US Banks Flag Stablecoin Risks in GENIUS Act Debate

Community banks across the United States are waving a red flag that lawmakers did not expect to see this soon: stablecoins might still end up behaving like savings products, even after a federal bill tried to shut that door. Their concern is simple on the surface, but messy in practice. If an issuer cannot pay yield directly, a crypto platform can still offer “rewards” on a stablecoin balance, and to the customer, the experience can look almost identical.

That is the heart of the debate now swirling around the GENIUS Act, a framework meant to keep stablecoins firmly in the payments lane. Bankers argue the rules leave a practical workaround that could pull deposits away from smaller lenders, tighten credit for local borrowers, and blur the line between a payment token and a bank account.

The dispute is not only about stablecoins. It is about who controls the future of everyday money movement, and whether consumers will be nudged toward products that feel safe and bank-like without actually carrying bank-style protections.

The Rule the GENIUS Act Was Built Around

The GENIUS Act was designed to build a federal standard for payment stablecoins, including reserve quality and consumer protection. But one of its most important guardrails is the yield restriction: stablecoin issuers are not supposed to pay interest or yield to holders simply for holding the token.

Community banks supported that idea, because issuer-paid yield could turn a stablecoin into something that competes directly with insured savings accounts. In plain terms, if a token behaves like cash but earns like a deposit, a portion of customers will naturally ask why their money should stay in a traditional bank at all.

The original intent was not subtle as lawmakers wanted stablecoins to work like digital payment rails, not like a shadow banking product wrapped in a crypto interface.

The “Rewards” Workaround Banks Say Still Exists

Bankers are not focused on a stablecoin issuer sending yield to every holder. Their argument is about how stablecoins are actually distributed and used, which is often through exchanges, broker-style apps, and wallet platforms that sit between the issuer and the customer.

Under the GENIUS Act, the issuer may be blocked from paying interest, but a platform can still pay rewards to users holding stablecoins on that platform. From the user’s point of view, the outcome is nearly the same: hold a stablecoin balance, earn something extra, and treat it as a place to park liquid funds.

This is why community bankers call it a loophole. The law targets issuer behavior, yet the market reality is that consumer behavior is shaped by distribution partners, not by the issuer’s internal policy.

The American Bankers Association’s Community Bankers Council recently urged lawmakers to tighten the framework, warning that stablecoin ecosystems were already exploring the gap.

Why Small Banks Are Loudest About It

Large banks can fund themselves in multiple ways, including wholesale markets and institutional channels, so they can often absorb shifts in retail deposits better than smaller lenders. Community banks, by contrast, live and die by local deposits. They use those deposits to make loans to small businesses, farmers, first-time homebuyers, and everyday families.

That is why the debate around the GENIUS Act is being framed as a local credit issue, not a corporate turf war. If deposits steadily move from checking and savings accounts into stablecoin balances that sit on platforms, smaller banks argue they will have less capacity to lend, and the cost of credit could rise.

The Banking Policy Institute has also warned that pushing funds away from deposits and money market funds into incentivized stablecoin holdings could reduce credit availability and increase lending costs.

This is the part of the conversation that tends to land with lawmakers, because it ties a digital asset policy debate to real-world effects that voters feel fast: loan rates, access to financing, and whether a local business can expand.

How Rewards Can Exist Without “Issuer Yield”

A rewards program does not need an issuer to write a yield check. Banks argue that platforms can fund incentives through trading revenue, product margins, marketing support, or revenue-sharing structures tied to distribution. The exact mechanics can vary, but the end result is familiar: customers see a number that goes up while they hold a stablecoin balance.

From a policy standpoint, this matters because the GENIUS Act is trying to regulate the most direct path, while platforms can create indirect paths that produce the same consumer outcome.

Critically, banks are not claiming that every rewards program is dangerous. They are arguing that rewards based on balances, paid consistently, and marketed like “earn while you hold,” can function as interest in everything but name.

The Crypto Industry Pushback: “This Line Was Intentional”

On the other side, crypto advocacy groups argue that lawmakers drew the line where they meant to draw it. In their view, banning issuer-paid yield was the cleanest way to stop stablecoins from becoming bank deposits, while still allowing platforms to compete on features and customer experience.

