What the GENIUS Act Was Meant to Stop-and the Stablecoin Loophole Banks See

"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."

"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."

The GENIUS Act of 2025 established a federal framework for payment stablecoins, imposing strict reserve and consumer-protection standards and banning issuers from paying interest or yield to holders. Exchanges and affiliated platforms can still offer rewards on stablecoin balances, creating a practical loophole around the issuer ban. Community and smaller banks are particularly exposed because deposit outflows would directly reduce their capacity to lend to local businesses and households. Reward programs can be funded through platform revenues or affiliate arrangements, preserving incentives to shift deposits. Congress faces choices to tighten rules, close affiliate loopholes, or allow market-driven outcomes.

Read at Cointelegraph