Introduction to the GENIUS Act and Stablecoins
The GENIUS Act of 2025 was designed to establish a federal framework for payment stablecoins in the US, setting strict standards for reserves and consumer protection. However, community banks have warned Congress about a potential loophole in the stablecoin rules, which could allow stablecoin issuers to circumvent the law and pay interest to holders indirectly. In this article, we will explore the GENIUS Act, the concerns of community banks, and the potential implications for the stablecoin market.
What the GENIUS Act Tried to Prevent
The GENIUS Act aimed to prevent stablecoins from functioning as savings products, instead intending for them to be used as payment instruments. To achieve this, the law prohibits stablecoin issuers from paying holders interest or income solely for holding the token. This restriction was supported by banks, which argued that stablecoins could become an alternative to insured savings accounts if they could pay out earnings directly, potentially encouraging depositors to withdraw funds from traditional bank accounts.
The “Loopholes” in the GENIUS Act
Community banks argue that the problem lies not with what stablecoin issuers are doing directly, but rather with their distribution partners, including exchanges and other crypto platforms. These partners can enable rewards for stablecoin holders even if the issuer itself does not pay interest. This structural feature of how stablecoins work has highlighted a regulatory gap, as the GENIUS Act limits the return paid by the issuer but does not prevent third-party platforms from offering customers incentives for deposited stablecoins.
Why Community Banks Are More Concerned
Large banks can diversify their funding sources and access wholesale funding markets more easily than smaller lenders. Community banks, on the other hand, tend to rely more heavily on stable retail deposits. As a result, community bankers frame the loophole debate as a local lending problem, warning that if deposits from community institutions transition into stablecoin balances, banks could have less capacity to lend to small businesses, farmers, students, and home buyers.
How Rewards Can Be Offered Without the Issuer Paying Interest
Banks argue that rewards programs can be funded through a mix of platform revenue, marketing subsidies, revenue share agreements, or affiliate structures tied to the issuance and distribution of stablecoins. While funding mechanisms vary by platform and token, the controversy is less about an individual program and more about the incentive outcome. Banks fear that stablecoins could offer bank customers an alternative place to store liquid assets, potentially undermining the traditional banking system.
The Crypto Industry’s Counterargument
Crypto advocacy groups and industry associations have pushed back against the concerns of community banks, arguing that Congress intentionally drew a clear line by banning issuer-paid interest while leaving room for platforms to offer legitimate rewards and incentives. The Blockchain Association and Crypto Council for Innovation argue that stablecoins are primarily payment and settlement tools and should not be regulated as a replacement for deposits.
Policy Options and Potential Outcomes
Based on the public arguments to date, policymakers have several possible paths to address the concerns of community banks. These include expanding the GENIUS Act’s prohibition on returns to affiliated issuers and distributors, requiring clear disclosures and consumer protection, or allowing certain activity-based incentives while restricting interest-like balance-based incentives. The outcome of this debate will determine whether stablecoins remain payment instruments or potentially evolve into more bank-like stores of value.
For more information on the GENIUS Act and its implications for the stablecoin market, visit Cointelegraph.
