Key Takeaways
- The American Bankers Association’s Community Bankers Council submitted a letter Monday urging lawmakers to strengthen the GENIUS Act
- “Some companies have exploited a perceived loophole allowing stablecoin issuers to indirectly fund payments to stablecoin holders through digital asset exchanges…” the community bank leaders wrote.
More than 200 community bank executives have called on the US Senate to revise federal stablecoin legislation, arguing that crypto platforms are circumventing restrictions designed to prevent yield-bearing digital tokens from competing with traditional bank deposits.
The American Bankers Association’s Community Bankers Council submitted a letter Monday urging lawmakers to strengthen the GENIUS Act, which Congress passed last year to establish regulatory oversight for dollar-pegged stablecoins. Bank leaders contend that while the statute prohibits stablecoin issuers from directly paying interest to holders, cryptocurrency exchanges have implemented reward programs that achieve functionally identical results through indirect arrangements.
These reward structures typically involve platforms like Coinbase and Kraken distributing earnings to users who maintain stablecoin balances on their services. The compensation doesn’t flow directly from token issuers but rather through intermediary companies, creating what banking advocates characterize as a regulatory workaround that contradicts legislative intent.
“Some companies have exploited a perceived loophole allowing stablecoin issuers to indirectly fund payments to stablecoin holders through digital asset exchanges and other partners,” the letter has flagged.
The GENIUS Act originally incorporated provisions preventing stablecoin issuers from offering interest, a restriction that emerged from banking industry lobbying during the bill’s development. Legislators accepted arguments that yield-bearing stablecoins would directly compete with traditional savings accounts, potentially destabilising deposit bases that banks rely upon to originate loans.
Community bank representatives in the letter argue this arrangement poses risks to regional financial institutions. Their letter emphasised that deposits fund lending operations supporting local businesses, agricultural producers, students, and homebuyers — economic activities that would contract if customers migrate savings toward higher-yielding stablecoin alternatives.
“Community banks are the backbone of local economies,” the correspondence stated. “Allowing inducements like interest or rewards on stablecoins could incentivize customers to move savings out of banks, jeopardizing the lending that fuels growth in towns across America.”
The banking group described the current situation as allowing “the exception to swallow the rule,” warning that if billions of dollars shift from community bank deposits, “small businesses, farmers, students, and home buyers in towns like ours will suffer.”
The council specifically rejected assertions that crypto platforms could substitute for traditional banking functions, noting that exchanges and affiliated companies lack deposit insurance protections offered by federal regulators and are not structured to provide commercial lending services.
This complaint represents the latest banking industry effort to restrict stablecoin functionality. The Banking Policy Institute, whose membership includes major financial institutions, previously contacted lawmakers in August requesting identical legislative modifications. The firm had projected that unaddressed stablecoin yield programs could trigger deposit outflows reaching $6.6 trillion across the traditional banking system.