U.S. Community Bankers Urge Amendments to GENIUS Act Due to Stablecoin Yield Concerns

In a recent move, a coalition of community bankers in the United States is calling on Congress to modify the GENIUS Act. They believe this legislation contains a loophole that permits yield-generating stablecoins to rival traditional bank deposits.

Key Takeaways:

Community bankers are asking Congress to address a loophole that could allow stablecoin rewards.
There are concerns that rewards linked to stablecoins could lead to the depletion of deposits and hinder local lending.
Crypto industry representatives challenge these claims, suggesting that stricter regulations could stifle innovation while failing to protect bank lending.

A letter sent to the Senate on Monday from the Community Bankers Council, part of the American Bankers Association, urges lawmakers to impose stricter regulations on stablecoins as outlined in last year’s legislation.

The council emphasized that the bill should ensure stablecoin issuers cannot indirectly provide yield to token holders through third-party entities.

US Community Bankers Seek Changes to GENIUS Act Over Stablecoin Yield Concerns

Community Bankers Argue Stablecoin Incentives Undermine the GENIUS Act

The Community Bankers Council, representing over 200 community bank leaders, highlighted that, "Some companies have taken advantage of a perceived loophole that lets stablecoin issuers indirectly fund payments to stablecoin holders via digital asset exchanges and other partners."

The GENIUS Act directly forbids stablecoin issuers from offering interest or yield, addressing lawmakers' worries that yield-generating tokens may draw funds away from banks' insured savings accounts.

Community bankers warn that the original aim of this legislation is being compromised by crypto platforms that provide incentives based on stablecoin holdings.

Major cryptocurrency exchanges such as Coinbase and Kraken offer benefits to users holding specific stablecoins on their platforms, even if the issuers do not directly pay yield.

According to the council, this situation poses a risk of depleting local banks of deposits, impacting their lending capabilities.

“With this activity, the exception swallows the rule,” the council stated, cautioning that significant deposit outflows could diminish credit availability for small businesses, farmers, students, and homebuyers in local areas.

Furthermore, they argue that exchanges and related crypto entities lack the capacity to serve as alternative lenders and do not offer products secured by federal deposit insurance.

Consequently, the council has requested lawmakers to extend the yield prohibition under the GENIUS Act to include affiliates and partners of stablecoin issuers in forthcoming crypto market structure legislation.

This letter adds to the mounting pressure from the banking sector, as the Banking Policy Institute—headed by JPMorgan CEO Jamie Dimon—expressed similar concerns last year, warning that unregulated stablecoin incentives could divert trillions from the traditional banking system.

Crypto Industry Groups Dispute Bank Concerns and Warn Against Stricter Stablecoin Measures

In response, crypto industry representatives have pushed back. The Crypto Council for Innovation and the Blockchain Association previously informed lawmakers that payment stablecoins do not generate funds for loans, arguing that stricter regulations would hinder innovation and reduce consumer options.

In November, Coinbase Global also urged the U.S. Treasury Department to guarantee its forthcoming guidelines for the GENIUS Act align with Congress's original intent.

The exchange cautioned against excessive regulations that could prevent innovation and undercut U.S. leadership in the crypto space.

Furthermore, it clarified that the prohibition on interest payments in the GENIUS Act pertains only to stablecoin issuers, and not to exchanges or intermediaries offering loyalty or rewards programs.

“Labeling third-party rewards or loyalty programs as prohibited 'interest' would distort Congress's carefully constructed framework and contradict the statute’s objectives,” Coinbase underscored.