Banks lobby to close loophole for stablecoin interest over deposit flight risk

[Stablecoin]
JLGutierrez

Banks are lobbying for a change to the new stablecoin legislation in the U.S., warning that a loophole in the regulation risks trillions of dollars worth of bank deposit outflows.

The landmark GENIUS Act, which establishes a regulatory framework for stablecoins, contains a prohibition on stablecoin issuers offering interest or yield.

But without an explicit prohibition applying to cryptocurrency exchanges, this "can be easily evaded and undermined by allowing payment of interest indirectly to holders of stablecoins," five banking lobbies warned lawmakers in a joint letter.

This means that crypto exchanges can indirectly offer interest and rewards to holders of stablecoins issued by third parties like Circle (NYSE:CRCL [https://seekingalpha.com/symbol/CRCL]) or Tether. For example, Coinbase (NASDAQ:COIN [https://seekingalpha.com/symbol/COIN]) currently offers 4.1% reward rate for its customers holding USDC (USDC-USD [https://seekingalpha.com/symbol/USDC-USD]) - a stablecoin issued by Circle.

The lobbies said this loophole risks mass bank deposit outflows, if customers choose to earn yield by holding stablecoins on crypto exchanges instead of cash at banks.

"Incentivizing a shift from bank deposits and money market funds to stablecoins would end up increasing lending costs and reducing loans to businesses and consumer households," they warned. "The result will be greater deposit flight risk, especially in times of stress, that will undermine credit creation throughout the economy."

The lobbies that wrote the letter [https://bpi.com/closing-the-payment-of-interest-loophole-for-stablecoins/] include the American Bankers Association, the Bank Policy Institute and the Consumer Bankers Association, whose members are some of the biggest banks in the U.S.

In April, the Treasury Department estimated [https://home.treasury.gov/system/files/221/TBACCharge2Q22025.pdf/] that stablecoins could lead to about $6.6T in bank deposit outflows, depending in part on whether stablecoins are yield-bearing.

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