As Congress crafts legislation to establish a regulatory framework for digital assets markets, a slew of new research is underscoring the risks to small businesses and job creation posed by a critical issue in this debate: the payment of interest, yield or rewards on payment stablecoin holdings. While the GENIUS Act took the first step in addressing these risks by prohibiting payment stablecoin issuers from offering yield and interest, Congress must explicitly extend this important prohibition to crypto exchanges, affiliates, and other intermediaries.
Community banks have a foundational role in keeping credit and banking services available to the nation’s local communities through good times and bad, fueling small-business innovation, job creation and economic growth. But allowing crypto exchanges and other intermediaries to offer yield-like incentives on payment stablecoins would pose significant risks to the local economies that depend on Main Street lenders. According to an analysis of industry research by the Independent Community Bankers of America — whose Digital Assets Subcommittee I chair — continuing to allow crypto intermediaries to pay interest or yield on payment stablecoin holdings could reduce community bank lending by $850 billion due to a $1.3 trillion reduction in the industry’s deposits.
Amid Treasury estimates that stablecoins will grow from $300 billion to trillions of dollars by the end of the decade, a recent Federal Reserve Notes research paper underscores these warnings about the impact of stablecoins on bank deposits and lending. The Fed paper says that as retail deposits substitute into stablecoins, banks will face more concentrated, uninsured, wholesale deposits — increasing both liquidity risk and funding costs.
Further, the paper says these pressures could lead to declining bank credit, which would be particularly felt by small businesses that rely on relationship banking. In turn, banking industry consolidation may accelerate in response to these pressures, leaving U.S. communities with fewer choices and depriving them of a hometown presence that can understand and address Main Street credit needs.
These troubling analyses are critical as lawmakers consider market structure legislation and work to avert harm to local communities and the real economy. With community banks holding $4.8 trillion in deposits that fuel $4 trillion in total lending activity, this reduction in lending would significantly diminish access to credit and economic resilience in local communities.
Small-business lending — led by the community banking sector — is a critical example. In the second quarter of 2024, small-business loans as a percent of total loans at community banks were more than double the rate at regional and large banks, according to the Federal Reserve Bank of Kansas City. Local businesses are also most likely to be approved for most or all of their applications for credit at community banks, according to the Fed’s Report on Employer Firms. With small businesses accounting for more than half of the nation’s job creation and nearly 73% of its workers, the community bank dedication to small business sustains the U.S. economy.
Community banks are also a vital partner to U.S. farmers, accounting for 81% of farm real estate debt held by commercial banks, 74% of operating debt, and almost 90% of commercial bank farmland loans with original amounts of $500,000 or less, the Kansas City Fed reports. With community bank branches representing over 71% of all bank branches in rural areas and holding nearly two-thirds of rural deposits, according to the FDIC, rural communities rely on community banks.
Digital asset firms are working to establish an alternate financial system in which deposit accounts and payments, the underpinnings of the financial system, are rerouted to operate on stablecoin rails. They are offering “rewards” often advertised as “annual percentage yield” to incentivize users to keep stablecoin holdings on platforms as a consumer would in a savings account, but without the same regulatory safeguards and deposit insurance as highly regulated community banks. America’s Main Streets will pay the price if money is siphoned out of their communities to be held in reserves backing yield-bearing payment stablecoins.
To avoid this outcome, Congress must ensure pending digital assets market structure legislation is crafted carefully. The GENIUS Act took the first step in addressing the risks posed by yield-bearing payment stablecoins by prohibiting payment stablecoin issuers from offering yield, interest, or other considerations to payment stablecoin holders. Now, lawmakers must protect communities across America by extending this prohibition to crypto exchanges, affiliates, and other intermediaries.
With Americans counting on community banks to provide small-business credit, meet agricultural lending needs, and provide banking services to American families across the country, extending the yield prohibition will enable community banks to continue serving their vital role in powering local economies across the nation.
