Stablecoin Yield: Urgent Warning from US Banks on GENIUS Act Loophole

The cryptocurrency landscape continually evolves, introducing new financial instruments and challenging traditional systems. Recently, US banking groups issued a significant warning. They believe a specific loophole in the new GENIUS Act regarding stablecoin yield could pose a substantial threat to the conventional banking system. This development captures the attention of anyone interested in the future of finance and the ongoing integration of digital assets.

US Banks Target Stablecoin Yield ‘Loophole’

Several prominent US banking groups have urged Congress to act. Led by the Bank Policy Institute (BPI), these groups want to close a perceived loophole. This loophole, they argue, allows stablecoin issuers to offer yields through affiliated firms. The concern is clear: it could undermine the established banking system.

On Tuesday, BPI sent a letter to Congress. They warned that failing to address this loophole in the new stablecoin laws, specifically under the GENIUS Act, could disrupt credit flow. American businesses and families might face severe consequences. Furthermore, the BPI letter highlighted a potential risk of $6.6 trillion in deposit outflows from traditional banks.

The GENIUS Act and its Unintended Consequences

The GENIUS Act prohibits stablecoin issuers from directly offering interest or yield to token holders. However, the law does not explicitly extend this ban. It does not cover crypto exchanges or affiliated businesses. This omission creates a pathway for issuers. They could potentially sidestep the law by offering yields through these partners. Source: Bank Policy Institute

Offering yield remains a significant marketing tool for stablecoin issuers. It helps them attract new users. Some stablecoins provide native yield to holders. Others, like Circle’s USDC, offer rewards to users holding the stablecoin on exchanges. Platforms such as Coinbase and Kraken are examples. The banking groups are convinced. Widespread adoption of yield-bearing stablecoins could indeed undermine the banking system. Banks rely on attracting deposits with high-interest savings products. These deposits then back the loans they make.

Stablecoins Could Undermine the Banking System, Say Bankers

The letter, co-signed by major organizations, emphasizes key differences. These include the American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America, and the Financial Services Forum. BPI noted that stablecoins fundamentally differ from bank deposits and money market funds. Importantly, they do not fund loans. They also do not invest in securities to offer yield.

The BPI stated, “These distinctions explain why payment stablecoins should not pay interest. Highly regulated banks do so on deposits. Money market funds also offer yield.” Allowing interest or yield payments on stablecoins could lead to substantial deposit outflows. BPI cited an April US Treasury report. This report estimated a potential $6.6 trillion in outflows. A chart illustrates how money supply might “reshuffle” into stablecoins under the GENIUS Act. Source: US Treasury Department

The Risk to America’s Credit System

Such a large shift in the financial system could pose a serious risk. BPI added that it threatens America’s credit system. They elaborated on the potential outcomes. “The result will be greater deposit flight risk,” they warned. This risk increases especially during times of financial stress. It will also undermine credit creation across the entire economy. A corresponding reduction in credit supply means higher interest rates. It also leads to fewer loans. This directly increases costs for Main Street businesses and households.

Understanding the Current Stablecoin Market and Crypto Regulation

The total market capitalization of stablecoins currently stands at $280.2 billion. This figure represents a fraction of the US dollar money supply. The Federal Reserve reported the US dollar money supply as $22 trillion at the end of June. Related: Stablecoin laws aren’t aligned — and big fish benefit

The stablecoin market shows significant concentration. Tether (USDT) and USDC dominate more than 80% of the market. Their market caps are $165 billion and $66.4 billion, respectively, according to CoinGecko data. US President Donald Trump signed the GENIUS Act into law on July 18. Many crypto industry analysts believe this act will boost US dollar dominance. It promotes stablecoins pegged to the dollar. This rivals other currencies. It also reinforces the dollar’s role as the world’s leading reserve currency. The Treasury expects the stablecoin market to grow to $2 trillion by 2028. Magazine: Bitcoin vs stablecoins showdown looms as GENIUS Act nears

The Future of the Banking System Amidst Digital Evolution

The debate surrounding stablecoin yield highlights a critical juncture. Traditional finance and the burgeoning digital asset space are converging. Banks are pushing for comprehensive crypto regulation. They seek to ensure a level playing field. They also aim to protect the stability of the financial system. This ongoing dialogue will shape how digital currencies integrate into the global economy. It will also determine the future role of established financial institutions. The outcome of these discussions will significantly impact consumers and businesses alike.