Several U.S. banking groups are pushing for new regulations to close a “loophole” that allows stablecoins to offer interest or yield. They argue that this practice threatens the stability of the financial system by potentially siphoning funds away from traditional bank deposits.
Several significant US banking associations are urging Congress to tighten new stablecoin regulations, warning that a gap in the GENIUS Act could allow issuers to skirt restrictions on paying interest to holders.
The Bank Policy Institute (BPI) stated in a letter sent on Tuesday that the current wording of the law allows stablecoin issuers to offer yield through affiliated exchanges or other partners indirectly.
The American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America, and the Financial Services Forum joined the BPI.
GENIUS Act Bans Stablecoin Yield Payouts by Issuers, Leaves Affiliate Loophole
Issuers are prohibited from directly paying interest or yield under the GENIUS Act, which was signed into law by President Donald Trump on July 18. However, related entities are not explicitly prohibited from doing so.
The groups contend that such an arrangement could disrupt the US financial system. They cite a US Treasury estimate that yield-bearing stablecoins could result in as much as $6.6 trillion in deposit outflows from traditional banks.
They caution that a significant transition to stablecoins could increase financing costs for households and businesses, as banks depend on deposits to finance loans.
The letter emphasized that stablecoins do not engage in lending or securities investment to generate returns and that they should not pay interest on deposits in the same manner as highly regulated and supervised banks or offer yield in the same way as money market funds.
Stablecoin adoption continues to be significantly influenced by yield. Historically, certain issuers, such as Tether (USDT), have refrained from explicitly offering interest, while others have reaped the benefits of exchange-based rewards.
For instance, users who holds Circle’s USDC on Coinbase or Kraken can generate returns, thereby establishing a competitive alternative to conventional savings accounts.
The banking groups have warned that the emergence of stablecoins containing a yield could increase the risk of “deposit flight,” particularly during periods of economic stress, resulting in tighter credit conditions.
“The corresponding reduction in credit supply means higher interest rates, fewer loans, and increased costs for Main Street businesses and households,” they wrote.
Tether and USDC Control Over 80% of $280B Stablecoin Market
The stablecoin market is currently valued at $280.2 billion, with Tether and USDC commanding more than 80% of the sector at $165 billion and $66.4 billion, respectively, according to CoinGecko.
While that figure is still modest compared to the $22 trillion US money supply, the Treasury projects the market could grow to $2 trillion by 2028.
Coinbase and PayPal, two of the largest crypto-linked companies in the United States, continue to implement stablecoin yield programs, despite recent US legislation explicitly prohibiting such incentives for stablecoin issuers.
In recent earnings calls, executives from Coinbase and PayPal have confirmed that they will continue to reward users who hold stablecoins on their platforms, claiming that the law does not apply to them.
Coinbase CEO Brian Armstrong responded to a shareholder inquiry: “We are not the issuer.” “We do not provide interest or yield; rather, we offer rewards.”