U.S. Bankers Warn That Stablecoin Yield Loophole Could Impact Main Street Deposits

A group of community bankers in the United States is urging Congress to revise federal stablecoin legislation. They warn that a loophole in the GENIUS Act enables exchanges to offer indirect yields on stablecoins. This practice could jeopardize local bank deposits and has prompted calls for legislative action.

Key Takeaways

U.S. community bankers are asking Congress to revise the GENIUS Act to close a loophole allowing indirect yields on stablecoins.
The loophole permits exchanges to offer yields, which could threaten local bank deposits and impact community lending.
Banking groups argue that crypto exchanges cannot replace the essential role that community banks play in local economies.
Legislative action is being pursued to explicitly prevent partners of stablecoin issuers from offering interest.
The crypto industry counters that payment stablecoins do not pose the same risks as bank deposits and that tighter regulations could stifle innovation.

U.S. banks urge crackdown on stablecoin yield loophole

Overview of the Stablecoin Yield Issue

In a recent communication, the Community Bankers Council of the American Bankers Association requested that lawmakers tighten the provisions in the already enacted GENIUS Act, which governs stablecoins. The council highlighted that while the act forbids stablecoin issuers from directly paying interest to tokenholders, it fails to block these returns from being channeled through affiliated platforms and third-party partners.

The council noted: “Some companies have exploited a perceived loophole allowing stablecoin issuers to indirectly fund payments to stablecoin holders through digital asset exchanges and other partners.” They argued that this effectively recreates the interest-bearing offerings the legislation aimed to eliminate.

The GENIUS Act was originally meant to clarify the distinction between payment stablecoins and traditional bank deposits. Lawmakers believed that permitting yield-generating stablecoins could directly compete with insured bank savings accounts, thus posing a risk to the financial system's stability.

Major crypto exchanges, like Coinbase and Kraken, provide rewards to users who keep specific stablecoins on their platforms. While these rewards are typically managed by the exchanges or third-party partners, the banking council argues that the economic consequences are similar to traditional interest-bearing accounts.

Impact on Local Communities

The council expressed concern that if significant amounts of money are diverted from community bank lending, small businesses, farmers, students, and homebuyers in local areas would be adversely affected. They stated: “If billions are displaced from community bank lending, small businesses, farmers, students, and home buyers in towns like ours will suffer.”

Community banks play an essential role in local economies by offering federally insured products and personalized relationship-based lending. In contrast, the council pointed out that crypto exchanges and companies linked to stablecoins do not provide the same level of consumer protection or oversight.

Legislative Requests and Broader Industry Response

To resolve this situation, the council urged lawmakers to specifically prohibit stablecoin issuers' affiliates and partners from offering yields within the broader cryptocurrency market regulation discussions that are currently underway in Congress.

Moreover, the Banking Policy Institute echoed these concerns, cautioning that a rise in yield-generating stablecoins could result in as much as $6.6 trillion in deposits leaving traditional banks. This warning was issued by the institute’s chair, Jamie Dimon.

Conversely, crypto advocacy groups have countered the banking sector's concerns. In a joint letter, the Crypto Council for Innovation and the Blockchain Association argued that payment stablecoins are not used to finance loans and therefore do not carry the same risks as bank deposits. They asserted that tightening the GENIUS Act further could hinder innovation, limit consumer options, and slow down the growth of digital payment systems while stablecoin usage is on the rise.