JPMorgan warns yield-bearing stablecoins risk shadow banking

Umar Farooq, global co-head of JPMorgan Payments, and Peter Muriungi, CEO of Digital Assets and Blockchain Solutions, published a note Monday warning that yield-bearing stablecoins could drift into what they described as “shadow banking” and urging lawmakers to establish a clear U.S. framework for digital assets.

The executives praised tokenization and programmable money for their ability to modernize payments and enable instant, around-the-clock settlement. They said those tools can improve commerce and financial infrastructure but stressed that rules must close loopholes and align oversight with how markets actually operate.

Farooq and Muriungi drew a distinction between payment stablecoins-fiat-pegged tokens backed by cash and equivalents-and yield-bearing stablecoins that pay rewards or interest. They argued payment stablecoins fit under existing federal law, while yield-bearing products present different risks because they offer returns simply for holding balances.

“When consumers are offered ‘rewards’ or ‘cashback’ simply for holding balances, many reasonably assume the product carries familiar safeguards,” they wrote. “If it does not, the result is not just consumer confusion; it is heightened run risk and the potential for destabilizing shifts of funds during periods of stress.”

The note recommended that stablecoins behaving like deposits be subject to the same supervision and oversight as traditional deposit products. The executives also urged strong anti-money-laundering controls and closer cooperation with law enforcement, saying those measures are necessary as digital-asset markets speed up and integrate with conventional finance.

Views in the industry are split. Many banks and banking trade groups have called for limits or bans on yield-bearing stablecoins, arguing such products could pull funding away from banks and weaken the deposit base that supports lending. JPMorgan CEO Jamie Dimon has opposed proposals that would allow crypto firms to offer interest-like rewards on stablecoin balances.

Congress is considering legislation meant to clarify which federal agencies regulate different crypto activities and to set rules for market participants and consumer protections. Some law enforcement agencies sent a joint letter to the Department of Justice and the White House arguing that gaps in proposed bills could make it harder to investigate illicit crypto activity.

Farooq and Muriungi wrote that responsible innovation is possible under current guardrails if those rules are applied to digital assets. They urged lawmakers to design policy that prevents unstable fund shifts, reduces run risk, and limits illicit activity while allowing legitimate tokenization projects to proceed.

A federal stablecoin framework for payment tokens passed last year. Lawmakers continue to weigh broader measures for crypto markets this year, though some analysts have reduced their estimates of the odds that comprehensive legislation will clear Congress next year, citing timing and calendar constraints.