Several US banking groups led by the Bank Policy Institute (BPI) urged regulators to close what they say is a loophole that could indirectly allow stablecoin issuers and their affiliates to pay interest or yields on stablecoins.
In a Tuesday letter to Congress, BPI warned that a failure to close the so-called loophole in the new stablecoin laws under the GENIUS Act could disrupt the flow of credit to American businesses and families, potentially triggering $6.6 trillion in deposit outflows from the traditional banking system.
The GENIUS Act prohibits stablecoin issuers from offering interest or yield to holders of the token; however, it does not explicitly extend the ban to crypto exchanges or affiliated businesses, potentially enabling issuers to sidestep the law by offering yields through those partners, the groups said.
Source: Bank Policy Institute
Offering yield is one of the biggest marketing pulls that stablecoin issuers have to attract users. Some offer yield natively for holders while others, such as users of Circle’s USDC (USDC), are rewarded for holding the stablecoin on exchanges such as Coinbase and Kraken.
The banking groups are seemingly concerned that the wide adoption of yield-bearing stablecoins could undermine the banking system, which relies on banks attracting deposits with high-interest savings products in order to back the loans they make.
Stablecoins could undermine credit system, bankers say
In the letter, also signed by the American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America and the Financial Services Forum, BPI noted stablecoins are fundamentally different from bank deposits and money market funds because they don’t fund loans or invest in securities to offer yield.
“These distinctions are why payment stablecoins should not pay interest the way highly regulated and supervised banks do on deposits or offer yield as money market funds do.”
Allowing payments of interest or yield on stablecoins could lead to $6.6 trillion in deposit outflows, BPI noted, citing a US Treasury report from April.
A chart illustrating how money supply may “reshuffle” into stablecoins under the GENIUS Act. Source: US Treasury Department
Such a large shift in the financial system could pose a serious risk to America’s credit system, BPI added.
“The result will be greater deposit flight risk, especially in times of stress, that will undermine credit creation throughout the economy. The corresponding reduction in credit supply means higher interest rates, fewer loans, and increased costs for Main Street businesses and households.”
Stablecoin market still a fraction of US money supply
The total market cap of stablecoins currently sits at $280.2 billion, a fraction of the US dollar money supply, which the Federal Reserve reported as $22 trillion at the end of June.
The stablecoin market is more than 80%dominated by Tether (USDT) and USDC at $165 billion and $66.4 billion, respectively, CoinGecko data shows.
US President Donald Trump signed the GENIUS Act into law on July 18, which many crypto industry analysts say will boost US dollar dominance by promoting stablecoins pegged to the dollar, rivaling other currencies and reinforcing the dollar’s role as the world’s leading reserve currency.
The Treasury expects the stablecoin market to grow to $2 trillion by 2028.
