US Community Bank: Stablecoins face deposit outflow risks! Urges Congress to close loopholes in the GENIUS Act

The American community bank requests amendments to the “GENIUS Act,” pointing out that stablecoins offering rewards through exchanges are effectively providing interest, which could lead to deposit outflows and impact the local financial system.

Community Banks Co-Sign Letter to Congress Highlighting Stablecoin “Interest” Issue

Recently, multiple American community banks have again pressured Congress to amend the “GENIUS Act” passed last year, addressing what they see as regulatory loopholes that allow stablecoins to “effectively pay interest.”

According to reports from various foreign media, the Community Bankers Committee under the American Bankers Association (ABA), representing over 200 community bank leaders, has officially written to the Senate, warning that some crypto companies are indirectly providing yields to stablecoin holders through exchanges or related entities, undermining the legislative intent of prohibiting stablecoins from paying interest.

Bank industry insiders point out that the original purpose of the “GENIUS Act” was to prevent direct competition between stablecoins and bank deposits, explicitly banning issuers from paying interest to holders. However, in practice, “rules have been swallowed by exceptions,” rendering the regulatory goal ineffective.

Further Reading
The American Bankers Association seeks to ban Coinbase stablecoin rewards, exposing conflicting interests!

Bank Industry Warns of Deposit Outflows, Impacting Local Lending and Economy

In the letter, the Community Bankers Committee emphasizes that if stablecoins offer yields through platform rewards or partner mechanisms, it could attract funds out of local banking systems, directly impacting the core deposit and lending model of community banks.

These banks rely on deposits to provide credit to local small businesses, farmers, students, and homebuyers. If funds are transferred on a large scale, the local economy could be severely affected.

Banking groups cite internal analyses indicating that if these loopholes are not closed, in the most extreme scenario, up to $6.6 trillion in bank deposits could face outflows.

Bank industry insiders openly state that crypto platforms and their related entities are not designed to serve as local lenders, nor can they offer deposit products protected by regulators, making it difficult to fill the financing gap left by community banks’ withdrawal.

Exchange Reward Mechanisms at the Heart of Controversy, Law Amendment Scope Draws Attention

The controversy centers on the fact that some cryptocurrency exchanges still offer rewards or yield programs for certain stablecoins on their platforms. The Community Bankers Committee believes that although stablecoin issuers do not directly pay interest, indirect funding through exchanges, related companies, or partners substantially violate the original legislative intent.

Therefore, the Community Bankers Committee urges Congress to explicitly extend the “interest prohibition” scope in future crypto market structure legislation to include stablecoin issuers’ related entities and partners, preventing regulatory gaps from being exploited. This stance also echoes previous positions from banking policy research institutions, indicating a more unified lobbying effort within the banking industry.

Crypto Industry Responds, Congress Becomes a Key Battleground

In response to the banking industry’s accusations, crypto industry groups continue to counter, claiming that the Community Bankers Committee’s risk descriptions are exaggerated.

Several crypto advocacy organizations point out that stablecoins are mainly used for payments and transaction settlements, not for supporting lending activities. Limiting platforms from offering rewards could weaken competition and innovation in the payments market. They also cite studies indicating that there is currently no evidence that the widespread use of stablecoins has caused disproportionate bank deposit outflows.

As the Senate considers a more comprehensive crypto asset regulatory framework, whether stablecoins can offer yields and whether the “GENIUS Act” needs strengthening have become key issues in the face-off between the banking and crypto industries. The final legislative direction could profoundly influence the role of stablecoins within the US financial system and their relationship with traditional banks.