A coalition of US community banks is intensifying its push for Congress to amend the GENIUS Act, arguing that a perceived loophole allows stablecoins to compete directly with bank deposits. In a letter sent on January 5 to the Senate, the American Bankers Association’s Community Bankers Council urged lawmakers to block arrangements that enable stablecoin holders to earn yield through exchanges and affiliated platforms.
The council, representing more than 200 community bank leaders, said the current framework undermines the law’s intent. While the GENIUS Act explicitly prohibits stablecoin issuers from paying interest to tokenholders, banks argue that rewards offered by third parties effectively recreate yield-bearing products outside the banking system.
According to the group, these structures risk drawing funds away from community banks that rely on deposits to support lending in local economies. The council warned that the impact would be felt most acutely by small businesses, farmers, and households dependent on relationship-based banking.
GENIUS Act Faces Renewed Scrutiny amid Market Structure Debate
The GENIUS Act, passed last year, was designed to establish guardrails for payment stablecoins while preventing them from functioning like unregulated savings accounts. Lawmakers included the yield prohibition after lobbying from banks, which argued that interest-bearing stablecoins could bypass deposit insurance and prudential oversight.
Community bankers now contend that exchanges offering rewards on stablecoin balances have effectively weakened that safeguard. Platforms, including major US crypto exchanges, provide incentives for holding certain tokens, often funded through trading revenue or partnerships rather than the issuer itself.
The council has asked Congress to address the issue through broader crypto market structure legislation currently under consideration. Specifically, it wants lawmakers to bar affiliates and partners of stablecoin issuers from offering interest or yield linked to stablecoin holdings.
From the banks’ perspective, the concern is systemic rather than competitive. They argue that entities offering yield without regulatory capital requirements or access to federal backstops are not positioned to replace banks’ role in credit creation during economic stress.
Industry Groups Clash over Role of Stablecoins in Lending
The push from community banks follows similar efforts by larger industry bodies. The Banking Policy Institute, whose members include major US lenders, has previously warned that unchecked stablecoin growth could lead to trillions of dollars in deposit outflows over time.
Crypto industry groups have pushed back, arguing that payment stablecoins are primarily transactional tools rather than lending instruments. In prior correspondence with lawmakers, trade associations said restricting third-party reward programs would limit innovation and reduce consumer choice without meaningfully protecting the banking system.
The debate highlights a broader policy challenge as digital assets move closer to mainstream finance. Stablecoins already play a central role in crypto market liquidity, and their potential use in payments has drawn interest from both fintech firms and banks exploring tokenized cash.
As Congress weighs market structure reforms, the dispute underscores competing views on how digital dollars should fit within the existing financial system. For community banks, closing the GENIUS Act loophole is framed as a defensive step to preserve local lending capacity. For crypto advocates, it represents another test of whether regulation will accommodate new payment models or reinforce traditional boundaries.