Alabama State Senator Keith Kelley is raising concerns about the potential negative impacts of the federal stablecoin bill, known as the GENIUS Act, on small community banks in Alabama. The GENIUS Act was signed into law two months ago by U.S. President Donald Trump.
Kelley, a Republican representing Alabama's 12th district, expressed his worries in an op-ed for 1819 News. He believes a loophole in the act could devastate rural economies in Alabama. According to Kelley, the GENIUS Act would allow cryptocurrency platforms to distribute financial rewards, incentivizing people to withdraw funds or close accounts at small community banks.
Kelley emphasized that community banks rely on local deposits to fund their lending. A decrease in deposits could significantly restrict their ability to offer loans to individuals, families, and small businesses. He is particularly concerned about rural farming communities, where margins are thin and seasonal cash flow is critical, stating that the loss of a trusted lending partner could be devastating.
The GENIUS Act, while signed into law on July 18, is not yet in effect. The U.S. Treasury and Federal Reserve are in the process of finalizing regulations related to the bill. The Treasury Department began this process in August by seeking public comments focusing on detecting illicit activity.
Proponents of the GENIUS Act argue that it will drive innovation by establishing regulatory clarity for stablecoin issuers. However, others have warned of potential issues with the law. Timothy Massad, a research fellow at Harvard University, pointed out a "foreign issuer loophole" that was not sufficiently addressed, potentially disadvantaging U.S.-based stablecoin issuers.
Kelley's concerns echo those of some banking groups. He highlighted a provision in the act that prohibits stablecoin issuers from paying interest or yields solely for holding the stablecoin. However, the bill does not explicitly prevent issuers from using cryptocurrency exchanges or affiliates to offer yields, potentially bypassing the law.
Kelley argues that allowing these cryptocurrency companies to function like banks, offering rewards or yield-generating products without requiring them to comply with the same regulations, is not innovation but regulatory arbitrage. He believes it puts the livelihoods of American families and local economies at risk.
The Bank Policy Institute echoed similar concerns in August, suggesting the GENIUS Act could lead to $6.6 trillion in deposit outflows from traditional banks, disrupting the flow of credit to communities that depend on it.
Christopher P. Couch noted that the GENIUS Act, while seemingly offering community banks an opportunity to participate in the digital payments space, could accelerate disintermediation. By shifting funds out of local banks and into national stablecoin ecosystems dominated by large issuers and wallet providers, it creates a playing field where scale, liquidity, and brand recognition determine success – factors stacked against community banks. He also pointed out that the law permits stablecoin issuance only by subsidiaries of insured depository institutions, federally approved nonbanks, or state-authorized nonbank issuers, but bars issuers from paying interest or yield, ostensibly to prevent deposit flight. This prohibition only applies to issuers, not to wallets or custodians, including major exchanges, which remain free to offer yield on stablecoin balances, creating a competitive asymmetry.