The industry position tends to revolve around three ideas. First, stablecoins are not deposits and should not be regulated as if they are. Second, stablecoins do not fund loans the way banks do, so comparing them to deposit-funded lending is a category mismatch. Third, banning third-party incentives broadly could reduce consumer choice and slow down experimentation in payments and settlement products.

That argument matters because it reframes the debate. Instead of “closing a loophole,” it becomes “restricting competition,” which is a very different political fight.

The Market Signals Traders Watch While Washington Debates

While this legislative dispute sounds technical, crypto markets tend to react to stablecoin policy shifts quickly, especially when the rules could affect liquidity. Traders and analysts typically watch stablecoin supply trends, exchange inflows, and on-chain transfer volume because they reveal whether stablecoins are being used as a bridge into risk assets or simply sitting idle.

Another indicator is the reserve backdrop. Many stablecoin issuers hold reserves in short-term US Treasury bills, which means changes in Treasury yields can ripple into stablecoin business models and platform incentives.

In broader market context, risk appetite still shapes the backdrop for everything. When Bitcoin trades near levels like $96,522 and Ether hovers around $3,322, traders tend to watch liquidity conditions, volatility spikes, and derivatives positioning, including open interest and funding rates, because these metrics hint at whether the market is building steady conviction or fragile leverage.

The GENIUS Act debate matters here because stablecoins sit at the center of crypto liquidity. If incentives rise, stablecoin balances could swell. If incentives are restricted, liquidity patterns may shift toward other rails or products.

What Lawmakers Can Change Next

If Congress decides the current structure is too loose, the most direct option is to extend the yield restriction beyond issuers and apply it to affiliates and distribution partners. That would aim to close the practical gap community banks are describing, but it could also trigger fierce pushback from platforms.

Another path is a disclosure-heavy approach. Under that model, rewards could remain legal, but platforms would face stricter requirements on explaining who pays rewards, what risks exist, and what protections do not apply. This would lean into consumer clarity rather than a hard ban.

A narrower, more surgical option would be a safe harbor, where incentives tied to usage could be permitted while balance-based incentives that closely resemble interest are limited.

Whatever happens, the next edits to the GENIUS Act will likely shape whether stablecoins remain payment-first tools or evolve into products that feel like bank accounts without being treated like them.

Conclusion: A Small Loophole With Big Consequences

Stablecoins have always lived in the middle of two worlds, one foot in crypto rails and the other in traditional money behavior. The current clash over the GENIUS Act shows how hard it is to regulate outcomes, not just mechanisms. A law can ban issuer-paid yield, yet a platform can still create a reward experience that nudges users toward treating stablecoins as a savings substitute.

Community banks see that as a direct threat to deposit funding and local lending. Crypto platforms see it as normal competition and innovation in payments. In the middle sits the consumer, who may not care who funds the rewards, as long as the interface looks safe and the number increases.

That is why this debate is not going away. It is likely to intensify as stablecoins become more common in everyday transfers, and as policymakers decide whether the GENIUS Act is a payments framework with clean edges or the start of a broader financial rewrite.

Frequently Asked Questions

Why are community banks concerned about stablecoin rewards?

Community banks rely heavily on deposits to fund local lending. If customers move cash into stablecoin balances that pay rewards, those deposits can shrink, limiting banks’ ability to lend.

Are stablecoin rewards the same as interest?

Banks argue the customer experience can feel identical, even if the reward is funded by a platform instead of the issuer. Platforms argue rewards are incentives, not deposit interest.

Does the law ban yield-bearing stablecoins completely?

The framework restricts stablecoin issuers from paying yield solely for holding a token. The debate is whether third-party platforms should also be restricted in how they pay rewards.

Glossary of Key Terms

Stablecoin: A crypto token designed to keep a stable value, often pegged to $1, commonly used for trading and payments.

Yield-bearing stablecoin: A stablecoin setup where holders earn returns, directly or indirectly, for holding the token.

Reserves: Assets held to back a stablecoin’s value, often including cash and short-term US Treasury bills.

Deposit outflow: Money leaving traditional bank accounts, which can reduce a bank’s ability to fund loans.

Liquidity: How easily assets can be bought or sold without moving the price sharply, often supported by stablecoin availability in crypto markets.

Open interest: The total number of outstanding derivatives contracts, used to gauge how much leverage and positioning exists in the market.

Funding rate: A periodic payment between traders in perpetual futures markets that signals whether long or short demand is dominating.

Reference

Cointelegraph

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