Community Banks Push Congress to Tighten GENIUS Act Rules on Stablecoin Rewards

Highlights:

• Community banks warn that stablecoin rewards could reduce deposits used for local loans.
• Lawmakers are under pressure to clarify the GENIUS Act rules on stablecoin rewards.
• Crypto groups have disputed bank concerns as Congress reviews crypto market structure rules.

Community bankers are urging U.S. lawmakers to revisit stablecoin rules that they say allow indirect yield payments. The American Bankers Association’s Community Bankers Council sent a letter this week to the U.S. Senate. The council represents more than 200 community bank leaders from across the country. They warned that the current language in the GENIUS Act permits stablecoin issuers to benefit holders through third-party arrangements. As a result, bankers argue the rules weaken safeguards meant to protect community bank deposits.

The council said some crypto firms rely on partners to distribute rewards linked to stablecoin holdings. According to the letter, these arrangements bypass limits lawmakers already approved. Lawmakers originally restricted issuer-paid yield to prevent competition with bank savings accounts. However, the bankers said indirect rewards undermine that original policy goal. They urged Congress to address the issue before these practices become widespread.

The community bankers emphasized that deposits are crucial to local lending activity. Banks use deposits as a way of financing loans to small businesses, farmers, and households. Lending capacity in local communities might decrease in case the deposits are moved. The council cautioned that this move may impact students and first-time home buyers. They positioned the problem as a social challenge of credit access to the community instead of a technical fight over crypto.

GENIUS Act Debate Focuses on Stablecoin Rewards and Deposit Risks

The discussion has now shifted to incentives that are anchored on stablecoins stored on crypto exchanges. Cryptocurrency exchanges like Coinbase and Kraken also provide rewards to customers who have particular stablecoins. Community bankers contend that these incentives operate as yield in practice. They claim that this method contradicts the limits described in the GENIUS Act. As a result, they want lawmakers to clarify how the rules apply to partners and affiliates.

Bankers warned that affiliate-based reward programs blur regulatory responsibility. They said issuers benefit from these programs without directly paying yield. In their view, this structure allows firms to sidestep the intent of the law. They cautioned that unchecked growth could pull significant funds from insured bank deposits. Such shifts, they said, could weaken credit availability in smaller communities.

Other banking groups have echoed these concerns and increased pressure on Congress. The Banking Policy Institute raised similar warnings on the GENIUS Act last year. Its leadership warned that deposit movement could reach trillions under certain scenarios. Banking groups argue that even smaller shifts could disrupt community banking models. Therefore, they continue to push lawmakers for tighter legislative language.

Community bankers also questioned whether crypto firms can replace traditional banking roles. They said stablecoin networks lack federal insurance and local lending obligations. They added that exchanges do not provide the same consumer protections as banks. For these reasons, they urged lawmakers to restrict yield offers by affiliates. They linked this request to broader crypto market structure legislation under discussion.

Crypto Groups Push Back as Lawmakers Prepare Market Structure Talks

Crypto advocacy groups have rejected claims raised by the banking industry. The Crypto Council for Innovation and the Blockchain Association sent rebuttals to lawmakers. They argued that payment stablecoins do not fund loans or replace bank deposits. They also said reward programs promote competition across financial services. According to the groups, limiting rewards could reduce consumer choice.

The groups cited research showing no clear link between stablecoin growth and deposit losses. They noted banks already hold large reserves earning interest at the Federal Reserve. They warned that reopening settled rules, such as the GENIUS Act, could weaken regulatory clarity. The groups urged lawmakers to avoid changes that could disrupt market balance.