The Stablecoin Loophole Banks Don’t Want Companies to Use

A coalition of major United States banking organizations, including the Bank Policy Institute (BPI), American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America, and Financial Services Forum, has called on Congress through a letter, urging them to address a loophole in the GENIUS stablecoin Act. 

President Donald Trump signed the GENIUS Act into law on July 18, 2025, with the House voting 308-122 and the Senate voting 68-30.

Banking Coalition Targets GENIUS Act Loophole

The GENIUS Act aims to strengthen and promote the US dollar’s global reserve status by regulating dollar-pegged stablecoins. 

However, the banking groups warn that the technicality in the law that allows affiliates of stablecoin issuers, such as crypto exchanges like Coinbase or Kraken, to offer yields or interest undermines the Act’s prohibition on issuers directly providing yields.

The GENIUS Act prohibits issuers from directly offering interest to token holders to avoid competing with government-regulated bank deposits.

The loophole does not extend this prohibition to affiliates, allowing them to provide indirect yields, such as rewards programs for stablecoins like Circle’s USDC or Tether’s USDT. 

Banking groups argue that sidesteps the Act’s purpose and risks destabilizing traditional banking, while advocates, including Coinbase, see such yields as a catalyst for financial innovation and mainstream adoption.

Stablecoins Surge, but Banks Fear Economic Fallout

The banking groups caution that yield-paying stablecoins can lead to large bank deposit drains, and an April 2025 US Treasury report projected potential shifts in the money supply.

Such outflows could limit banks’ lending capacity, potentially increasing interest rates and costs for businesses and consumers. The BPI specifically notes that stablecoins, unlike bank deposits or money market funds, do not fund productive investment like lending and face less regulatory oversight, and therefore pose threats to financial stability.

The stablecoin market currently stands at $282 billion, with Tether’s USDT at $164 billion and USDC at $66.2 billion, according to CoinMarketCap data. 

Stablecoin market overview (Source: CoinMarketCap)

That is a small fraction of the $22 trillion US money supply—but the Treasury projects growth to $2 trillion by 2028. Yields, whether offered natively or through exchange rewards, drive demand, rewarding users but threatening banks. 

Meanwhile, advocates argue that regulated stablecoins, backed by the GENIUS Act’s 1:1 reserve and anti-money laundering requirements, improve financial inclusion and reinforce global dollar dominance.

Banks Urge Congress to Level the Playing Field

The banking institutions are urging Congress to amend the GENIUS Act to expressly prohibit affiliates from yielding or paying interest, so issuers will not be able to exploit loopholes.

This, they argue, would align the Act with its goal of promoting innovation while protecting regulated financial institutions. 

Without the amendment, banks warn of an uneven playing field, with stablecoins offering bank-like services without equivalent regulatory oversight, putting deposit flight in danger, especially in periods of economic stress.

Issuers emphasize the Act’s benefits, including increased trust through reserve requirements and compliance measures. The Treasury has noted a potential “reshuffling” of the money supply toward stablecoins if yields continue, as illustrated in a recent chart, though the extent of this shift remains under debate.