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Regulatory Loophole: Over 200 community bank leaders have warned the Senate that crypto firms are skirting the GENIUS Act’s ban on stablecoin interest.
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Affiliate Rewards: Banks argue that while stablecoin issuers cannot pay interest, they are using affiliated exchanges to funnel rewards to users.
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Deposit Flight: The American Bankers Association (ABA) cites a Treasury report suggesting up to $6.6 trillion in deposits could flee banks for stablecoin yields.
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Lending Crisis: Bank groups warn that a loss of deposits will cripple their ability to fund local small business and agricultural loans.
The Battle for the 'Backbone' of the Economy
The tension between traditional banking and the stablecoin market has reached a boiling point following the passage of the GENIUS Act. In a recent letter to the Senate, community bankers argued that the current law is being "swallowed by the exception." While the Act was designed to prevent stablecoins from competing with bank deposits by banning interest payments, crypto firms have found a workaround: paying "rewards" or "inducements" through third-party partners. Bankers contend that this creates an unlevel playing field, where unregulated platforms offer yield backed by risky activities like rehypothecation, while banks are bound by strict reserve requirements.
Exaggerated Fears or Essential Warning?
Not everyone agree with the bankers' dire $6.6 trillion assessment. Regulators like the OCC’s Jonathan Gould have downplayed the threat, suggesting that a "bank run" to stablecoins would not happen overnight and would be noticed by authorities long before it became a systemic crisis. Meanwhile, crypto industry leaders argue that strict crackdowns on these rewards could push activity toward offshore, unverified channels. The debate now centers on whether Congress will update market structure legislation to ensure that "interest" and "rewards" are treated under the same regulatory umbrella to protect local lending.
