U.S. community banks say a loophole in the GENIUS Act allows exchanges to pay “backdoor” returns on stablecoins, threatening local deposits and demanding Congress shut them down.
Summary
- The American Bankers Association’s Community Bankers Council told senators that the GENIUS Act still allows indirect stablecoin revenue through exchanges and affiliates.
- Banks warn that yield-style stablecoins could siphon billions from insured deposits, undermining community lending and shifting money to lightly regulated platforms.
- Crypto industry groups counter that payments stablecoins don’t fund loans and argue that stricter regulations would hinder the innovation and growth of digital payments.
A coalition of U.S. community bankers has called on Congress to change federal stablecoin legislation to address what the group characterizes as a loophole that allows yield-generating returns on crypto-linked products.
Stablecoin carvings in US crypto law?
The American Bankers Association’s Community Bankers Council sent a letter to the Senate on Monday requests Lawmakers are tightening provisions in the GENIUS Act, and stablecoin legislation was passed last year, the correspondence shows.
The council stated that while the GENIUS Act prohibits stablecoin issuers from paying interest or distributing proceeds directly to token holders, the law does not prevent these proceeds from being distributed indirectly through affiliated platforms and third-party partners.
“Some companies have exploited a perceived loophole that allows stablecoin issuers to indirectly fund payments to stablecoin holders through digital asset exchanges and other partners,” the council wrote in the letter, adding that the practice effectively mimics interest-bearing products that lawmakers sought to ban.
The GENIUS Act is designed to distinguish payment stablecoins from bank deposits. During the passage of the bill, lawmakers sided with banking groups that argued that allowing interest-bearing stablecoins would create direct competition with insured savings accounts and potentially destabilize the financial system, the legislation shows.
Crypto exchanges, including Coinbase and Kraken, offer rewards or incentives to users who own certain stablecoins on their platforms. While these payouts are typically facilitated by the exchanges or related partners and not by the stablecoin issuers themselves, the Banking Council continues to believe that the economic impact is equivalent.
“With this activity, the exception is the rule,” the municipality said in the letter. “If billions are displaced by community bank loans, small businesses, farmers, students and homebuyers in cities like ours will suffer.”
The group claimed that crypto exchanges and stablecoin affiliates are not equipped to replace the role that community banks play in local economies. The council noted that, unlike banks, these entities do not offer federally insured products or engage in relationship-based lending to support small businesses and households.
The council also stated that stablecoin-linked platforms are not subject to the same prudential supervision as banks, raising concerns about consumer protection and financial stability if deposits continue to move away from regulated institutions.
To address this issue, the council has asked lawmakers to explicitly prohibit affiliates and partners of stablecoin issuers from offering interest or returns as part of broader crypto market structure legislation currently being considered in Congress.
The Banking Policy Institute recently made a similar request to lawmakers, warning that the widespread adoption of interest-rate stablecoins could trigger as much as $6.6 trillion in deposit outflows from the traditional banking system, the institute said. The effort was led by the institute’s president, Jamie Dimon.
Crypto advocacy groups have challenged the banking sector’s position. In a joint letter, the Crypto Council for Innovation and the Blockchain Association told the Senate Banking Committee that payment stablecoins are not used to fund loans and therefore do not pose the same risks as bank deposits, according to the correspondence.
The groups argued that further tightening of the GENIUS Act would stifle innovation, limit consumer choice and slow the development of digital payment systems at a time when stablecoin use is increasing.
