US community banks are joining forces to advocate for the closure of a perceived "loophole" within the recently enacted Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act). This legislation, designed to regulate payment stablecoins, has inadvertently created an avenue for cryptocurrency exchanges and other digital platforms to offer incentives akin to interest on stablecoins, a practice that banks argue undermines their ability to compete and support local economies.
The heart of the issue lies in the interpretation and application of the GENIUS Act's prohibition on stablecoin issuers paying interest or yield to holders. While the Act directly restricts issuers, it seemingly does not explicitly extend this restriction to exchanges or affiliated platforms that distribute stablecoins. This has led to a situation where these platforms can offer rewards or other incentives to attract and retain customers holding stablecoins, effectively circumventing the intended purpose of the law.
The banking industry is concerned that this loophole creates an uneven playing field, potentially leading to a significant outflow of deposits from traditional banks to crypto platforms. The Consumer Bankers Association, Bank Policy Institute, American Bankers Association, Financial Services Forum, and Independent Community Bankers of America, among others, have voiced these concerns. They argue that if customers are incentivized to hold stablecoins on exchanges to earn yield-like rewards, they are less likely to keep their funds in bank accounts. A U.S. Treasury report in April estimated that stablecoins could pull approximately $6.6 trillion of deposits away from banks.
Community banks, in particular, are worried about the potential impact on their ability to serve their local communities. These banks rely heavily on deposits to fund loans to small businesses, families, and nonprofits. If deposits are drained in favor of crypto platforms, community banks may struggle to meet the borrowing needs of their communities, especially in low- and moderate-income neighborhoods. This also undermines the goals of the Community Reinvestment Act (CRA), which requires banks to meet the credit needs of the communities they serve.
The American Bankers Association and 52 state bankers associations have jointly urged lawmakers to address these loopholes in upcoming market structure legislation. They have recommended several fixes, including: * Strengthening the GENIUS Act's prohibition on interest payments to include brokers, dealers, exchanges, and affiliates of stablecoin issuers. * Repealing Section 16(d) of the GENIUS Act to restore state authority over out-of-state-chartered financial institutions. * Closing loopholes related to nonfinancial companies issuing payment stablecoins.
By closing these regulatory gaps, preserving the dual banking system, and upholding the separation between banking and commerce, Congress can foster responsible innovation while protecting consumers, preserving access to credit, and promoting economic stability. Without intervention, banks may need to increase deposit rates to compete with exchanges, which will make credit more expensive for small businesses, farmers, homebuyers, students, and local governments.
