Banking industry groups are mobilizing against what they characterize as a glaring loophole in the recently enacted GENIUS Act—one that allows stablecoin issuers to circumvent yield prohibitions by simply routing interest payments through affiliated crypto exchanges and broker-dealers rather than offering them directly.
The mechanics are breathtakingly straightforward: while the GENIUS Act explicitly bars stablecoin issuers from paying interest directly to token holders, it remains conspicuously silent on whether these same issuers can funnel yields through their corporate cousins. This regulatory gap has banking groups sounding alarms about a potential $6.6 trillion exodus from traditional deposits, according to U.S. Treasury estimates—a figure that would make the 2008 financial crisis look like a minor inconvenience.
The competitive dynamics are particularly galling for traditional banks, which face stringent regulations on deposit-taking activities while watching crypto firms operate under considerably more relaxed oversight. Banks must maintain capital ratios, undergo regular stress tests, and navigate complex compliance frameworks, yet their stablecoin competitors can effectively offer the same yield-bearing products through affiliated entities with minimal regulatory friction. Meanwhile, established platforms like CEX.IO have demonstrated how regulated crypto exchanges can serve over 4 million users across 99% of global countries while maintaining compliance with AML/KYC requirements.
The systemic implications extend far beyond competitive fairness. Should the Treasury’s projections materialize, the resulting deposit flight would severely impair banks’ lending capacity, potentially choking credit availability for businesses and households alike. Higher borrowing costs and tightened loan conditions would follow inevitably, creating a self-reinforcing cycle of credit contraction. The Act’s bipartisan support with a 68-30 Senate vote demonstrates the political momentum behind stablecoin regulation, making rapid legislative corrections increasingly unlikely.
Banking groups are demanding thorough legislative fixes, including extending yield prohibitions to all affiliated entities—brokers, dealers, exchanges, and subsidiaries. They’re also advocating for repealing Section 16(d) to restore state regulatory authority and proposing an outright ban on nonfinancial companies issuing payment stablecoins. The dual banking system framework would benefit from these proposed changes, as they would help preserve the traditional regulatory structure that has long governed financial institutions.
The GENIUS Act’s regulatory framework requires 1:1 backing with high-quality liquid assets and mandates Anti-Money Laundering compliance, yet these provisions prove meaningless if affiliated entities can simply sidestep the core restrictions. Regulators are expected to issue clarifying guidance soon, though whether such measures can adequately address the fundamental structural asymmetries remains an open question.
The stakes—$6.6 trillion worth—suggest that incremental fixes may prove insufficient for this particular financial innovation.
