Update: Why Us Community Banks Say The Genius Act Has A Stablecoin Loophole

Banks argue that stablecoin rewards offered through exchanges exploit a GENIUS Act loophole, blurring the line between payment tokens and savings accounts.

The GENIUS Act was designed to keep stablecoins as payment tools rather than savings products. As a result, it bans issuers from paying interest or yield to stablecoin holders.

Community banks argue that a loophole exists because exchanges and affiliated partners can still offer rewards on stablecoin balances, even if the issuer itself does not pay yield.

Smaller banks are more concerned than large banks because they rely heavily on local deposits. Any outflow of deposits could directly reduce lending to small businesses and households.

Banks also note that reward programs can be funded through platform revenues or affiliate structures, making the ban ineffective in practice if partner incentives continue.

In the US, the GENIUS Act of 2025 was intended to provide a federal framework for payment stablecoins. The law established strict standards for reserves and consumer protection. However, the banking sector soon warned Congress of a potential loophole in the stablecoin rules.

This article examines what the GENIUS Act was designed to achieve and the regulatory gap that bankers are concerned about. It explains why community banks are more affected than larger institutions, outlines counterarguments from the crypto industry and explores the options available to Congress.

The GENIUS Act aimed to prevent stablecoins from functioning as savings products. Lawmakers wanted stablecoins to continue operating as payment instruments. For this reason, the law prohibits stablecoin issuers from paying interest or yield to holders solely for holding the token.

Banks supported restrictions on yield-bearing stablecoins. They argued that if stablecoins could pay yield directly, they could become an alternative to insured savings accounts. This could encourage some depositors to move funds out of traditional bank accounts. Banks also warned that the impact would fall most heavily on smaller community banks, which rely on local deposits to fund lending.

Did you know? Some US states already regulate money transmitters that handle stablecoins. As a result, a single stablecoin platform can face both federal GENIUS Act requirements and dozens of separate state licensing and reporting obligations.

Source: CoinTelegraph