Stablecoins Won’t Drain Bank Deposits, Says Zero Knowledge CEO
For months, banks have sounded the alarm that stablecoins pose a threat to their deposit base. However, Austin Campbell, founder and CEO of Zero Knowledge, argues that the underlying mathematics tells a different story.
In a recent episode of CoinDesk’s The Policy Protocol podcast, published around October 23, 2026, Campbell asserted that stablecoins cannot lead to a net outflow of deposits from the banking system. His reasoning is that while money changes hands, it never truly leaves the system.
Campbell’s argument hinges on a fundamental observation about financial infrastructure. He explained that every time a stablecoin is created or redeemed, a bank deposit is simply transferred from one account to another.
“Stablecoins causing deposit flight is mathematically not possible,” Campbell stated.
In simpler terms, when an individual purchases a stablecoin, their dollars are deposited into someone else’s bank account. When they redeem the stablecoin, the process reverses. Campbell contends that ownership of the deposit shifts between accounts or even between banks, but the overall deposit pool remains intact.
Campbell’s point is precise and technical: while a specific bank might experience a loss of deposits to another institution, the banking system as a whole does not see a reduction in its total deposits.
He also challenged the notion that stablecoins are merely a riskier alternative to bank accounts. Campbell characterized them as being more akin to cash or money-market instruments, rather than leveraged bank deposits.
This distinction is significant. Banks operate by lending out a portion of the deposits they hold. A stablecoin structured more like a money-market product functions on a fundamentally different model, making direct comparisons potentially misleading.
This debate is at the heart of an active lobbying effort. Banking industry groups, including the American Bankers Association (ABA) and the Independent Community Bankers of America (ICBA), have voiced concerns that stablecoins offering yield could divert funds away from traditional bank deposits.
These groups have advocated for restrictions on stablecoins that provide returns to holders. The logic is straightforward: if a digital dollar offers interest while a checking account provides minimal returns, consumers may opt to move their money.
Campbell, however, dismissed these concerns as misinformed. He described the narrative of deposit flight as a misunderstanding of stablecoin mechanics rather than a genuine assessment of risk.
Under the proposed Genius Act framework, stablecoin issuers have the option to back their tokens with bank deposits, Treasury bills, repurchase agreements, or reverse repos. They are not mandated to replicate FDIC-insured deposits.
The podcast discussion coincided with several significant developments in the U.S. The Office of the Comptroller of the Currency (OCC) has been in the process of finalizing regulations for stablecoins, aiming to provide regulatory clarity to a sector that has operated in regulatory ambiguity for years.
Concurrently, JPMorgan launched its JPMD tokenized deposit on the Ethereum blockchain.
Campbell drew a clear distinction between bank deposit tokens like JPMD and stablecoins. He explained that a tokenized deposit remains a bank liability, with all the implications that entails. A stablecoin, in his view, is a distinct product with its own unique risk profile.
Campbell’s perspective is informed by direct experience. He previously managed reserves for Paxos’ BUSD, which grew to become the third-largest stablecoin, with a peak valuation exceeding $20 billion.
Managing reserves at such a scale provided him with an intimate, daily understanding of issuance and redemption mechanics. His descriptions of deposits moving between accounts are based on workflows he personally managed.
He has also been a vocal critic of the banking sector’s understanding of stablecoins. His broader thesis emphasizes the potential efficiency gains that blockchain technology can bring to payments and settlement, rather than viewing stablecoins as a threat to existing financial institutions.
For policymakers, Campbell’s argument shifts the focus of the central question. If stablecoins merely facilitate the movement of deposits, the debate becomes less about systemic stability and more about which banks gain or lose market share.
The issue of yield is likely to be the deciding factor. If regulators accept the deposit-flight thesis, imposing restrictions on yield-bearing stablecoins will be more easily justified. Conversely, if Campbell’s perspective gains traction, such restrictions may appear more like protectionist measures than prudent policy.
For banks themselves, the launch of JPMD suggests that at least some major institutions are opting to innovate rather than resist. Tokenized deposits allow banks to maintain customer relationships while offering on-chain functionality. The question of whether smaller community banks can adopt this path is a more complex challenge, and it helps explain the strong advocacy from groups like the ICBA.
Campbell’s accounting-based argument may not definitively settle the debate. However, it compels critics to articulate more precisely their concerns: whether they fear a depletion of the deposit base or simply the redirection of deposits to venues they find less desirable.
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