US Banking Groups Push to Close Stablecoin Yield ‘Loophole’

Several major 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.

Key Takeaways:

• TUS banking groups want Congress to close a GENIUS Act loophole allowing stablecoin yield via affiliates.
• They warn yield-bearing stablecoins could trigger $6.6T in bank deposit outflows.
• Such outflows could raise interest rates, cut loan availability, and increase borrowing costs.

In a letter sent Tuesday, the Bank Policy Institute (BPI) said the law’s current wording leaves room for stablecoin issuers to offer yield indirectly through affiliated exchanges or other partners.

The BPI was joined by the American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America, and the Financial Services Forum.

The GENIUS Act, signed into law by President Donald Trump on July 18, bans issuers from directly paying interest or yield but does not explicitly prohibit related entities from doing so.

The groups argue that such an arrangement could disrupt the U.S. financial system, citing a US Treasury estimate that yield-bearing stablecoins could trigger as much as $6.6 trillion in deposit outflows from traditional banks.

Banks rely on deposits to fund loans, and a large-scale shift into stablecoins could, they warn, drive up borrowing costs for businesses and households.

“Payment stablecoins should not pay interest the way highly regulated and supervised banks do on deposits or offer yield as money market funds do,” the letter stated, emphasizing that stablecoins do not engage in lending or securities investment to generate returns.

Yield remains a key draw for stablecoin adoption. Some issuers, such as Tether (USDT), have historically avoided offering interest directly, while others benefit from exchange-based rewards.

So-called stablecoins are effectively zero-yield money market funds, created primarily for regulatory arbitrage. Why else own one when T-bills yield 4%+? Are ounterparty, regulatory, and depegging risks underestimated in today’s environment? #GENIUSACT $USDT $USDC $CRCL pic.twitter.com/rE7VTJij2k

For example, users holding Circle’s USDC on Coinbase or Kraken can earn returns, creating a competitive alternative to traditional savings accounts.

The banking groups warn that the rise of yield-bearing stablecoins could heighten “deposit flight risk,” particularly during economic stress, leading to 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.

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 small compared to the $22 trillion U.S. money supply, the Treasury projects the market could grow to $2 trillion by 2028.

As reported, two of America’s largest crypto-linked companies, Coinbase and PayPal, are pushing forward with stablecoin yield programs, despite new US legislation explicitly banning such incentives for stablecoin issuers.

In recent earnings calls, executives at both Coinbase and PayPal confirmed they will continue rewarding users who hold stablecoins on their platforms, arguing the law does not apply to them.

“We are not the issuer,” Coinbase CEO Brian Armstrong said, responding to a shareholder question. “We don’t pay interest or yield, we pay rewards.”

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