Bankers warn stablecoin yield loophole could drain Main Street deposits

Source: Cryptonews Original Title: Bankers warn stablecoin yield loophole could drain Main Street deposits Original Link: U.S. community banks say a loophole in the GENIUS Act lets exchanges pay “backdoor” yields on stablecoins, threatening local deposits and demanding Congress shut it down.

Summary

• The American Bankers Association’s Community Bankers Council told senators the GENIUS Act still allows indirect stablecoin yields via exchanges and affiliates.
• Banks warn that yield-style stablecoins could siphon billions from insured deposits, undermining community lending and shifting money into lightly regulated platforms.
• Crypto industry groups counter that payment stablecoins do not fund loans and argue tighter rules would choke innovation and digital payments growth.

Stablecoin carve outs in US crypto legislation?

A coalition of U.S. community bankers has called on Congress to amend federal stablecoin legislation to address what the group characterizes as a loophole permitting yield-generating returns on crypto-linked products.

The Community Bankers Council of the American Bankers Association sent a letter to the Senate requesting lawmakers tighten provisions in the GENIUS Act, stablecoin legislation passed last year.

The council stated that while the GENIUS Act prohibits stablecoin issuers from paying interest or yield directly to tokenholders, the law does not prevent those returns from being distributed indirectly through affiliated platforms and third-party partners.

“Some companies have exploited a perceived loophole allowing 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 recreates interest-bearing products lawmakers sought to ban.

The GENIUS Act was designed to distinguish payment stablecoins from bank deposits. During the bill’s passage, lawmakers sided with banking groups that contended allowing yield-bearing stablecoins would create direct competition with insured savings accounts and potentially destabilize the financial system.

Crypto exchanges offer rewards or incentives to users who hold certain stablecoins on their platforms. Although those payouts are typically facilitated by the exchanges or related partners rather than the stablecoin issuers themselves, the banking council maintains the economic effect is equivalent.

“With this activity, the exception swallows the rule,” the council stated in the letter. “If billions are displaced from community bank lending, small businesses, farmers, students, and home buyers in towns like ours will suffer.”

The group contended that crypto exchanges and stablecoin-affiliated companies are not equipped to replace the role 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 that supports small businesses and households.

The council also stated that stablecoin-linked platforms are not subject to the same prudential oversight as banks, raising concerns about consumer protection and financial stability if deposits continue to migrate away from regulated institutions.

To address the issue, the council requested lawmakers explicitly prohibit affiliates and partners of stablecoin issuers from offering interest or yield as part of broader crypto market structure legislation currently under consideration in Congress.

The Banking Policy Institute recently made a similar request to lawmakers, warning that widespread adoption of yield-adjacent stablecoins could trigger up to $6.6 trillion in deposit outflows from the traditional banking system.

Crypto advocacy groups have disputed the banking industry’s position. 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.

The groups contended that further tightening the GENIUS Act would stifle innovation, limit consumer choice, and slow the development of digital payment systems at a time when stablecoin usage is expanding.