Although stablecoins have emerged as a popular digital asset for transactions, banking industry groups led by the Bank Policy Institute (BPI) have raised concerns regarding a regulatory gap in the GENIUS Act that permits stablecoin issuers to offer indirect interest yields through affiliates or crypto exchanges. While the GENIUS Act explicitly prohibits direct interest payments on stablecoins by issuers, it does not address the ability of related third parties, such as crypto exchanges or affiliated companies, to provide yields indirectly. This omission has prompted banking groups to urge Congress to close the loophole, warning that its persistence could trigger a significant shift of funds from traditional bank deposits into stablecoins. Such regulatory challenges highlight the need for adaptation in financial regulations to keep pace with evolving digital assets.
Banking groups warn GENIUS Act loophole allows indirect stablecoin yields, risking massive fund shifts from bank deposits.
The potential economic impact of such a deposit flight is considerable. Estimates from the Treasury Department suggest that approximately $6.6 trillion could migrate from bank deposits into stablecoins if indirect yield payments continue unchecked. This transfer threatens the fundamental role of banks in attracting deposits, which serve as critical funding sources for loans to households and businesses. A substantial outflow may reduce banks’ lending capacity, thereby constraining credit availability and potentially increasing borrowing costs across the economy. Furthermore, this dynamic could destabilize the financial system during periods of market stress and slow overall economic activity by undermining established revenue models reliant on interest-bearing deposits. Banking coalitions have emphasized that this loophole could threaten financial stability if left unaddressed. The Treasury Department has also warned of the destabilizing effects from allowing stablecoins to pay interest.
The GENIUS Act establishes a regulatory framework aimed at stabilizing the payment stablecoin market while restricting interest or yield payments to holders by issuers. However, the legislation’s lack of clarity and enforcement mechanisms concerning yield offerings by third parties has been identified as a significant limitation. This regulatory gap enables stablecoin issuers to collaborate with exchanges and affiliates to bypass the intended restrictions, effectively undermining the law’s objectives. Banking institutions advocate for detailed revisions to the Act that would extend prohibitions to encompass affiliates, brokers, dealers, and crypto exchanges to preserve the integrity of deposit regulations.
In contrast, representatives from the crypto industry, including major firms like Coinbase, dispute the characterization of the gap as a loophole, arguing that Congressional attempts to limit competition have previously been rejected. They contend that banking concerns are primarily motivated by profit protection rather than systemic risk and emphasize that stablecoins function principally as transaction tools rather than deposit substitutes. Despite these differing perspectives, banking and state associations maintain that legislative action is necessary to address the indirect yield issue and safeguard the stability of the traditional banking system.
