Several U.S. banking groups are pressing lawmakers to address a perceived loophole in the recently enacted Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act). Led by the Bank Policy Institute (BPI), these groups argue that the existing legislation could unintentionally allow stablecoin issuers and their affiliates to circumvent the ban on offering interest or yield on stablecoins.
The GENIUS Act, signed into law on July 18, 2025, establishes a regulatory framework for payment stablecoins in the United States. A key provision of the Act prohibits stablecoin issuers from directly offering interest or yield to stablecoin holders. This measure was intended to prevent stablecoins from competing with traditional banks for deposits and to protect the traditional banking sector. However, the banking groups contend that the law does not explicitly extend this prohibition to crypto exchanges or affiliated businesses of stablecoin issuers. This omission, they warn, could allow issuers to indirectly offer yields through these partners, effectively sidestepping the intended restriction.
In a letter to Congress, the BPI and other banking associations, including the American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America, and the Financial Services Forum, highlighted the potential risks of this loophole. They cautioned that failure to close it could disrupt the flow of credit to American businesses and families, potentially triggering a massive outflow of deposits—estimated at $6.6 trillion—from the traditional banking system.
The banking groups argue that stablecoins are fundamentally different from bank deposits and money market funds. Unlike these traditional financial products, stablecoins do not fund loans or invest in securities to generate yield. This distinction, they assert, is why stablecoins should not be allowed to pay interest in the same way that regulated banks do on deposits or that money market funds do. Allowing interest or yield on stablecoins, they believe, could undermine the credit system.
The concern among bank executives is high, with a recent survey by IntraFi revealing that 96% of them worry that major retailers and tech companies will exploit loopholes to offer yield-bearing stablecoins. This could intensify competition for bank deposits, putting traditional banks at a disadvantage.
Examples of companies potentially taking advantage of this situation already exist. PayPal, for instance, has added the ability for users to earn rewards on its stablecoin, PYUSD, on PayPal and Venmo. Similarly, Coinbase offers a program that allows USDC holders to earn rewards simply by holding the tokens on the exchange. Coinbase CEO Brian Armstrong has defended the legality of the program, emphasizing that Coinbase is not the issuer of USDC and is simply offering rewards to customers.
The GENIUS Act aims to foster innovation in the stablecoin market while ensuring consumer protection and preventing illicit activities. It requires 100% reserve backing with liquid assets like U.S. dollars or short-term Treasuries and mandates monthly public disclosures of reserve composition. The Act also subjects stablecoin issuers to the Bank Secrecy Act, requiring them to establish anti-money laundering and sanctions compliance programs.
However, some experts point out other potential weaknesses in the GENIUS Act, such as the limited regulation of offshore stablecoin issuers, which could put U.S. issuers at a competitive disadvantage and potentially encourage new issuers to incorporate in less-demanding jurisdictions. Despite these concerns, the GENIUS Act represents a significant step toward establishing a regulatory framework for stablecoins in the U.S. Federal agencies are now tasked with writing detailed rules for capital, liquidity, and operational resilience. The unresolved question of interoperability will also be crucial in shaping the future of the U.S. payments ecosystem.
