enough to sustain razor-thin interest rates has evaporated. Stablecoins created a credible “exit threat,” and that threat has driven measurable improvements in consumer welfare.

The Cornell research shows that stablecoins don’t “shrink the pie”—they expand it. The framework enables “greater credit supply and more comprehensive financial intermediation,” ultimately benefiting depositors through better terms and broader access to services.

The Regulatory Architecture: Building Safety Into the System

Of course, legitimate concerns about systemic risk remain. The specter of “run risk”—where loss of confidence triggers a fire sale of reserve assets, potentially cascading into broader financial instability—cannot be dismissed.

Yet this is not a novel category of risk. Bank runs, liquidity crises, and reserve management challenges are century-old problems. The financial industry has developed mature institutional frameworks to address them: capital requirements, liquidity ratios, stress testing, and reserve management protocols.

The GENIUS Act (signed into law in July 2025) translates these proven principles into explicit statutory requirements for stablecoin issuers. By mandating that stablecoins be fully backed by cash, short-term U.S. Treasury securities, or insured deposits, the legislation establishes hard safety requirements at the institutional level. As academic researchers have noted, these guardrails “directly address the core vulnerabilities identified in financial research, including both run risk and liquidity challenges.”

The Federal Reserve and the Office of the Comptroller of the Currency now bear responsibility for translating these statutory principles into enforceable regulatory rules—requirements addressing operational risk, custodial failure possibilities, reserve management complexities, and the novel integration challenges of blockchain systems at scale.

The Efficiency Dividend: Beyond “No Deposit Flight”

Once you move past the defensive question of “Will deposits flee?” a far more compelling opportunity emerges. The genuine value proposition of tokenized stablecoins lies in what technologists call “atomic settlement”—the ability to transfer value instantly and irrevocably across borders without counterparty risk.

Today’s correspondent banking system remains frustratingly costly and slow. International wire transfers languish in a labyrinth of intermediaries, with settlement often requiring days as funds traverse multiple institutions’ ledgers. Stablecoins compress this entire process into a single, final, irreversible on-chain transaction.

The implications for global treasury operations are profound. Instead of capital being “stuck in transit” for days—tied up in correspondent accounts earning nothing while creating cash management inefficiencies—funds can be allocated instantly across borders. This releases vast quantities of liquidity previously trapped within the correspondent banking infrastructure.

In domestic markets, the efficiency gains are equally significant: lower payment costs, faster merchant settlement, reduced reconciliation overhead.

For the traditional banking industry, this represents an opportunity to modernize clearing infrastructure that has been maintained largely through patches and COBOL code—a digital equivalent of duct tape holding together critical systems.

The Larger Choice: Leadership or Irrelevance

At the macro level, the United States confronts a binary strategic choice. It can either lead the development and regulation of this technology domestically, establishing clear rules and maintaining dollar dominance in digital form, or it can watch as financial innovation migrates to offshore jurisdictions beyond meaningful regulatory oversight.

The dollar remains the world’s predominant financial instrument. Yet the technological “rails” supporting its operation are demonstrably outdated. The GENIUS Act offers something more strategic: a genuinely competitive regulatory framework that transforms stablecoin issuance from a shadow-banking novelty into a legitimate component of domestic financial infrastructure.

By bringing stablecoins within the regulatory perimeter, the framework “localizes” digital dollar innovation. Uncertainty becomes transparency. Uncontrolled offshore experimentation becomes a structured, accountable upgrade to the dollar’s operational architecture.

The Historical Parallel: Resistance Then Adaptation

The most instructive parallel comes from the entertainment industry’s experience during the digital revolution. The recording industry initially resisted the streaming era, viewing it as existential cannibalization of their CD-based revenue model. Yet after the inevitable transition, companies discovered that streaming created entirely new revenue categories and consumer relationships they hadn’t anticipated.

Banks are following a similar resistance pattern. The institutions viewing stablecoins as an existential threat are, in fact, resisting a transformation that could ultimately revitalize their business models. When banks cease profiting from “delay” and instead charge for “speed”—leveraging the efficiency gains and 24/7 availability that blockchain infrastructure enables—they will discover that this technology doesn’t undermine banking. It reconstructs banking for an era where speed and efficiency are no longer novelties but baseline expectations.

The catfish effect, ultimately, regenerates rather than destroys. Stablecoins may not replace traditional banks, but they are already serving as the competitive force that pushes the entire financial system toward renewal.