U.S. community banks are urging Congress to tighten stablecoin rules, warning that a loophole in current law allows crypto platforms to offer indirect yields that could pull money away from local bank deposits.
In a letter sent to the Senate on Monday, the Community Bankers Council of the American Bankers Association said the GENIUS Act still allows stablecoin holders to earn returns through exchanges and affiliated platforms. The council said this undermines the law’s goal of banning yield-bearing stablecoins.
The GENIUS Act, passed last year, prohibits stablecoin issuers from paying interest directly to token holders. However, bankers argue the law does not stop exchanges or partners from offering rewards tied to holding stablecoins, creating what they describe as a “backdoor” yield.
“Some companies have exploited a perceived loophole,” the council wrote, adding that the practice recreates interest-bearing products lawmakers intended to block.
Bankers warned that if stablecoins continue to offer yield-like incentives, billions of dollars could move out of insured bank deposits. They said this could weaken community banks and reduce lending to small businesses, farmers, students, and home buyers.
The council also raised concerns about oversight. Unlike banks, crypto exchanges and stablecoin-linked platforms do not provide federally insured products or follow the same prudential rules, they said.
Several large crypto exchanges, including Coinbase and Kraken, currently offer rewards or incentives to users who hold certain stablecoins. While these payments usually come from the platforms or partners rather than the stablecoin issuers, bankers say the economic effect is the same.
To address the issue, the council asked lawmakers to explicitly ban affiliates and third-party partners from offering interest or yield connected to stablecoins as part of broader crypto legislation now being debated.
Other banking groups have made similar warnings. The Banking Policy Institute has said widespread adoption of yield-style stablecoins could lead to as much as $6.6 trillion leaving the traditional banking system.
Crypto industry groups dispute these claims. In a separate letter to lawmakers, the Crypto Council for Innovation and the Blockchain Association said payment stablecoins are not used to fund loans and do not pose the same risks as bank deposits. They warned that stricter rules could slow innovation and limit the growth of digital payments.
