Banking Sector Campaigns Against Loophole in Stablecoin Law

Banks are reportedly campaigning to close what they call a loophole in newly adopted stablecoin legislation.

Industry groups such as the American Bankers Association, the Bank Policy Institute and the Consumer Bankers Association are warning that the legislation contains language that will allow some cryptocurrency exchanges indirectly pay interest to stablecoin holders, the Financial Times reported Monday (Aug. 25).

Under the GENIUS Act, passed by Congress last month, issuers are barred from paying “yield” or interest to customers. Under this legislation, banks are allowed to issue stablecoins of their own but are forbidden from paying interest.

However, the FT report added, cryptocurrency exchanges will be allowed to indirectly offer interest and rewards to people holding stablecoins issued by third parties like Circle or Tether.

Banks are concerned this would lead to an unlevel playing field, and trigger a wave of deposit outflows if customers decide they want to earn yield by holding stablecoins at crypto exchanges rather than keeping fiat currency at banks, the report said.

The industry points to an April report by the U.S. Treasury which estimated stablecoins could pull about $6.6 trillion of deposits away from banks.

“The result will be greater deposit flight risk, especially in times of stress, that will undermine credit creation throughout the economy,” the Bank Policy Institute wrote earlier this month.

“The corresponding reduction in credit supply means higher interest rates, fewer loans, and increased costs for Main Street businesses and households.”

Per the FT report, at least one crypto industry figure has pushed back against the banking sector’s arguments.

“This was no loophole and you know it,” Coinbase chief legal officer Paul Grewal wrote on X, contending that a majority of lawmakers had “rejected your unrestrained effort to avoid competition . . . So did one president. It’s time to move on.”

PYMNTS wrote last week about banks’ efforts to enter the stablecoin custody space, arguing that these lenders are “planting flags in a future financial architecture where tokenized assets and stablecoins become mainstream.”

If stablecoins transform into a parallel payments system, PYMNTS wrote, gaining control custody of reserves is similar to controlling the vaults of a new global currency. If tokenization makes equities, bonds and private credit into blockchain-based instruments, custody a gateway for trillions of dollars in transactions.

“Banks don’t want to repeat the FinTech era, when startups captured payments, lending and retail trading flows while incumbents played catch-up,” that report added. “Custody gives them a chance to shape the rails early.”