Community Banks Seek Tightened Stablecoin Rules
A coalition of over 200 US community bankers is pressing Congress to revise the GENIUS Act, citing a loophole that allows stablecoin issuers to indirectly provide interest or yield to token holders through third-party crypto exchanges.
In a letter sent Monday to the Senate, the American Bankers Association (ABA) Community Bankers Council argued that this practice undermines traditional banking, potentially diverting deposits away from savings accounts and reducing funds available for loans to small businesses, farmers, students, and home buyers.
“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 said.
“If billions are displaced from community bank lending, towns like ours will suffer.”
Why the Loophole Matters
The GENIUS Act passed last year prohibits stablecoin issuers from offering yield or interest directly to token holders. However, major crypto exchanges like Coinbase and Kraken provide rewards or interest via their platforms, effectively sidestepping the ban.
Community bankers warn that these third-party arrangements allow stablecoins to compete unfairly with bank deposits, threatening the stability of community lending systems that local economies rely on.
“Exchanges and a constellation of stablecoin-affiliated companies are not designed to fill the lending gap,” the council noted, highlighting the lack of deposit insurance and regulatory safeguards on these platforms.
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Congressional Action and Industry Pushback
The bankers’ call to action comes as Congress considers revisions to crypto market structure legislation. The council asked lawmakers to explicitly prohibit affiliates and partners of stablecoin issuers from offering yield or interest, closing the loophole.
This push echoes earlier efforts from the Bank Policy Institute, led by JPMorgan CEO Jamie Dimon, which warned that unchecked stablecoin yields could trigger $6.6 trillion in deposit outflows from the traditional banking system.
However, crypto advocacy groups, including the Crypto Council for Innovation and the Blockchain Association, argue that payment stablecoins do not function as loan funding vehicles. They warn that tightening these rules could stifle innovation and limit consumer choice in the crypto ecosystem.
The Stakes for Community Banks and Crypto Markets
The debate over stablecoin yields highlights a broader tension between traditional finance and emerging digital assets. Community banks emphasize that unchecked stablecoin rewards threaten local lending and economic growth, while crypto advocates argue that such regulations could hinder market development.
As Congress weighs updates to the GENIUS Act, the future of stablecoin yield offerings and the balance between innovation and financial stability hangs in the balance.
