Banking groups are mobilizing against what they consider a glaring oversight in federal stablecoin legislation—one that threatens to siphon trillions in deposits from traditional institutions while technically adhering to the letter of the law.
The GENIUS Act, enacted July 18, 2025, explicitly prohibits stablecoin issuers from paying direct interest or yield to token holders. Yet the legislation’s architects apparently overlooked a rather obvious workaround: nothing prevents affiliate entities or crypto exchanges from offering yields on behalf of these same issuers. This carve-out has created what banking groups characterize as a dangerous loophole that circumvents the law’s spirit while exploiting its literal interpretation.
The mechanism operates with elegant simplicity. Stablecoin issuers like Circle collaborate with affiliated exchanges—Coinbase, Kraken, and others—to offer “rewards” or interest-like returns that functionally replicate deposit yields without technically violating the prohibition. Coinbase currently offers approximately 4.1% on USDC holdings, while PayPal provides 3.7% through their platform. These arrangements bypass direct payment restrictions while delivering identical economic benefits to users.
Banking groups estimate this loophole could trigger $6.6 trillion in deposit outflows from traditional banks—a figure that would fundamentally reshape American finance. The American Bankers Association, Bank Policy Institute, Consumer Bankers Association, and other Fed-aligned institutions warn that such massive deposit flight would undermine banks’ ability to fund loans, potentially destabilizing credit creation during economic stress periods.
The implications extend beyond mere competitive concerns. Significant deposit losses would reduce banks’ stable funding sources, likely increasing lending costs and reducing loan availability for businesses and consumers. This threatens the deposit-loan intermediation model that powers much of the economy, as yield-bearing stablecoins directly compete with high-interest savings accounts for customer deposits. The stablecoin market currently holds approximately $280 billion in market capitalization, representing just a small fraction of the broader financial ecosystem. Marketing strategies employed by stablecoin issuers may blur lines between stablecoin yields and traditional bank interest, adding to consumer confusion. Unlike traditional stock markets which operate during set hours, crypto markets provide 24/7 trading opportunities that could further attract depositors seeking constant access to their yields.
Banking groups have responded with organized resistance, formally requesting Congress amend the GENIUS Act to explicitly prohibit affiliate payout arrangements. The Bank Policy Institute and trade associations have sent letters urging regulators to extend interest-yield bans to crypto exchanges and allied entities. Their efforts reflect growing alarm over what they perceive as regulatory capture through technical loopholes—a development that could fundamentally alter traditional banking’s competitive landscape.
