US Bankers Warn Stablecoin Yield Workarounds Threaten Local Lending

Community banks are looking to close a loophole in federal stablecoin rules, urging U.S. senators to tighten oversight of yield-based workarounds.

The American Bankers Association's Community Bankers Council sent a letter to lawmakers on Monday, warning that crypto companies are skirting the GENIUS Act's ban on stablecoin interest payments by funneling rewards through affiliated exchanges.

More than 200 community bank leaders expressed concern that while the law prohibits stablecoin issuers from paying interest, a safeguard to ensure deposits fund loans for families and small businesses, some companies are circumventing Congressional intent through indirect payments.

"Community banks are the backbone of local economies," the letter said. "Allowing inducements like interest or rewards on stablecoins could incentivize customers to move savings out of banks, jeopardizing the lending that fuels growth in towns across America."

The letter warns that without stronger legislative clarity, up to $6.6 trillion in deposits could be at risk, threatening credit availability nationwide, citing a U.S. Treasury report from last year.

The ABA's Community Bankers Council is calling on Congress to clarify that the interest prohibition applies to stablecoin issuers' affiliates and partners.

"Anything less will put economic growth and local communities at risk," the letter concludes.

The banking industry has been sounding alarms since the passage of the GENIUS Act last July, with the ABA, Bank Policy Institute, and over 50 state banking groups writing to Congress in August to warn that "the restriction is easily bypassed because exchanges or other third parties can still offer rewards to stablecoin holders."

However, Jonathan Gould, head of the Office of the Comptroller of the Currency, downplayed concerns at the ABA's Annual Convention last October, saying any material deposit flight "would not happen in unnoticed fashion" and "would not happen overnight."

"If there were to be a material flight from the banking system, I would be taking action," Gould said, noting that "highly elected officials" and trade associations would also intervene.

Crypto industry pushback

Saravanan Pandian, CEO of crypto exchange KoinBX, told Decrypt that banks’ push to review the GENIUS Act points to traditional caution toward digital assets, but warned that "strict policies can push activity towards unverified channels, which can ultimately end up being challenging for all stakeholders."

He expressed hope for a system where “banks and crypto platforms can exist through mutual co-operation and innovate together.”

Nitesh Mishra, co-founder and CTO at hedging platform ChaiDEX, told Decrypt the $6.6 trillion risk is "somewhat blown out of proportion," but acknowledged banks are "directionally right" since stablecoins provide similar returns "without the equivalent rules faced by the banks."

Mishra called for "clear definition between interest and reward" and urged regulators to "impose robust reserve, liquidity, and disclosure standards plus activity-based licensing for nonbank issuers, so banks and stablecoin firms compete under comparable rules without stifling innovation."

CoinGecko data pegs the stablecoin market at over $312 billion, but users of prediction market Myriad, owned by Decrypt’s parent company Dastan, place just a 3% chance on it breaking the $360 billion barrier by February.