Banking Groups Want a Do-Over on the GENIUS Act

The American Banking Association, the Bank Policy Institute and dozens of state banking groups are asking Congress for a do-over of the recently enacted GENIUS Act. In a letter to the chair and ranking member of the Senate Banking Committee Tuesday, the groups warned that several “loopholes” in the stablecoin law could lead to substantial outflows of deposits from traditional accounts.

“Payment stablecoins do not substitute for bank deposits, money market funds or investment products, and payment stablecoin issuers are not regulated, supervised or examined in the same way,” the letter said. “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.”

The GENIUS Act established rules for the issuance of stablecoins, including by nonbank institutions or organizations. The coins are cryptocurrency tokens backed by real-world assets, typically U.S. dollars or treasuries on a 1:1 basis. Retailers and payment services have embraced the tokens, issuing their own branded stablecoins as a vehicle for customer payments to save on costs related to traditional banks and payment processors such as Visa and Mastercard.

The law prohibits stablecoin issuers from paying interest on deposits or offer yields to coin holders from investments made with the deposits. The bank groups’ letter warns those prohibitions are easily evaded, however, using a variety of workarounds.

One common strategy is to offer indirect payments and incentives on deposits through affiliate organizations, or to partner with an exchange through which the coin is issued to offer payments. Without an explicit ban on such arrangements, the groups warn, the payment of interest or earnings on stablecoin deposit could encourage consumers and businesses to shift savings from traditional bank accounts to stablecoin accounts, draining banks of capital.

“These arrangements between stablecoin issuers and affiliates or exchanges, often jointly and explicitly marketed to consumers, will undermine the GENIUS Act’s prohibition regarding payment of interest and yield,” the letter said. “The result will be greater deposit flight risk, especially in times of stress, that will undermine credit creation throughout the economy.”

The letter refers to a report issued by the Treasury Department in April, before the GENUIS Act was passed, that estimated stablecoins could lead to as much as $6.6 trillion in deposit outflows, depending in part on whether issuers were allowed to offer yields similar to bank accounts. The report led to the ban on direct payment of yields being included in the bill.

Some in the FinTech world, however, say the risk of deposit flight due to stablecoins is being overstated by the banks.

Musheer Ahmed, founder of research and advisory firm 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 some deposits do shift away from traditional banks, he added, the impact on the broader economy would be limited because “crypto lending will pick up, likely making up the gap.”