Before the Tumbleweeds Roll In

I keep thinking about a banker I knew years ago who could tell you, without looking at a report, which small business owner was going to need a line increase next quarter. He knew because he had watched the business grow –- years of conversations, seasonal cycles, and credit decisions. He also knew exactly where the funding for that line would come from. Local deposits. Other businesses and families in the community who banked with us.

Community banking, in all of its beauty and wonderment, is not necessarily romantic. It is mechanical. Deposits come in. Loans go out. Margin holds the machine together.

That machine is now quietly under pressure.

In our recent research, we analyzed 225,577 Coinbase-related transactions across 92 community banks. These were not theoretical models or policy projections: These were real customer-initiated transfers between bank accounts and a crypto exchange. Across the 53 banks where we could determine direction, for every dollar that came back from Coinbase, $2.77 left. Over 13 months, that resulted in $78.3 million in net outflows.

On its face, $78 million spread across dozens of institutions does not sound catastrophic. But community banking is not a game of single datapoints. It is a game of multiplied impact.

Research cited in the report estimates that small banks reduce lending by approximately $0.389 for every $1 decline in deposits. Applied to those observed outflows, that equates to roughly $30.5 million in reduced lending capacity from one exchange, over just 13 months, at 53 banks.

Now scale that.

Community banks hold $4.9 trillion in deposits and fund 60 percent of small business loans under $1 million and 80 percent of agricultural lending in this country. In one quarter of U.S. counties, they are the only physical banking presence.

When deposits leave these institutions, there is not a diversified funding desk in Manhattan ready to offset the gap. There is a lender in a small office deciding whether to tighten credit because liquidity must be preserved. There is a board asking harder questions about concentration and capital. And there is a small business owner who may not get the same answer they got last year.

The spread is quiet. The consequences are not.

This is not about innovation. It is about allocation.

I am not anti-crypto, nor am I anti-innovation. Markets evolve. Customers explore. At its core, these changes should be viewed as exciting.

But there is structural asymmetry.

Stablecoin reserves are largely invested in U.S. Treasuries, not recycled into community lending. When dollars move from a money market account at a community bank to a yield-bearing product on an exchange, that funding does not reappear as a farm operating loan or a small manufacturer’s line of credit.

The lending implications are direct. Deposits are the raw material of credit creation in community banks. Remove enough of them and the credit function contracts. Not overnight, not dramatically, but incrementally and persistently.

The ICBA projects that allowing stablecoin intermediaries to pay yield could reduce community bank deposits by $1.3 trillion and lending by $850 billion. A December 2025 Federal Reserve analysis modeled moderate stablecoin growth reducing bank lending by $190 to $408 billion.

Those are national figures – they feel abstract until you run them through the lens of a single market.

Imagine a rural county with one community bank. That bank’s deposits shrink by 8 to 10 percent over several years as yield-sensitive customers quietly move funds elsewhere. The bank maintains capital ratios by trimming loan growth and tightening underwriting. Nothing dramatic, just fewer approvals with smaller lines and shorter terms.

There is no headline announcing that three businesses did not expand that year. No press release explaining that two farms delayed equipment upgrades. Credit contraction at the community level is almost always invisible until it accumulates. And then everyone calls it a surprise.

We have seen this movie before. In 1977, the introduction of the Cash Management Account triggered significant deposit outflows before regulatory frameworks caught up. It took years to recalibrate. Banks that survived that period didn’t do it by being reactive, they did it by understanding their own funding base well enough to see the pressure before it became a crisis.

The window to act then was measured in years. Today, digital pathways are already built. Ninety percent of the banks in our dataset showed Coinbase-related activity. The rails exist. Yield is simply the accelerant.

We have to look at the data differently

What unsettles me most is not the presence of crypto transactions. It is how little visibility many institutions have into their own exposure.

If you are a community bank leader, do you know how much left your money market accounts for crypto platforms last quarter? Do you know whether those flows are concentrated among your largest, most rate-sensitive relationships? Do you know how that trend intersects with your loan-to-deposit ratio and projected liquidity needs?

You cannot protect community lending with anecdotes. You cannot advocate in policy debates with instinct alone. You need to see the flows clearly, daily, directionally.

That is why this research matters. Not as a political statement, but as a diagnostic tool.

Community banking has always been about stewardship.  But stewardship requires clarity.

The full analysis, The Quiet Spread: What Transaction Data Reveals About the Stablecoin Impact on Community Bank Deposits and Lending, lays out the data in detail. I would encourage every banker I know to read it not through the lens of ideology, but through the lens of allocation.

Where is the money going?

And what, precisely, will no longer be funded when it gets there?