TLDR
- Community bankers have asked the U.S. Senate to address a loophole in the GENIUS Act related to yield-bearing stablecoins.
- They believe that stablecoin rewards could draw deposits away from community banks and reduce their ability to provide local loans.
- The American Bankers Association warned that this issue could harm small businesses, farmers, students, and homebuyers.
- ABA President Rob Nichols stated that the loophole might divert trillions of dollars from traditional banking institutions.
- The Blockchain Association argued that stablecoin rewards do not cause disproportionate deposit outflows from banks.
Community banks are urging lawmakers to act on a stablecoin bill loophole, warning it could harm local lending and communities, as they claim yield-bearing crypto products could pull deposits from banks, limiting their ability to serve small borrowers and local economies.
Bankers Press for Closing Yield Loophole
Community bankers raised concerns in a letter sent this week to the U.S. Senate, citing potential deposit displacement caused by yield-bearing stablecoins. They said the GENIUS Act, passed earlier this year, failed to clearly prevent stablecoin issuers from offering interest rewards. The American Bankers Association’s Community Bankers Council called on lawmakers to close the existing legal gaps.
The letter warned that unrestricted yield offerings could reduce community banks’ ability to fund local loans. “If billions are displaced from community bank lending, small businesses, farmers, students, and home buyers in towns like ours will suffer,” the council wrote. Bankers emphasized that stablecoin products paying returns could divert deposits away from traditional institutions.
The group argued that failure to address this issue could shift funds to crypto platforms not engaged in community development. ABA President Rob Nichols echoed the council’s concerns in an internal memo. He said the loophole in the GENIUS Act “could mean that trillions of dollars are diverted away from banks.”
Nichols urged bank leaders to contact lawmakers and demand strict limits on stablecoin yield-bearing activities. He warned that crypto firms could bypass traditional lending responsibilities. “Lawmakers need to understand the very real risks to local communities in their state if they allow this loophole to be exploited,” he stated.
Crypto Industry Pushes Back Against Concerns
The Blockchain Association responded to the concerns in a separate letter sent to lawmakers last month. The group argued that yield-bearing stablecoins would not negatively affect community banks’ deposit bases. It said preventing crypto rewards could stifle competition and block innovation.
The Blockchain Association stated that independent research did not find evidence of large deposit outflows linked to stablecoin use. It also highlighted that banks currently hold excess reserves earning interest at the Federal Reserve. These reserves, they said, are not always used to issue loans.
Their letter described the banker concerns as inaccurate and misleading. The group maintained that restricting yield programs would hurt consumers and payment systems. It further urged lawmakers to support regulatory clarity and fair access for digital assets.
They insisted that allowing stablecoin yield programs supports transparency and aligns with existing legal frameworks. The Blockchain Association said any changes to the GENIUS Act must be carefully evaluated. It warned against regulatory overreach that could harm financial innovation.
Senators to Revisit Stablecoin Law
A group of U.S. senators will meet this Tuesday to review the GENIUS Act and broader crypto legislation. Discussions are expected to include the treatment of stablecoin rewards. Lawmakers are considering whether current rules adequately protect traditional banking structures.
The GENIUS Act passed earlier this summer as a foundational step in regulating stablecoins. However, critics argue it lacks restrictions on interest payments by crypto issuers. This has raised alarms in the banking sector.
Lawmakers will now examine proposals to tighten the language in the bill. They aim to ensure a balance between financial innovation and community banking needs. The hearing will address whether yield-bearing stablecoins require stricter oversight.
Congressional aides confirmed that the meeting will include input from both financial industry leaders and crypto stakeholders. The outcome could shape how the U.S. regulates future digital financial products. Discussions are set to continue as bipartisan talks evolve.
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