Major U.S. banking groups are urging lawmakers to fix a key flaw in the recently passed GENIUS stablecoin Act. They claim a loophole lets crypto exchanges offer interest on stablecoins, which could pull trillions in deposits away from traditional banks and shake up the financial system.
What Is the GENIUS Stablecoin Act?
The GENIUS Act became law in July 2025, marking the first major U.S. regulation for stablecoins. These digital assets aim to hold a steady value, often tied to the dollar, and back it with safe reserves like cash or Treasuries.
This new law sets rules for issuers, requiring them to be licensed and follow strict guidelines to protect users. It bans stablecoin issuers from paying interest directly to holders, a move designed to keep the system stable and prevent risky behaviors.
Lawmakers passed the Act to bring clarity to the growing stablecoin market, worth over $150 billion as of August 2025. Supporters say it helps the U.S. stay ahead in fintech while guarding against collapses like those seen in past crypto crises.
The Act also allows banks and approved firms to issue stablecoins, but with limits on activities like lending. This setup aims to blend traditional finance with crypto innovation.
The Loophole Sparking Debate
Banks point to a gap in the law that lets crypto exchanges offer rewards on stablecoins without facing the same rules as banks. While issuers cannot pay interest, exchanges can provide yields through linked programs.
This means users might earn returns on holdings like USDC or USDT via platforms such as Coinbase, even if the issuer itself stays neutral. Banking groups call this an unfair edge that skips banking regulations.
The issue came to light soon after the Act passed, with reports highlighting how exchanges could attract users seeking better returns. This setup does not violate the law directly but creates what banks see as a backdoor advantage.
Crypto advocates argue this feature promotes choice and growth in the sector. They say closing it would stifle new ideas and favor old-school banks.
Recent discussions in Congress show growing pressure to address this before the Act fully takes effect in early 2026.
Why Banks Are Raising Alarms
Banking lobbies, including the American Bankers Association and Bank Policy Institute, warn that the loophole could trigger massive deposit shifts. They reference a Treasury report estimating up to $6.6 trillion might flow out of banks to yield-bearing stablecoins.
Such outflows could raise borrowing costs for everyday people and businesses. Banks rely on deposits to fund loans, and losing them might limit credit availability across the economy.
Leaders from major banks argue this threatens financial stability. They say crypto platforms gain without the oversight banks face, like reserve requirements and consumer protections.
In recent letters to lawmakers, these groups pushed for quick amendments. They want rules that bar any entity from offering stablecoin yields without full banking compliance.
This push reflects broader tensions as crypto challenges traditional finance. Banks fear losing ground in a market where digital assets grow fast.
Experts note that similar concerns arose during the rise of money market funds in the 1980s, which also pulled deposits from banks.
Crypto Industry Fights Back
Crypto groups like the Blockchain Association push back, calling the loophole a strength, not a weakness. They say it fosters competition and lets users benefit from innovation.
Industry voices argue that banning exchange rewards would protect banks at the expense of progress. They point out that stablecoins already offer speed and low costs for payments, and yields add real value.
Key figures in crypto have spoken out on social media and in hearings. They stress that the Act’s current form balances regulation with growth, and changes could drive business overseas.
Advocates highlight how stablecoins help underserved communities with faster, cheaper transactions. Restricting yields might limit these benefits.
The debate shows a divide: banks want a level field, while crypto seeks room to evolve.
- Stablecoins provide near-instant global transfers, unlike traditional bank wires that can take days.
- They often have lower fees, making them popular for remittances and online payments.
- Yields on stablecoins can range from 2% to 5% annually, based on market conditions.
Potential Impacts on the Financial World
If banks succeed in amending the Act, it could reshape how stablecoins work in the U.S. Exchanges might lose a key draw, slowing crypto adoption.
On the flip side, leaving the loophole open might boost stablecoin use but risk bank runs during economic stress. Regulators worry about systemic risks if too much money shifts quickly.
A recent study by financial analysts predicts stablecoin market cap could hit $1 trillion by 2030 if yields remain an option. This growth might create jobs in fintech but challenge banks’ role.
Global effects matter too. Other countries watch U.S. moves, with the EU already rolling out its own stablecoin rules under MiCA.
| Aspect | Traditional Banks | Crypto Exchanges |
|---|---|---|
| Interest Offering | Banned for own stablecoins | Allowed via rewards on third-party coins |
| Regulatory Burden | High (reserves, oversight) | Lower for non-issuers |
| Deposit Risk | Potential outflows | Attracts users seeking yields |
| Innovation Level | Limited by rules | High, with new features |
This table shows the core differences fueling the conflict.
Lawmakers face tough choices. They must weigh stability against innovation in a fast-changing field.
What’s Next for Stablecoin Regulation?
Amendments could come up in Congress sessions this fall. Experts expect hearings where both sides present cases.
The outcome might set precedents for broader crypto laws, like those for Bitcoin and DeFi. With elections looming, political winds could sway decisions.
For now, the GENIUS Act stands as a landmark, but tweaks seem likely amid lobbying.
Readers, what do you think about this banking versus crypto battle? Share your views in the comments and pass this article along to spark discussion.
