The American Bankers Association, the Bank Policy Institute, and over 50 state banking groups are demanding that Congress close “several loopholes” in the recently enacted GENIUS Act, warning that the nation’s first major stablecoin legislation contains gaps that could trigger a massive deposit flight and undermine the traditional banking system.
In a letter addressed to Senate Banking Committee leaders on Tuesday, the coalition warned that even while the GENIUS Act prohibits stablecoin issuers from paying interest directly, “the restriction is easily bypassed because exchanges or other third parties can still offer rewards to stablecoin holders.”
This loophole could incentivize Americans to move their money from bank deposits into yield-bearing stablecoins, potentially disrupting the flow of credit to businesses and families, the letter said.
A Treasury Department report from April estimated that stablecoins could trigger up to $6.6 trillion in deposit outflows, depending on whether they can offer interest or yield.
The total market capitalization of all stablecoins is $280.3 billion, up about 0.6% in the past 24 hours, according to CoinGecko.
“Incentivizing a shift from bank deposits and money market funds to stablecoins would end up increasing lending costs and reducing loans to businesses and consumer households,” the group said.
A “relatively low” threat
Musheer Ahmed, Founder & MD of Finstep Asia, told Decrypt that the threat posed by stablecoins to traditional bank deposits is “relatively low given most retail users are unlikely to jump to stablecoin providers till they gain trust.”
Even if deposits do shift away from traditional banks, Ahmed suggested that the impact may be manageable since “crypto lending will pick up, likely making up the gap” and “more stablecoins in circulation could lower interest rates and balance this issue out.”
He advocated for clearer regulatory guidance, calling it “prudent to have SEC/CFTC issue guidelines on crypto-based lending” given past enforcement actions on unauthorized crypto lending.
The banking groups urged Congress to “extend the stablecoin issuers interest prohibition to cover digital asset exchanges, brokers, dealers, and affiliated entities” to prevent circumvention of the GENIUS Act, according to a Law360 report.
They also called for removing the approval pathway that lets non-financial firms issue stablecoins, warning it poses “serious risks and marks a major shift in federal policy,” and for repealing the provision allowing state-chartered issuers to operate nationwide without added oversight.
The GENIUS Act signing ceremony in July drew major crypto industry figures, including Coinbase CEO Brian Armstrong, Circle CEO Jeremy Allaire, and others, pointing to broad industry support for the federal framework despite widespread criticism from political figures including Senator Elizabeth Warren (D-MA).
Major stablecoin firms are moving fast to capitalize on the new framework, with Paxos filing for a national trust charter with the Office of the Comptroller of Currency, following similar applications from Circle and Ripple.
