A group of US community bankers is currently exerting significant pressure on Congress to implement changes…

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A group of US community bankers is currently exerting significant pressure on Congress to implement changes to the GENIUS Act, a legislative framework governing the digital asset space. This effort is being spearheaded by the American Bankers Association’s Community Bankers Council, which formally expressed its concerns in a letter sent on Monday to the United States Senate. The primary objective of this industry pressure is to close what the bankers describe as a “loophole” within the existing legislation. This perceived gap currently allows stablecoin issuers to provide yield or interest to their holders through various third-party channels, potentially circumventing the restrictions that were originally intended to apply to these digital assets.

The council has specifically requested that lawmakers take action to incorporate a new prohibition within forthcoming crypto market structure legislation. This prohibition would target the affiliates and partners of stablecoin issuers, preventing them from offering interest to participants in the crypto market. The bankers argue that such measures are necessary to maintain the integrity of the GENIUS Act, which originally banned stablecoin issuers from directly offering interest or yield to their token holders. By targeting the constellation of affiliated companies and exchanges, the council aims to prevent what they characterize as an exploitation of the law that could undermine the competitive position of traditional financial institutions across the country.

Context

The historical background of this legislative tension centers on the GENIUS Act, which was designed to regulate the burgeoning stablecoin market. One of the core provisions of the act was a ban on stablecoin issuers offering interest or yield to holders. This restriction was established because lawmakers and bank lobbyists agreed that yield-bearing tokens could directly compete with traditional bank savings accounts, potentially drawing capital away from regulated financial institutions. However, the American Bankers Association’s Community Bankers Council points out that the current market environment has evolved in ways that the original act did not fully encompass.

Specifically, major cryptocurrency exchanges such as Coinbase and Kraken have continued to offer rewards to users who hold certain stablecoins on their platforms. The community bankers argue that these practices constitute a loophole, as they allow users to receive financial returns on stablecoin holdings despite the direct ban on issuers providing such yields. The council contends that these exchanges and the wide array of stablecoin-affiliated companies are not structured or designed to fill the “lending gap” that traditional banks occupy. Unlike community banks, these digital asset entities do not typically offer regulated, insured products or engage in the same types of community-focused lending that support local economies.

Impact

The potential economic impact of these stablecoin yields has raised alarms among various banking advocacy groups. The Banking Policy Institute, an organization led by JPMorgan CEO Jamie Dimon, has joined the effort to pressure lawmakers for legislative action. The institute has presented a stark assessment of the situation, arguing that failure to close the perceived loophole could result in massive shifts in the financial landscape. Specifically, the group has claimed that the continued ability of stablecoin-related entities to offer yields could trigger as much as $6.6 trillion in deposit outflows from the traditional banking system. Such a significant migration of funds could fundamentally alter the liquidity and stability of standard bank deposits.

The Community Bankers Council further emphasizes that this loss of deposits would directly impact the lending abilities of its member banks. They argue that if billions of dollars are displaced from community banks, the resulting “lending gap” will not be filled by crypto exchanges or their affiliates. The council maintains that closing this loophole is crucial because traditional banks rely on these deposits to fund loans for small businesses, students, and home buyers. Without the ability to compete effectively for deposits against yield-generating stablecoins, community banks fear their capacity to support local economic development will be severely diminished, potentially leading to broader consequences for the financial health of diverse communities.

Outlook

The debate over the GENIUS Act and the regulation of stablecoin yields is meeting significant resistance from the cryptocurrency industry. Two prominent advocacy groups, the Crypto Council for Innovation and the Blockchain Association, have formally rebuffed the banks’ arguments in a letter sent to the Senate Banking Committee. These organizations contend that the banks’ fears regarding lending are misplaced. They argue that payment stablecoins are fundamentally different from traditional bank deposits because they are not used to fund loans. By extension, the crypto advocacy groups suggest that the proposed restrictions on affiliates and partners would do more to stifle innovation and limit consumer choice than to protect the financial system.

As crypto market structure legislation moves through Congress, the resolution of this conflict remains a focal point for both the banking and digital asset sectors. The Community Bankers Council continues to advocate for a strict prohibition on interest offerings by any entity affiliated with a stablecoin issuer, seeking to ensure the original intent of the GENIUS Act is upheld. Meanwhile, the crypto industry is fighting to maintain its ability to offer rewards through exchanges, portraying the bankers’ push as an attempt to protect traditional business models from technological advancement. The outcome of this legislative struggle will likely determine the competitive dynamics between traditional savings accounts and digital stablecoins for years to come.